Health Savings Account (HSA)

What is an HSA?

A Health Savings Account is a savings or investment account created primarily for the purpose of paying for medical expenses. The account does not have to be used to pay medical expenses, but works most advantageously when it does. Health Savings Accounts (HSAs) were created by a provision contained in the Medicare legislation passed in November 2003 and signed into law by President Bush December 8, 2003. The legislation is designed to encourage the use of high deductible health insurance plans together with personal savings to create a more efficient method to fund the increasing cost of medical care. The law attaches substantial tax advantages to a qualifying savings account.

The Health Savings Account is used to pay for eligible medical expenses not paid for by insurance, at your discretion. Health Savings Accounts may be established January 1, 2004 and after.

Who is Eligible to Establish an HSA?

An eligible individual is an individual, in any month, who:

  1. Is covered under a qualifying high-deductible health plan (HDHP);
  2. Is not also covered by any other health plan that is not a HDHP (with certain exceptions for plans providing limited coverage)
  3. Is not entitled to benefits under Medicare; and
  4. May not be claimed as a dependent on another person's tax return.

What is a Qualifying Health Plan?

A qualifying high-deductible health plan (HDHP) is a plan that satisfies certain requirements relative to deductible and out-of-pocket expenses.

Exceptions

Certain insurance plans providing limited benefits need not meet the HDHP requirements, including:

Accident Insurance   Long-Term Care Insurance   Dental Coverage

Vision Care Insurance   Specified Disease Insurance   Hospital Indemnity Insurance

Additionally, preventative care benefits do not have to meet HDHP requirements.

Tax Benefits of Contributions to a HSA

Contributions by an eligible individual to a HSA are deductible up to certain limits. Specifically, contributions will reduce the adjusted gross income of the eligible individual and therefore are not subject to federal or state income tax whether or not the individual (taxpayer) itemizes deductions.

Contribution Guidelines

Contributions which exceed the maximum amount are not deductible to the extent they exceed the limits. The maximum deduction for tax purposes is equal to the deductible selected for the qualifying health plan.

Health Savings Account Taxation

Qualifying contributions are tax deductible. Withdrawals for eligible medical expenses are not subject to income tax, whether before or after retirement age (age 65). Other distributions are subject to income taxes and subject to an additional 10% penalty if taken prior to age 65.

Traditional IRA Taxation

Qualifying (deductible) contributions are not subject to income tax. Generally, withdrawals prior to age 59½ are subject to income tax and a 10% penalty. At age 59½ the penalty is eliminated, but distributions continue to be subject to income tax.

Roth IRA

Contributions are not tax deductible. Distributions prior to age 59½ generally are subject to income tax and a 10% penalty to the extent they exceed contributions. Distributions at age 59½ and later are generally not subject to income tax.

Roth and Traditional IRA's do not treat withdrawals for medical expenses any differently than other withdrawals, with the exception of eligible medical expenses that exceed 7.5% of the taxpayer's adjusted gross income.

Any tax related information is for general purposes only and is not intended to be your tax advice. Consult with your tax advisor to determine the specific tax consequences of an HSA for you.