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What is a Illinois health savings account or "HSA"?

A health savings account or "HSA" is a tax advantaged account for medical expenses in combination with a high deductible qualified health insurance policy.

Almost all health insurance companies in Illinois offer a policy that is HSA eligible. The policies offer deductibles between $1150 and $5800 for single individuals and $2300 to $11600 for a family plan, depending on the insurer.

Health savings accounts will allow you to obtain a deduction from your federal income tax of up to $3000 for single individuals or up to $5950 for families, for the money deposited in the HSA each year. In Illinois, a state income tax deduction is also available. These deductions are available regardless of your income level. Individuals age 55 and over may deposit into their account (and take a tax deduction on) an additional catch-up contribution of $1,000 in 2009.

Contributions to the HSA must be made in cash. All deposits to an HSA become the property of the policyholder, regardless of the source of the deposit. Funds deposited but not withdrawn each year will carry over into the next year. If the policyholder ends their HSA-eligible insurance coverage, he or she loses eligibility to deposit further funds, but funds already in the HSA remain available for use. If you have a health savings account through your employer and the employer contributes funds, this money is not included in your taxable income. Who is eligible in Illinois to establish an HSA?

Persons are able to set up and contribute to an HSA if they have a qualifying high deductible health plan (HDHP) and no disqualifying coverage.

Individuals cannot be enrolled in Medicare, which generally occurs at age 65.

Individuals must not be able to be claimed as a dependant on another person's tax return. However, they can keep their HSA once they become ineligible.

Individual family members may have their own HSA, provided they each meet the eligibility rules. They can also be covered through the HSA of someone else in the family. For example, a husband may use his HSA to pay expenses of his spouse even though she has her own HSA.

Once I deposit money in the health savings account, what can it be used for?

As we have explained previously, you receive a tax deduction for depositing your money in an HSA. You are allowed to spend the money (tax free, of course) on qualifying medical expenses. These can include doctor visits, prescriptions, or hospitalization. Once you meet the deductible, your health insurance policy covers whatever the limits are in that particular policy.

You can also use the money in your HSA to cover medical expenses that may not be covered in your health insurance policy such as:

Dental and vision costs, mental health expenses, physical therapy, over the counter medications, pregnancy and maternity costs, medical equipment for the disabled, smoking cessation programs, transportation and lodging for medical care, and even some alternative medical treatments!

A complete list of qualifying and non-qualifying expenses for health savings account funds for are available from the Internal Revenue Service Publication 502 at www.irs.gov/pub/irs-pdf/p502.pdf

Keep in mind that even though you can use the health savings account funds to pay for certain medical expenses, this may not always go towards satisfying the deductible for your health insurance policy!

At death, if a surviving spouse is the designated beneficiary of an HSA, it becomes a HSA for that widow or widower. If someone other than a surviving spouse is the designated beneficiary, the HSA is terminated as of the date of death and the fair market value becomes taxable income to that person. If there is no designated beneficiary, the remaining assets become part of the deceased's estate.

Health savings accounts - Advantages and Disadvantages

Advantages: The money you deposit in a health savings account provides both federal and state income tax deductions in Illinois with no income limits!

Withdrawals are tax free!

The HSA is portable and can be moved to many different banks or financial institutions, even if you change employers.

With family HSA eligible policies, only 1 deductible is usually required to be met by the entire family instead of having separate deductibles for each person.

Money that is in your HSA stays in your account and rolls over from year to year. It can earn tax free interest when it is not being used and can have many different investment choices.

The list of qualifying medical expenses that the HSA funds can be used for is very extensive.

Premiums for HSA eligible health insurance policies are generally less expensive than traditional health insurance with similar deductibles and coinsurance.

You can withdraw money out of your HSA account for any reason after age 65 without penalty.

You should consider an HSA if you've been paying more for health insurance premiums that you've been using in health care.

Disadvantages: All HSA eligible health insurance policies generally have higher deductibles than traditional plans and do not pay for any expenses until the deductible is met compared to traditional health insurance plans that may cover doctor visits, prescriptions, and wellness benefits without having to meet the policy deductible.

Withdrawals out of the health savings account before age for any reason (except for qualifying medical expenses) can trigger taxation and penalties!

The tax advantages are not as significant for lower income brackets and persons that do fund their account to the maximum allowed.

Health savings account investments can be subject to market risk.

If you have major health issues, premiums may be charged at a higher rate than normal, certain illnesses may be not be covered for a certain or indefinite period of time (known as a waiver), or you may be declined coverage under an individual health insurance plan. (If you cannot obtain coverage, however, because of health issues, you may be eligible for a state funded health insurance plan, such as ICHIP www.chip.state.il.us )