How HSAs Work

By Rachel Kuntz
December 2004

Medical/Health Savings Accounts (HSAs) are savings accounts devoted to covering medical expenses.  Individuals, their employers, or their family members can put away a certain amount to pay toward annual insurance deductibles.  That amount is up to $2,600 a year for individuals and $5,150 a year for families.  Money deposited in HSAs could be invested, then withdrawn free of taxes for most medical expenses including prescription drugs, long-term care services, and Medicare premiums.  Every year the money not spent would stay in the account and gain interest tax-free, like an IRA.  HSAs are to stay with an individual for a lifetime.  Upon death, assets can be transferred tax-free to a spouse, who also would be limited to using the money for out-of-pocket medical expenses.  In addition, employers who contribute to employee HSAs as a benefit would pay no taxes on contributions.  Such accounts would allow individuals to build a medical nest egg.  Savings could accrue over time and be used for long-term care. 

An HSA grows tax free, allowing individuals to pay for medical expenses with pre-tax dollars.  HSAs put patients in control of health care rather than third party payers.  Patients may be better able to choose their own doctors and hospitals without network restrictions because of HSAs.  Under an HSA system, customers receive a debit-type card which is swiped right at the medical facility.  Consequently, the cost of insurance administration and processing may be reduced significantly.  For example, by eliminating insurance administration and processing, costs may be reduced by up to 20% during routine visits.

Rachel Kuntz is a principle at www.brynmorassociates.com and holds a Masters Degree in Management with Concentration in Human Resources, a Bachelors Degree in Management, and is currently working towards her doctoral degree in Business Administration.

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