Health Savings Accounts

Health Savings Accounts (HSAs) were created by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.  An HSA is a tax-exempt trust or custodial account used for paying qualified medical expenses of an eligible account beneficiary. An HSA is similar to an individual retirement account (IRA), but it is designed to provide for the qualified medical expenses of the individual.

There are several benefits to having an HSA:

1)      You can claim a tax deduction for contributions make to your HSA even if you do not itemize your deductions on your Form 1040

2)      Contributions to your HSA made by your employer may be excluded from your gross income

3)      The contributions remain in your account from year to year until you use them

4)      The interest or other earnings on the assets in the account are tax free

5)      Distributions may be tax free if you pay qualified medical expenses

6)      An HSA is portable so it stays with you if you change employers for leave the work force

In order to be eligible to establish an HSA, you must satisfy several conditions. First, you must be covered under a high deductible health insurance plan (HDHP). If the coverage is only for yourself, the plan must have an annual deductible of at least $1,100 and annual maximum out-of-pocket expenses (including deductible) of $5,600 for 2008. If you have family coverage, the plan must have an annual deductible of at least $2,200 and the annual maximum out-of-pocket expenses (including deductible) of $11,200 for 2008. 

Secondly, you may not be covered by any other health plan that is not a HDHP, including your spouse's plan, your plan, or Medicare. However, you can still be covered under insurance for specified diseases or illness, insurance that pays a fixed amount per day of hospitalization and insurance covering accidents, disability, dental care, vision, and / or long-term care.

Thirdly, you may not be claimed as a dependent on another person's tax return.

As stated above, if distributions are used for "qualified" medical expenses, they are tax-free. Below is a list of qualified medical expenses:

1)      Expenses that would generally qualify as medical and dental expenses for Schedule A - Itemized Deductions

2)      Expenses must be incurred by yourself, your spouse, and / or your dependents

3)      Insurance premiums are not considered a qualified medical expense

4)      Qualified long-term care insurance premiums and COBRA health care continuing coverage

The maximum deductible contribution you can make to your HSA is the lesser of your annual deductible under the HDHP or $2,900 for individual coverage for 2008. If you have family coverage, you can contribute up to the amount of your annual health plan deductible, but not more than $5,800 for 2008. If you are age 55 or older, you may contribute an additional $900 to your HSA for 2008.

Along with contributing for yourself or your family, your employer may contribute to your HSA and can pay the premiums for your HDHP on a deductible basis. The contributions made by your employer on your behalf are not taxable to you. If you have more than one HSA and/ or your employer is making contributions, your total contributions to all HSAs cannot be more that the limits discussed above.

You must report all contributions (made by you and your employer) and distributions (used for qualified medical expenses or not) from your HSA on Form 8889, Health Savings Accounts, and file it with your Form 1040. This form must be filed every year in which there is activity in your HSA.