Health savings accounts (HSAs) are wildly popular. Since their introduction in 2004, approximately 2.5 million Americans have enrolled in these so-called consumer-driven health plans. But, alas, HSA plans are not for everyone.
Here are some pointers to help you consider whether an HSA will benefit you and your family.

1. An HSA plan can cut healthcare costs by an average of 40% for many people.
Nevertheless, some people will not realize any net savings. Those most likely to realize significant savings are people who pay all of their own health insurance premiums, such as the self-employed, who are relatively healthy with few medical expenses.

2. health savings plan restores freedom of choice.
An HSA plan puts individual consumers back in control of their own health care. This also means that each individual must be more responsible for his or her own health care decisions. This approach of self-reliance is not always popular with or appropriate for everyone, especially those who have become comfortable with HMO-type “co-pay” plans.

3. Health savings accounts reduce income taxes.
Every dollar contributed into your HSA account is deducted from your taxable income in the same manner as contributions into a traditional IRA account–regardless of whether you spend it or just save it. Interest and investment earnings in a HSA accumulate tax-deferred, just like a traditional IRA. Unlike an IRA, withdrawals are tax-FREE when used to pay qualifying medical expenses. In many situations, new account holders are able to almost fully fund their HSA with money saved on premiums from a prior, higher priced plan. By stashing all or most of those savings into an HSA, the account holder realizes instant, additional savings in the form of reduced taxes.

4. You must have a properly qualified high health insurance policy in place first before
you can open a health savings account. One of the biggest misconceptions about HSA plans is that any insurance policy with a high deductible will qualify the policyholder to establish an HSA account. IRS regulations, however, are quite specific. Not just any policy with a so-called “high deductible” will suffice. It is important to be certain that you are insured under a properly qualified policy. Your best bet is to work with a qualified and duly licensed health insurance broker who is experienced in marketing properly qualified HSA plans.

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Concerned about the high cost of healthcare? Worried that your insurance doesn’t cover all your costs? Fortunately, a partial solution may be just around the corner. Since January 2004, taxpayers have had a tax savings tool called Health Savings Accounts, or HSAs. These HSAs may solve many of your healthcare cost problems.

How an HSA Works

In a nutshell, HSAs work like this. You buy a specific type of major medical, or catastrophic coverage, insurance called a High Deductible Health Plan. (This special HSA-compatible insurance is also known by the acronym HDHP.) Then, you annually contribute up to roughly $5,100 for a family and up to $2,600 for an individual–to a special health savings account. (Note that slightly higher deductions are available to taxpayers over the age of 55. Also, annual deductions are indexed for inflation.)

How You Save Taxes with HSAs

HSAs work because you get a tax deduction for the money you contribute to the health savings account. However, as long you spend the money in the account for eligible healthcare expenses—pretty much anything reasonable—you aren’t taxed when you withdraw the money. Note that HSAs deductions are not limited by taxpayer incomes.

In effect, the HSA makes all or most of your uncovered healthcare expenses fully deductible. This is a big deal because for most people, healthcare expenses are not deductible.

Just to put the value of an HSA into perspective, a family can save from $500 to as much as $1750 annually in income taxes by using one of these accounts. The final savings, predictably, depend on family income and the state where the family lives.

One other thing. Don’t confuse HSAs with the old style Flexible Spending Accounts, or FSAs. With FSAs, you lost the money you didn’t spend by the end of the year. With HSAs, you don’t lose the money. The unused balance just carries forward to the next year.

Aren’t Medical Expenses a Tax Deduction Anyway?

No, not really. For most people medical expenses are not a tax deduction. Here’s why. Healthcare expenses do count as an itemized deduction for people who don’t use the standard deduction. However, only the portions of one’s healthcare costs that exceed 7.5% of adjusted gross income get deducted. That means that most people never get to use their healthcare costs as tax deductions because their healthcare costs don’t cross the 7.5% threshold.
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