A Health Savings Account (HSA) is a trust account set up to accept pre-tax contributions to be used exclusively to pay current and future qualified medical expenses. This article will address some of the questions about HSA's and their various requirements.

Can anyone participate in an HSA?

No. To participate in an HSA an eligible individual must be covered by a High Deductible Health Plan (HDHP), not enrolled in Medicare Part A or B, not claimed as a dependent, and not covered by other health insurance, excluding permitted insurance and permitted coverage. Eligibility is determined on a monthly basis. On the first day of any month, an individual must be covered by an HDHP and not also covered under a non-HDHP.

What qualifies as a High Deductible Health Plan (HDHP)?

An HDHP is an insurance plan that must require a minimum deductible amount, and a maximum annual out-of-pocket amount. These amounts vary by Single and Family plans. Below is a table showing these amounts by plan type.

An HDHP must apply the costs of prescription drugs to the annual deductible or the plan does not qualify. Also, several states require that health plans provide certain benefits without regard to a deductible or with a deductible below the minimum amount.

How can I set up an HSA?

Any institution qualified to provide and IRA is authorized to provide an HSA, including insurance companies, banks, investment companies, etc. But remember, you must have an HDHP established before your HSA can be set up and contributions made to it. Below are a couple of websites that you can visit to learn more on HSA's in your state:

   www.eHealthInsurance.com

   www.hsainsider.com

Are there limits on the amount that I can contribute to my HSA? Are these contributions tax deductible?

Yes there are. You are allowed to contribute a maximum amount equal to the lesser of up to 100% of the deductible on your HDHP or the maximum contribution limit based on your plan. The maximum contribution limits for 2005 are, Single - $2,650 and Family - $5,250. For either limitation, if you are between the ages of 55 and 64, you can contribute an additional $600 per year ($700 for 2006) to your account. Please remember that these limits must be aggregated with any other HSA or MSA accounts that you have. Also, please note that your contributions must stop on the first month that you are enrolled in Medicare.

Your contributions to your HAS are deductible in calculating Adjusted Gross Income on your Federal tax return. Excess contributions are includible in gross income and subject to a 6 percent excess contribution penalty.

Are distributions from my HSA included in my taxable income?

Any amount paid or distributed out of an HSA that is used exclusively to pay the qualified medical expenses of any account beneficiary is not includible in gross income. However, any distributions not used to pay qualified medical expenses are included in gross income and if less than age 65 are subject to a 10 percent penalty.

Qualifying medical expenses are those incurred on behalf of the account beneficiary, spouse or dependents for medical care, certain over-the-counter medical items and certain health insurance premiums.

It is up to the account owner to maintain records showing substantiation for any distributions made from the account.

Can my employer contribute to my HSA?

As long as your employer offers a High Deductible Health Plan and you are enrolled in that plan, then your employer can make contributions to your account. Any contributions made to your account by your employer are reported to you in Box 12 on your W-2. Also, this account is owned by the account beneficiary, so even if he or she retires, changes jobs or becomes ineligible, the unused funds can be used to pay qualified medical costs in future years.

Where to go for additional information:  

• Medicare Prescription Drug and Modernization Act of 2003
• Questions and Answers with IRS Notice 2004-2 (IRB 2004-2)
• IRS Publication 969 – Health Savings Accounts and other Tax-Favored Health Plans
• Treasury Department – www.treas.gov -- click on “HSAs”
• IRS Notice 2004-50 – 88 really good answers about HSAs
• www.eHealthInsurance.com
• www.hsainsider.com

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