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Financial Focus Newsletter
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Financial Focus
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Health Savings Accounts (HSAs)
A Health Savings Account (HSA) is a tax-exempt trust or custodial account that you set up with a U.S. financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses. This account must be used in conjunction with a High Deductible Health Plan (High Deductible Health Plan), discussed later.
Important Note. If you currently have an Archer Medical Savings Account (MSA), you can roll it into a Health Savings Account tax-free.
What are the benefits of a Health Savings Account?
You may enjoy several benefits from having a Health Savings Account.
· The interest or other earnings on the assets in the account are tax free.
· You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040.
· Distributions may be tax-free if you pay qualified medical expenses.
· The contributions remain in your account from year to year until you use them.
· A Health Savings Account is "portable" so it stays with you if you change employers or leave the work force.
Qualifying for a Health Savings Account
To qualify for a Health Savings Account, you must meet the following requirements.
· You are an employee (or the spouse of an employee) of an employer who maintains an individual or family High Deductible Health Plan for you (or your spouse).
· You are a self-employed person (or the spouse of a self-employed person) who maintains an individual or family High Deductible Health Plan.
· You have no other health insurance or Medicare coverage except what is permitted under Other health insurance, later.
High Deductible Health Plan (High Deductible Health Plan)
To be eligible for a Health Savings Account, you must have a High Deductible Health Plan. A High Deductible Health Plan has:
· A higher annual deductible than typical health plans, and
· A maximum limit on the sum of the deductible and the annual out-of-pocket medical expenses that you must pay for covered expenses.
Family plans that do not meet the high deductible rules. There are some family plans that have deductibles for both the family as a whole and for individual family members. Under these plans, if you meet the individual deductible for one family member, you do not have to meet the higher annual deductible amount for the family. If either the deductible for the family as a whole or the deductible for an individual family member is below the minimum annual deductible for that year, the plan does not qualify as a High Deductible Health Plan.
Example. Mr. Orville has health insurance with company A in 2004. The annual deductible for the family plan is $3,500. This plan also has an individual deductible of $1,500 for each family member. Mr. Orville's wife had $2,200 of covered medical expenses. They had no other medical expenses for 2003. The plan paid $700 to Mr. Orville because Mrs. Orville met the individual deductible of $1,500, even though the Orvilles did not meet the $3,500 annual deductible for the family plan. The plan does not qualify as a High Deductible Health Plan because Mrs. Orville paid only $800 which was less than the minimum deductible amount.
Other health insurance. You (or your spouse if you file jointly) generally cannot have any other health plan that is not a High Deductible Health Plan. However, this rule does not apply if the other health plan(s) only covers the following items.
· Accidents.
· Disability.
· Dental care.
· Vision care.
· Long-term care.
· Benefits related to workers' compensation laws, tort liabilities, or ownership or use of property.
· A specific disease or illness.
· A fixed amount per day (or other period) of hospitalization.
Amount of Contribution
The amount you or your employer can contribute to your Health Savings Account depends on the nature of your coverage and your age.
If you have self-only coverage, you (or your employer) can contribute up to the amount of your annual health plan deductible, but not more than $2,600 ($3,100 if you are age 55 or older). If you have family coverage, you (or your employer) can contribute up to the amount of your annual health plan deductible, but not more than $5,150 ($5,650 if you are age 55 or older). You must have the insurance all year to contribute the full amount.
For each full month you did not have a High Deductible Health Plan, you must reduce the amount you can contribute by one-twelfth.
Example. You have a High Deductible Health Plan for your family for the entire months of July through December 2003 (6 months). The annual deductible is $4,000. You can contribute up to $2,000 ($4,000 ÷ 12 months × 6 months) to your Health Savings Account for the year.
Tip. If you and your spouse each have a family plan, you are treated as having family coverage with the lower annual deductible of the two health plans. The contribution limit is split equally between you unless you agree on a different division.
Note. You must reduce the limits above by any amount contributed to a Medical Savings Account or other Health Savings Account.
Medicare eligible individuals. Beginning with the first month you are entitled to benefits under Medicare, you cannot contribute to a Health Savings Account.
When To Contribute
You can make contributions to your Health Savings Account for 2004 until April 15, 2005.
Setting Up a Health Savings Account
No permission or authorization from the Internal Revenue Service is necessary to establish a Health Savings Account. When you set up a Health Savings Account, you will need to work with a trustee. A trustee can be a bank, insurance company, or anyone already approved by the Internal Revenue Service to be a trustee of individual retirement arrangements. Your employer may already have some information on Health Savings Account trustees in your area. The Internal Revenue Service intends to issue further guidance on setting up a Health Savings Account. This guidance will be published as Notice 2004-2 in the January 12, 2004, issue of the Internal Revenue Bulletin (2004-2).
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Clear as a bell, eh?
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