To get a good conceptual understanding of how a health savings account works (HSA), you need to first separate the health insurance coverage and HSA account. They both work independently from the other.
The Health Insurance
You will be covered by a high deductible health plan. The minimum deductible in 2017 is $1300 for an individual and $2600 for a family (although most group health plans in Tennessee have higher deductibles). Let’s say your deductible and out of pocket max is $3000. After you reach $3000 in expenses, your plan pays 100%. Your health plan operates independently from the Health Savings Account. Your doctor’s office doesn’t necessarily even know that you have an HSA. They simply bill your insurance company knowing that you are responsible for the first $3000 in costs. Same thing at the hospital.
The Health Savings Account
The HSA is just a separate bank account. The main difference is that money that is deposited is pre-tax. So when you go to the doctor’s office as described above with a $3000 deductible and the cost for the visit is $100, you could simply reach in your pocket, pull out your current debit card and pay the $100. If you have an HSA, then you reach in your pocket and pay with the HSA debit card. The only difference here is that you have now used pre-tax money to pay your health insurance bill. It’s that simple.
- HSA account deposits become a tax deduction when deposited to the HSA account.
- All money withdrawn and used to pay for qualified medical expenses is also pre-tax.
- If you have EE only coverage, up to $3400 per year can be deposited to your HSA in 2017.
- If you have EE + 1 or more, $6750 per year can be deposited to your HSA in 2017.
- If you are 55 or older, you can contribute an additional $1000 per year.
- You can contribute in any amounts you choose, up to April 15 for the previous tax year.
- Whatever you don’t spend in a given tax year, rolls over to the next year.
- If you spend HSA money on non-qualified health expenses, a 20% penalty plus income tax will be due.
- At age 65, HSA account money can be withdrawn for personal use and regular income tax applies.
- If you leave your Tennessee Group Health Insurance plan, HSA funds remain available for your use.