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Health Savings Account Basics
What is a Health Savings Account (“HSA”)?
A Health Savings Account health insurance plan is different from traditional health insurance; it is a savings account that can be used to pay health care expenses. HSAs allow you to pay health expenses with tax-free dollars. You can also save for future qualified medical expenses as well as save for health expenses after you retire. Health Savings Accounts were authorized by Congress and began January 1, 2004.You must have a High Deductible Health Plan (HDHP) to open a HSA. An HDHP will usually costs less than traditional health care coverage. The money that you save on insurance can be put into your Health Savings Account.
You own and you control the money in your HSA. You decide how to spend the money—not an insurance company. You also decide what to invest the money in.
What Is a “High Deductible Health Plan” (HDHP)?
Sometimes referred to as a “catastrophic” health insurance plan, an HDHP is an inexpensive health insurance plan that has a relatively high annual deductible. After the annual deductible is met, insurance benefits begin. The money in your HSA is used to pay for expenses your plan does not cover.For 2008, in order to qualify to open an HSA, your HDHP minimum deductible must be at least $1,100 (self-only coverage) or $2,200 (family coverage). The annual out-of-pocket (including deductibles, coinsurance, and co-pays) for 2008 cannot exceed $5,600 (self-only coverage) or $11,200 (family coverage). HDHPs can have first dollar coverage (no deductible) for preventive care and apply higher out-of-pocket limits (and copayments & coinsurance) for non-network services.
How much does an HSA cost?
An HSA is not a product you buy; it is a savings account that allows you to accumulate money on a tax deferred basis. When you spend the health savings account money on qualified medical expenses, it becomes tax free.How much may be contributed to an HSA?
The amounts established by the IRS for 2008 are $2,900 for individual coverage and $5,800 for family coverage. Consult with your CPA to determine which limit applies to you.The annual contribution limit is the same regardless of whether the contributions are made by an employer, an employee, or both.
You may make the full HSA contribution even if you were only covered by a HDHP for part of 2007. However, if you do not keep the HDHP inforce for the entire year of 2008, the excess contribution above the pro rated 2007 amount will be included as ordinary income on your 2008 tax return and subject to a 10% tax penalty.
The annual contribution amount is prorated to reflect any time which you were not eligible to contribute during the year. To figure the prorated amount, count only those months during which the high-deductible health plan was inforce for the entire month. The monthly limit is the annual limit divided by 12.
Even though the annual limitation is calculated on the basis of monthly prorating, the total contribution for the year can be made in one or more payments at any time up to your tax-filing deadline (without extensions). This limit is decreased by the any contributions made to a Medical Savings Account (Archer MSA).
What Happens to My HSA When I Die?
If you are married, your spouse becomes the owner of the HSA. Its tax treatment is unchanged. If you are not married, the account loses its tax favored treatment upon your death. The account will pass to your beneficiary or become part of your estate (and be subject to any applicable taxes).
Tax Savings—An HSA provides you triple tax savings!
- Tax deductions for contributions to your account;
- Tax-free investment earnings and,
- Tax-free withdrawals for qualified medical expenses.
Difference between HSA, HRA (Health Reimbursement Arrangement), and FSA (Flexible Spending Account)
You are 100% vested immediately in the HSA. It is your money. Money carries over from one year to the next. This is just the opposite of FSA (Flexible Spending Account) money where it is "Use it or Lose it." The unused HSA balance accumulates over time and grows based on the investment vehicle. Although HRA funds can accumulate from one year to the next, the money belongs to the company, not you. You can not take the money with you if you leave the company.
Who can contribute to an HSA?
Anyone can contribute to another person’s Health Savings Account. The tax benefit from such a contribution is gained by the person receiving the contribution, not to the person making the contribution.
Who can establish a HSA?
An adult can open a HSA if they:- Are insured by a High Deductible Health Plan (HDHP).
- Have no other first-dollar medical coverage (other types of insurance like specific injury insurance or accident, disability, dental care, vision care, or long term care insurance are permitted).
- Are not enrolled in Medicare.
- Cannot be claimed as a dependent on someone else’s tax return.
