To help reduce health insurance costs, the Health Savings Account might be the right option for you. HSAs have grown in popularity as a way for consumers to manage the costs of healthcare.

The concept of HSAs is simple. First, to be eligible for an HSA, you must be covered under a high-deductible health plan among other conditions. An HDHP is generally a plan that has an annual deductible for 2011 of at least $1,200 for self-only coverage and at least $2,400 for family coverage. Also, the HDHP must have a maximum out of pocket expense limit of $5,950 for self-only coverage and $11,900 for family coverage. For 2012, the out of pocket expense limits increase to $6,050 and $12,010, respectively.

In other words, you pay for routine medical care like doctor visits, while insurance covers catastrophic medical expenses. Since you accept more of the expense of your healthcare, your premiums will be substantially lower.

This is where the HSA comes in. An HSA is a separate account into which you can deposit pre-tax dollars. In 2009, the maximum annual amount you may contribute to your HSA is $3,000 for self-only coverage and $5,950 for family coverage. If you are age 55 or older by the end of the year, you may contribute up to an additional $1,000. Medicare enrolled individuals cannot contribute to an HSA.

You may take federal income tax-free distributions from an HSA to pay for qualified medical expenses including doctor visits, eye and dental care and even a portion of qualified long-term care insurance premiums. Any money not used in the year can remain in the HSA and continue to grow tax deferred, it’s not a “use it or lose it” type of account.

If you withdraw money for something other than qualified medical expenses before you are 65, the withdrawal will be taxed as ordinary income and subject to an additional 10 percent tax penalty. At age 65, the penalty tax no longer applies, however funds withdrawn will be taxed as ordinary income if used for non-qualified medical expenses.

An HSA can be an effective financial tool, particularly for those who are uninsured or under-insured, small business owners or anyone facing the challenge of affording quality health insurance coverage. To find out if HSAs are right for you, talk to a financial services professional that knows your needs.

Neither State Farm nor its agents provide tax or legal advice.

Stuart Heflin is a State Farm agent in Natchez.