What are Health Savings Accounts (HSAs)?
In 2003, Congress passed legislation that provides tax benefits for individuals and families who can obtain health insurance only through medical plans with high annual deductibles, more commonly known as "catastrophic health insurance plans." Those who qualify can set aside money in a special savings account that can be used to pay for medical care and medical expenses within certain restrictions. Funds in the account can be invested and any earnings will accrue to the account tax-free.
Unlike Flexible Spending Accounts, in which any unspent monies put in the account to pay for medical expenses are forfeited at year's end (also known as the "use it or lose it rule"), Health Savings Accounts make monies available to account holders until all funds are spent. There is no time limit to spend the account funds. HSA account holders own their own accounts and can invest the monies in them as they wish.
The most important advantage of a Health Savings Account is the ability to draw upon tax-free money to pay for qualified health expenses.
Who is eligible for HSAs?
To qualify to open a Health Savings Account (HSA), the applicant:
- must have medical coverage with a high-deductible health plan (HDHP);
- must not be covered under any other health insurance policy (for example, that of a spouse or a parent or relative);
- must not be enrolled in Medicare;
- must not be listed as a dependent on the tax return of another person.
Note: Individuals can open an HSA even if they have no earned income.
What is a “high-deductible health plan” (HDHP)
To qualify for a HSA, the applicant must be enrolled in a health insurance plan with a high deductible, commonly known as "catastrophic health insurance plans": for individuals, not less than $1,050 per year; and for families, not less than $2,100. The medical plan must not allow out-of-pocket expenses per year of more than $5,250 for individuals or $10,500 for families. A high-deductible health plan may be better known to most people as a "catastrophic health insurance plan."
HDHPs that Qualify for Health Savings Accounts
| |
Individuals |
Families |
| Minimum annual deductible |
$1,050 |
$2,100 |
| Maximum annual out-of-pocket |
$5,250 |
$10,500 |
It's important to understand that not all HDHPs qualify for the HSA program. For example, if your high-deductible health plan does NOT apply costs of prescription drugs toward the annual deductible, you will not qualify for a Health Saving Account. (For other restrictions, consult with your health insurance agent.)
HSA Contribution rule
WHO CAN CONTRIBUTE?: If you qualify for a HSA, it can be funded by many different sources: by yourself, by your employer, or both. If you add your own money to your HSA, it can be claimed as a deduction on your annual taxes. If your employer adds money to your account, it is not considered to be income or wages and therefore cannot be part of your tax burden. HSAs can also be funded by any individual, but any tax advantages with only benefit the account holder. There are few constraints on who can fund a Health Savings Account.
HOW MUCH CAN BE CONTRIBUTED?: If you qualify for a HSA, the amount of money you can put into the account is limited. It cannot be more than the smaller figure: either (1) the annual deductible of your HDHP or (2) the maximum amount set by government regulation.
For 2006, the amount individuals can put in their HSAs is between $1,050 and $5,250; and for families it is between $2,100 and $10,500.
Maximum Contributions to a Health Savings Account
| |
Individuals |
Families |
| Annual deductible minimum |
$1,050 |
$2,100 |
| Maximum specified by law in 2006 |
$2,700 |
$5,450 |
HSA Distributions
HSA distributions are payments from your HSA to pay for medical expenses. If the medical expenses to be paid qualify under the HSA rules, the distribution is not taxed; but if the medical expenses do not qualify, the amount of the distribution is added to your annual income and also subject to an additional tax of 10 percent.
"Qualified medical expenses" include costs of medical care not covered by the deductible of your high-deductible health plan as well as:
- over-the-counter drugs
- costs for COBRA medical coverage
- any health plan coverage while receiving unemployment compensation
- some long-term care insurance premiums
Funds in an Health Savings Account can also used to pay for medical costs not covered by your health plan, not simply costs that are excluded by the high deductible.
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