The cost of health insurance could be prohibitive for a self-employed individual. As a result, many self-employed people can afford only health insurance with high deductibles. This is usually done alongside a health savings account (HSA). Health savings account work like retirement savings in that you use these accounts to save money for future health costs. Just like retirement plans, health savings account can be established with banks. Health insurance companies also offer these accounts with a high deductible insurance plan.
Health savings account can be used to cover routine medical procedures. Money in your HSA can be used to pay for virtually any medical related expenses. The great thing about this is you do not have to pay taxes on the amounts you withdraw from your HSA.
Requirement for Health Savings Account
A health savings account has to be used with a HSA health insurance plan. HSA health plans generally cost less than plans with lower deductibles.
There are 2 requirements for a health insurance plan to qualify as a HSA namely:
- The plan must have a high deductible. High deductible must be at least $1,250 for individuals or $2,500 for families. The money in your HSA can be used to pay your deductibles.
- There must be a cap for out of pocket expenses. In 2014, the maximum out of pocket expense your health insurance provider can charge is $6,350 for individuals and $12,700 for families.
Contribution limits
There is no minimum contribution required to your HSA plan. However, there are maximum contributions you can make with your plan. In 2014, an individual can contribute no more than $3,250 and families are limited to $6,550. If you are between the ages of 55 and 65, you can make catch up contributions of $1,000.
Tax treatment of withdrawals
There are no taxes for withdrawals when funds are used to pay for eligible medical expenses. If you use your HSA for non-medical expenses then you are taxed regular income tax on the withdrawal plus a 20% penalty.
After the age of 65 or if you become disabled, you are allowed to withdraw funds from your HSA without penalty