Cutting Healthcare Costs With An HSA Is Now Easier

Enactment of The Tax Relief and Healthcare Act of 2006 made it easier to contribute to a Health Savings Accounts (HSAs). Introduced in 2003 as an alternative to increasingly costly health insurance plans, an HSA allows an employee to sock away pre-tax income in a special account to pay for healthcare expenses.

HSAs work with high-deductible health plans (HDHPs). HDHPs typically require an employee to pay the first $1,500, and in many cases, more, of their medical expenses. But if you use money from an HSA to meet those high deductibles, you are paying with pre-tax dollars. If you're in the 40% effective tax bracket, paying with an HSA is like getting a 40% discount on your deductibles. And since high-deductible heath insurance plans cost less, the savings on premiums combined with the HSA's benefits can be significant.

In 2007, you can contribute up to $2,850 to an HSA for individual coverage or $5,650 for families. If you are age 55 or older, you can contribute an additional $800. To qualify for HSAs, your HDHP must have a deductible of $1,100 for individual coverage and $2,200 for families.

The new tax law allows individuals to make tax-free rollovers from a Flexible Spending Account, Health Reimbursement Account or Individual Retirement Account into a HSA, and the added flexibility is likely to make more businesses adopt HSAs.