January 2005

Home | Site Map | FAQ

970.498.4960

Health Savings Account (HSA)

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 created a new benefit, the Health Savings Account (HSA), effective January 1, 2004.

What is an HSA?

Designed somewhat like IRAs, these new accounts can be used to build tax-sheltered nest eggs that can pay out-of-pocket medical expenses with tax-free dollars.

In general, an HSA helps individuals who have high-deductible medical insurance policies. When medical bills come due, you withdraw money from your HSA to cover out-of-pocket medical costs until your insurance kicks in. Contributions to an HSA are tax-deductible, and qualified withdrawals from the account aren’t taxed.

Who qualifies?

To contribute to an HSA, you need to be covered by a high-deductible health plan (HDHP). For self-only coverage, the policy must have an annual deductible of at least $1,000. For family coverage, the annual deductible must be at least $2,000.

In addition, you can’t be covered by Medicare or another health plan (except plans that cover long-term care, dental, vision, and certain other medical costs.)

Finally, you must be under age 65.

What can you contribute?

Every year, you may contribute to an HSA the lesser of your insurance deductible or certain amounts set by law. For 2004, these amounts are $2,600 for singles and $5,150 for family coverage.

For example, if you’re a single person and your medical insurance deductible is $2,700, your deductible contributions for 2004 are limited to $2,600. On the other hand, if your policy’s deductible is $2,000, that amount becomes your maximum deductible contribution.

How do you set up an HSA?

You open an HSA with a financial institution. However, your health insurance company may be an IRS-approved trustee or custodian so check with them first. There are relatively few guidelines about how HSA funds can be invested, so it’s especially important to choose a reputable firm to handle your account.

When may HSA contributions be made? Is there a deadline for contributions to an HSA for a taxable year?

You can make contributions to your HSA from January 1st through the tax-filing deadline (excluding extensions) for the year, generally April 15.

What are the “qualified medical expenses” that are eligible for tax-free distributions?

"Qualifying Medical Care Expenses" are described in IRS Publication 502 (http://www.irs.gov/pub/irs-pdf/p502.pdf). Such medical expenses are qualified only to the extent they are not covered by insurance or otherwise.

In addition, "Qualified Medical Care Expenses" must be incurred after the HSA has been established.

Are health insurance premiums qualified medical expenses?

Generally, health insurance premiums are not qualified medical expenses except for the following: qualified long-term care insurance, COBRA health care continuation coverage, and health care coverage while an individual is receiving unemployment compensation.

Reporting to IRS
As a Health Savings Account (HSA) owner, you will be required to submit IRS form 8853 with your federal income tax return. This form reports your total HSA deposits and withdrawals for the tax year. Your HSA administrator will provide necessary information to complete this form.

The information presented in the Tax Newsletter is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly, cannot be regarded as legal or tax advice. Please contact your tax advisor for more information on the subject and how it pertains to your specific situation.

For more information
For current contribution and other limits, visit HSAcenter.com.

For more information
Review IRS Publication 969, Health Savings Accounts and other Tax-Favored Health Plans.