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In order to qualify,
individual or family must purchase a high deducible health insurance policy. These are special policies that have a minimum deductible of $1000 to a maximum of $5000 for an individual and $2000 to $10,000 for a family. The higher deductible, lower premium.
Individuals can deduct lesser of $2250 or deductible on policy: for married couples or families it is double that. If over 55, deduction is $600 higher for individual and $1200 higher for couples and will continue to rise at $100 a year until 2009, where it will be capped at $1000 for individuals and $2000 for families.
The money in HSA cannot be used to pay premiums for this policy except in certain circumstances (basically when you’re unemployed). It is meant to meet deductible, co-pays, drug costs, eyeglasses or any other medical expense that could be itemized on an individual tax return as a medical expense.
Money withdrawn in excess of qualified medical expenses is taxed as income and subject to a 10% penalty, unless owner is disabled or over 65. Any money in account at death is added to taxable estate.
There are no income limits on this plan. If started early, when you are still young and healthy a substantial amount of money could accumulate to either meet higher medical costs as you get older or to use to supplement your income.
It pays to compare costs of this plan with whatever your insurance you have now. It might turn out that your employer’s plan is still cheaper and you might want to keep it. Or you might want to consider HSA’s for their portability (you carry it from job to job without cost or loss of any contributions) and tax benefit of having another vehicle to shelter income and capital growth, while giving you more control over cost and quality of your health care.
Chris Cooper is a retired attorney who has spent several periods of his life deep in debt. At http://www.credit-yourself.com he tries to pass on some of the knowledge he picked up in his journey to become debt free.
