Saving for a Sick Day

When it comes to your health, every penny counts.  Health Savings Accounts (HSAs) can help you build up a “sick day” fund, and, because eligible contributions and distributions are tax free, get more mileage for each buck you set aside for your health.

HSAs were created by law in 2003, and are available for individuals with a High Deductible Health Plan (HDHP), whether an HMO, PPO, or any other health plan, that does not cover the first dollar spent.  A person who is covered by Medicare or who can be claimed as dependent by someone else cannot make contributions to a HSA.

Eligibility for contributing to an HSA is determined regardless of income, but the value of the deductible that defines a plan as an HDHP and the maximum annual contribution are adjusted to inflation on a yearly basis.  For 2009, an individual health plan is qualified as HDHP if it has a minimum deductible of $1,150 and a maximum deductible and other out-of-pocket expenses of $5,800 (or $2,300 and $11,600, respectively, for a family plan).  If your plan qualifies, you can contribute up to $3,000 to an HSA this year ($5,800 as a family), and, importantly, if you qualify to make contributions to your HSA, family members and other people may contribute to it on your behalf.

If you are covered by an HDHP during only some months of the year, you may make contributions to an HSA during those months (your maximum contribution will be essentially pro-rated – see the instructions to filing the IRS Form 8889 to find out how).  Alternatively, under the “last month rule,” if you are eligible to make a contribution during the last month of the tax year (generally December 1-31), you may be considered eligible for the entire year.  Be careful when invoking this rule, however, as it puts you in a “testing period” where you have to be eligible during the next 12 months as well to avoid any penalties (more eligibility and contribution rules are outlined in the IRS’s Publication 969).

For tax purposes, HSAs work similarly to 401(k)s.  You and your employer may contribute pre-tax dollars, and, as long as you use the funds for qualified medical expenses, they are tax-free.  If you are self-employed, or if you choose to make contributions on your own, the contribution, up to the limit defined above, can be deducted from your income tax.  There is no exhaustive list of “qualified medical expenses,” but it includes any expenses that would have been considered deductible had you reached your insurance’s minimum, and is extended to cover non-prescription drugs and eye glasses, regardless of whether you have vision coverage or not.

If you are eligible, ask your employer about HSAs.  According to the Kaiser Foundation’s most recent Health Benefits Survey, 18-28% of large firms (200+ employees) and 11% of small firms (3-199 employees) offer HDHPs with savings options, but only 4% and 9% of eligible employees, respectively, are actually enrolled in them.  And several financial institutions offering 401(k) options can also have HSAs, so if your employer does not offer an HSA or if you are self-employed, check with your bank or credit union.  When you are sick, the last thing you need is to worry about the cost – with an HSA you can make sure that each dollar you put aside for your health will go right back to making you feel better.

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