Details about the Health Savings Account (HSA)

A Health Savings Account (HSA) is an account you can use for qualified healthcare expenses.

Both you and your employer can put money in your HSA. Once money goes into the account, it's yours forever - the HSA is in your name, just like a personal checking or savings account.

Why use an HSA for healthcare expenses?

Because you fund the HSA with pre-tax money, you're using tax-free funds for healthcare expenses you’d normally pay for out-of-pocket. Your HSA contributions don’t count toward your taxable income for federal taxes. They’re not taxable in most states, as well.

Another advantage is that your account can grow over time.

Since the money always belongs to you, even if you leave the company, and unused funds carry over from year to year, you never have to worry about losing your money. That means if you don’t use a lot of healthcare services now, your HSA funds will be there if you need them in the future – even after retirement.

The HSA is also an investment opportunity.

With Humana’s HSA, your account can grow tax-free in an interest-bearing savings account, a money market account, a wide variety of mutual funds – or all three. Of course, your funds are always available if you need them for qualified healthcare expenses.

To be eligible to contribute to an HSA, you need to get a certain kind of health plan called a High Deductible Health Plan.

Sometimes you'll see this plan abbreviated as HDHP. In addition to the qualified High Deductible Health Plan requirement, the IRS has set other rules about participating in an HSA.

You cannot have an HSA if any of the following is true:

You're covered by other insurance that pays for medical services, like coverage under a spouse's plan. This includes medical plans, the Flexible Spending Account, and the Health Reimbursement Arrangement. If your spouse has a comprehensive FSA (one that covers more than a "limited purpose" like vision and dental), you're not eligible for an HSA - even if the FSA dollars aren't used for you.
You are enrolled for Medicare benefits.
You can be claimed as a dependent on another person's tax return.

Generally, you can put enough in your HSA to cover your entire deductible, and then the qualified High Deductible Health Plan helps you pay for healthcare after you meet the deductible. The annual contribution limit is based on IRS rules. In general, the total amount that goes in your account each year – from both you and your employer – can't be more than the IRS annual contribution limit. If you're age 55 or older, you're allowed to make extra contributions each year.

To put money in your account, check with your employer to see if paycheck deductions are allowed.

If not, contributions can be made by sending the deposit directly to the account with personal funds.

You can spend only the money that's actually in your HSA.

If your healthcare expense is more than your HSA balance, you need to pay the remaining cost another way, such as cash or personal check. You can request reimbursement after you have accumulated more money.

You can use your HSA for your spouse and dependents – even if they aren't covered by your High Deductible Health Plan.

You can use HSA funds for IRS-approved items

Examples include:

Doctor's office visits
Dental services
Eye exams, eyeglasses, contact lenses and solution, and laser surgery
Hearing aids
Orthodontia, dental cleanings, and fillings
Prescription drugs and some over-the-counter medications
Physical therapy, speech therapy, and chiropractic expenses

More information about approved items, plus additional details about the HSA, is available on the IRS Website at www.irs.gov.

Every time you use your HSA, save your receipt in case the IRS asks you to prove your claim was for a qualified expense. If you use HSA funds for a nonqualified expense, you'll pay tax and penalty on the ineligible amount.

The HSA may sound a little like a Flexible Spending Account (FSA). Even though both are tax-free accounts to help pay expenses your health plan doesn't cover, they differ in several important ways. If you have both accounts, you can only use the FSA for dental and vision care, as well as for certain preventive care services. This is called a "limited FSA."

How it works example - single coverage

Lucy enrolls in a High Deductible Health Plan. Her plan is effective January 1, 2009 and has the following features:

$1,500 single deductible
80 percent coinsurance for in-network providers

She also has a Health Savings Account. Even though Lucy and her employer can put up to $3,000 in a Health Savings Account, Lucy funds the account up to the deductible ($1,500):

$500 from her employer
$1,000 from Lucy's tax-free paycheck deductions

Year 1

Lucy's healthcare costs are higher than usual because she breaks her leg. Her expenses for the year total $2,715:

Hospital doctor's services - $650
Hospital facility cost - $350
X-rays at hospital - $200
Specialist office visit - $315
Six physical therapy sessions - $1,050
Two prescriptions - $150

Here's how Lucy uses her HSA to pay for healthcare

HSA funds	$1,500
Total cost of services	$2,715
Lucy uses HSA to pay deductible	$1,500
Balance of cost of services	$1,215
PPO plan pays 80% of costs	$972
Lucy pays remaining 20%	$243
HSA funds remaining	$0

Summary

When the accident happened, Lucy used the HSA dollars deposited so far to cover her deductible. She wrote a check for the rest and then got reimbursed from her HSA when more money went into the account. After Lucy used the HSA to meet her $1,500 deductible, her health plan kicked in to help her pay the remaining $1,215. The plan paid 80 percent coinsurance, and Lucy paid the other 20 percent out of pocket. Because she used all the money in her HSA, Lucy has a zero balance at the end of the year.

Year 2

Lucy's healthcare costs aren't as high as last year. She has an illness that requires two doctor's office visits and two prescriptions. Her expenses for the year total $435:

Two doctor's office visits - $200
Two prescriptions - $235

Here's how Lucy uses her HSA to pay for healthcare

HSA funds	$1,500
Total cost of services	$435
Lucy uses HSA to pay deductible	$435
HSA funds remaining	$1065

Summary

Because her healthcare expenses were only $435, Lucy didn't use all of her HSA funds. She also didn't have to use any of her take-home pay to cover out-of-pocket costs. At the end of the year, she has $1,065 left - all of the money she put in, plus part of her employer's contribution. She can use the money tax-free for healthcare expenses in the future and even invest it tax-free.

These examples are for the purpose of illustration only. The amounts will vary, depending on the plan selected and whether you have single or family coverage.

How it works example - family coverage

Doug chooses a High Deductible Health Plan that covers himself, his wife Tina, and their two children – four-year-old John and newborn Julie. Their plan is effective January 1, 2009 and has the following features:

$2,500 family deductible
80 percent coinsurance for in-network providers

Even though Doug and his employer can put up to $5,950 in a Health Savings Account, Doug funds the account up to the deductible ($2,500):

For the first year, Doug's employer contributes $500, and Doug adds another $2,000 in tax-free paycheck deductions.
For the second year, Doug's employer contributes another $500. Doug adds $2,000 to the account through tax-free paycheck deductions. He also has the $1,725 left over from Year 1.

Year 1

Both children get sick once during the year. Not surprisingly, they spread the illness to their dad - but Tina manages to avoid it. Doug, John, and Julie each visit the doctor once. Doug and John need a prescription to treat the illness, and John also gets some lab tests. The family's expenses for the year total $775:

Three doctor's office visits - $300
# Lab tests - $100
# Three prescriptions - $375

Here's how Doug uses an HSA to pay for healthcare

HSA funds	$2,500
Total cost of services	$775
Douguses HSA to pay deductible	$775
HSA funds remaining	$1,725

Summary

Because the family's healthcare expenses were only $775, Doug didn't use all of his HSA. He spent his employer's $500 contribution, plus $225 of the money he put in tax-free. At the end of the year, he's spent none of his take-home pay on out-of-pocket costs, and he still has $1,725 left to use for future healthcare expenses.

Year 2

This year, John is injured – leading to X-rays, a three-day hospital stay, knee surgery, and two prescription drugs. On top of that, both Tina and Julie get sick and have to go to the doctor. The family's expenses for the year total $7,710:

Hospital care - $3,000
X-rays - $250
Surgeon and anesthesiologist - $4,000
Two doctor's office visits - $200
Two prescriptions - $260

Here's how Doug uses an HSA to pay for healthcare

HSA funds	$4,225
Total cost of services	$7,710
Doug uses HSA to pay deductible	$2,500
Balance of cost of services	$5,210
PPO plan pays 80% of costs	$4,168
Doug pays remaining 20% with HSA	$1,042
HSA funds remaining	$683

Summary

Doug used the $2,500 in his HSA to meet the plan's deductible, leaving $1,725 in his account. After meeting the deductible, the family's health benefits kicked in to pay 80 percent of the remaining healthcare costs. Doug paid the other 20 percent with his HSA. He didn't have to use any of his take-home pay to cover out-of-pocket costs, and he still has $683 left to use for future healthcare expenses.

These examples are for the purpose of illustration only. The amounts will vary, depending on the plan selected and whether you have single or family coverage.