Health Savings Accounts

Health Savings Accounts (HSAs) are a great way to pay for your medical costs using tax free dollars. An HSA account can be established by an individual or family who is eligible. Your contributions are deductible and the distributions are not taxed if used for medical costs. Unused amounts remain in the account from year to year to be used as needed.

These accounts are usually setup through a financial institution, such as a bank or insurance company. To qualify for an HSA you must meet the following requirements:

  • Must be covered under an HDHP (high deductible health plan)
  • May not be covered under any other non-HDHP plan
  • May not be entitled to Medicare benefits (although you may draw out of a previous HSA)
  • Cannot be claimed as a dependent by another taxpayer

High deductible health plan limits for 2004 are as follows: Individual $1,000—with a maximum annual deductible and out-of-pocket expense of $5,000. Family $2,000—with a maximum annual deductible and out-of-pocket expense of $10,000.

Contributions can be made in cash or through a cafeteria plan where you work. These payments can be made at the convenience of the individual or employer. Payments do not have to be made each month, and the amount can be different each time. Contributions made by an individual are deductible. Contributions made by an employer are excluded from income and are not subject to employment taxes (what a great incentive for employers!). Payments to an HSA cannot be made before the tax year and must be made by the return due date (without extensions) for the tax year.

Contribution limits for 2004 are as follows:
Self only: under age 55—$2,600; age 55 or older—$3,100 
Family: under age 55—$5,150; age 55 or older—$5,650

Contributions are reduced by 1/12 for each month an individual is not covered by an HDHP. They are also reduced by any amounts contributed to an MSA (medical savings account). Note that you can have both an HSA and MSA. Rollovers are allowed from an MSA to an HSA and the rollover is not subject to the annual contribution limit.

Withdrawals are not mandatory each year. Contributions and earnings can remain in the account until the individual requests a distribution. A distribution can be made any time during the year, but must be used for a medical expense or the distribution may be taxed. If you are no longer eligible to contribute you may still withdraw for qualified medical purposes.

Qualified medical expenses for an HSA are generally the same as expenses that can be deducted on the Schedule A. This also includes nonprescription drugs. Insurance premiums are not considered a qualified medical expense, but long-term care insurance premiums are.

Contact Napier and Company if you have additional questions about HSA’s.
 
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