The health-savings or health-retirement account isn't a new concept. Originally, it took the form of a medical savings account called the Archer MSA. These accounts were for small business owners with fewer than 50 employees. In 2003, health-savings accounts became available to a wider group of individuals, and replaced the MSA. The Medicare Advantage Plan contains a Medicare medical-savings account and a high deductible as an alternative.
The basic function of the health savings account (HSA) is to cover first-dollar expenses. It's a great opportunity for people who have few health-care issues. A single (unmarried) candidate for the HSA has to have a high-deductible health plan with at least $1,100 out of pocket before the company pays; the figure is $2,200 for family coverage. The money is then put in the HSA to cover the amount of the deductible. If it's not used, it's the insured party's to keep and accumulate tax-free. As the money in the HSA increases, the insured increases the deductible and saves on the health-policy premium; but in 2008, the maximum deductible amount was $2,900 for the individual and $5,800 for the family plan. For 2009, a catch-up is planned of $1,000 for people over 55.
People who use the HSA often do so because they are in good health and wish to put more toward retirement than an IRA would allow. Since all the money in the HSA remains available for medical use (even after retirement) and grows tax-free, this is an ideal opportunity for extra retirement income. You don't have to collect the money for unreimbursed medical expenses in the year you expense them, but can save them and allow the account to build, then remove the money tax-free when you retire. The government regulations have no time limit, as long as you incurred the expenses after the plan started.
If you remove funds for any reason other than a medical expense before you reach age 55, you not only pay taxes on the funds, but a 10-percent penalty as well. If an individual covered by the HSA dies or is disabled, the penalty does not apply. The longer you leave the funds in the account, the longer you enjoy the tax-free growth.
There are no "use it or lose it" rules in health retirement accounts as there are in flexible spending accounts. Employers may contribute the money to the account or deduct it from their employees' checks. The employee can put the money into the account supplied by the employer, but also has the right to roll over the account when she leaves, since she owns the account. There can be no more than one rollover per year. You also can pay for a spouse's, dependent's or child's medical payments from the account if you choose. Fees for the account can come directly out the account if you so desire.
Only people who have a high-deductible insurance policy may have an HSA. Otherwise, there is no income requirement for the account. If you have an HSA and take a job with a company that has a traditional health plan, you still can withdraw from it, just not add to it. You can use any vehicle to fund your HSA, as long as it's approved for the job.
You can pay for your Medicare premiums, unreimbursed medical expenses, dental expenses and long-term-care insurance from the health savings account without taxation or penalty. When you reach retirement, you can take out funds for everyday living expenses, but you have to pay taxes on them. Make sure you save all your receipts for medical bills, even if you didn't pay them out of the account. You might use them later for a tax-free withdrawal or need them as proof for an audit.