Health Savings Accounts

If your employer provides you with insurance that has a high deductible, they are required to also provide a Health Savings Account (HSA). This is an account that you place money into. This money is deducted from your check. The following will show you how placing money into an HSA is the best way to prepare for medical expenses and will leave you with real money in your pocket.

• Money placed into an HSA is deducted before taxes are applied to your salary. Instead of paying the taxes up front to Uncle Sam, you benefit from the savings immediately.  The equation is: Salary – Minus Your Contribution = Taxed Salary

• The money is then placed into an account that is usually accessed by a credit card. You pull this card out when asked to pay co-payments, deductibles and all sorts of out-of-pocket medical expenses for things like:
  • Glasses & contact lenses
  • OTC drugs ordered by your physician
  • Visits to out-of-network doctors
  • Dental visits and expenses

Start by computing the amount of medical expenses you have in a year. (Your last tax return will probably have the figure.) Medical expenses are only deductible if they reach 7.5% of your AGI (Adjusted Gross Income).

Most people lose out on this deduction because they do not meet this requirement — so why not get the deduction by placing pre-tax money in an HSA? You still get the standard deduction when you file your taxes.

Next you can divide the figure by the number of pay periods you have in a year to reach the per paycheck amount to contribute to your HSA. The following examples show how to compute your contribution and the effects of contributing to your HSA.

• Example: $1,000 expenses / 26 pay periods = $38.46 contribution per paycheck o A person who earns $500 per paycheck, is single and has one exemption, would have the following:
  • Federal Taxes paid before contribution on $500 = $29 Gross $471.00 x 26= $12,246 – $1,000 medical expenses = $11,246
  • Federal Taxes after contribution on $461.54 = $24 Gross $437.54 x 26 = $11,376 and the $1,000 medical expense was covered by the HSA
  • You will profit $130 in this example with the HSA.

• Example: $2,500 expenses/ 26 pay periods $100 contribution per paycheck o Earns $1,600 per paycheck, married, two exemptions
  • Federal taxes paid before contribution on $1,600 = $121 Gross $1,479.00 x 26 = $38,454-$2,500 medical expenses = $35,954
  • Federal taxes paid after contribution on $1,500 = $106 Gross $1,394 x 26 = $36,244 and the $2,500 medical expense was covered by the HSA
  • You will profit $290 in this example with the HSA

As you can see, because you paid the medical expenses out of your HSA account you retained more money in your pocket. During the year when you have medical expenses, you pay them with your HSA.