Health Savings Accounts

A health savings account is a special tax-deferred savings account that is used in conjunction with a qualified high deductible health plan (HDHP) to pay for medical bills. It is similar to an IRA and works in conjunction with a low cost, “high deductible” health insurance policy to provide comprehensive healthcare coverage at a lower cost for those who qualify (anyone with an individual health insurance plan. It favors the younger guide if he/she can/will regularly fund the account to the maximum allowable every year, stay healthy (not use it) and build it into a large account over time. It also favors families.

Since a “qualified high deductible health plan” is underwritten by a big insurance company you will be subject to an application that answers questions about your medical history.

Instead of buying high premium health insurance with low co-pays and a low deductible, you buy a low premium policy with a “high” deductible for the big bills (catastrophic) and save the difference—in the HSA account—to cover “small bills”. Money deposited into the account is 100% tax deductible (just like a traditional IRA) and can be easily accessed by check or debit card to pay most medical bills tax-free (even stuff not covered by insurance like dental and vision). What you don’t use for medical bills is yours to keep—it stays in your account and keeps growing on a tax-deferred basis to; cover future medical bills; or supplement retirement, just like an IRA—it’s basically a medical IRA

In sum, the medical savings account plan offers 1) lower premiums; 2) lower taxes; 3) freedom of choice; and 4) more cash at retirement.

But it’s more complex than it looks and should be explained in detail by a pro in this field. Call 800-829-3676 to order IRS Publication #969.

Tax advantages

Your HSA contributions that meet the applicable requirements are deductible from your gross income on your federal income tax return for the tax year for which the contributions are made. Many states also allow the deduction from state income taxes. Interest earnings grow on a tax-deferred basis. Contribution and earnings dollars may be withdrawn at any time tax free for qualified medical expenses. At age 65, or upon disability, you may make withdrawals from your HSA for any reason without penalty, however, withdrawals will be taxed as ordinary income.

Eligibility requirements

You are eligible to open an HSA if you are in one of the following categories and you do not have any other health plan (than certain permitted insurance coverage):

  • An employee (or family member of an employee) of a qualified small business that maintains a qualified HDHP.
  • A qualified small-business owner with a qualified HDHP.
  • For you to qualify for an HSA, your HDHP must meet one of the following criteria for tax year 2003
  • For Self Only coverage- A maximum annual contribution of $2,700 to
  • For Family coverage- A maximum annual contribution of $5,450.


You may take distributions (withdrawals) from an HSA at any time. Distributions made for qualified medical expenses are tax-free.

Note: This is a general description of the HSA account the details of which may change without notice. It is not intended to provide legal, health or tax advice. Consult your own legal, medical or tax counsel for guidance on issues which may be affected by your specific circumstances.

Contact: Mr. Kermit Smith
American Republic Insurance Company
914 N. San Francisco Street
Flagstaff, AZ 86001