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Introduction
A Health Savings Account, or HSA, is a tax-exempt
account with a financial institution in which
funds accumulate to pay for medical expenses.
They were created in response to the rising cost
of health care with the intent to give the consumer
back the control of their health care costs as
part of a movement towards consumer-driven health-care.
HSAs also give financial incentives for employers
of all sizes to provide health insurance and individual
consumers to have health insurance. HSAs allow
you to enjoy tax reductions while having affordable
health insurance premiums.
Overview
There are two parts to the HSA concept. Before
a health savings account can be opened, a qualified
High Deductible Health Plan (HDHP) must be in
place to cover the individual or family. An HDHP
provides health coverage for an individual or
family with an affordable premium. The guidelines
for an HDHP are determined by the Internal Revenue
Service each year. To determine if your plan qualifies,
please contact your health plan representative.
The current requirements of an HDHP are as follows:
Deductible Requirements Minimums for Tax
Year 2006:
$1,050 for Single
$2,100 for Family
Maximum
Out-of-Pocket Maximums for Tax Year 2006:
$5,250 for Single
$10,500 for Family
Eligibility
Any individual/employee is able to have an HSA
so long as their HDHP meets the IRS requirements
to be a qualified HDHP.
Contributions
Contributions
can be made by:
- Accountholders / Individuals
- Employers
- Any other third party
- Contributions are tax-deductible
for the accountholder. Employer contributions
and employee contributions through a Section
125 Plan are pre-tax.
- Contributions made to an
accountholder’s account belong to the
accountholder until the funds are used (please
see the Distributions section below).
- Employer contributions must
be made on a comparable basis.
- Contributions are limited
to the lesser of 100% of the deductible or the
IRS Contribution Limit.
Distributions
- Funds can be used tax-free
at any time for eligible medical expenses.
- As of age 65, funds
can be used for non-eligible medical expenses
subject to ordinary income tax without any IRS
penalty.
- Prior to age 65, funds
can be used for non-eligible medical expenses
subject to ordinary income tax and a ten percent
IRS penalty.
- Upon the accountholder’s
death, the assets in the HSA become the property
of their named beneficiary. If there is no beneficiary
named, the assets go to the accountholder’s
estate.
- If the beneficiary is
a spouse, the HSA may be treated as their own
account.
- If the beneficiary is
a non-spouse, the HSA must be treated as ordinary
income for taxation purposes.
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