You may have heard the term Health Savings Account
or its acronym HSA recently and be curious
as to exactly what these accounts are all
about. First of all, an HSA is not health
insurance. Instead, an HSA is a trust or
custodial account set up by a financial institution
and created exclusively for the benefit of
the account holder to save money for medical
expenses. The HSA rules are similar to the
rules that apply to an individual retirement
arrangement (IRA). As discussed below, HSA
contributions and distributions receive favorable
federal income tax treatment and the funds
in an HSA are not subject to federal income
tax. The account holder or someone else, such
as the account holder’s employer, may make contributions
to the HSA. An HSA may accept rollover contributions
from an Archer Medical Savings Account. HSA contributions
may be part of a cafeteria plan.
Any individual under age 65 who is covered
by a "high deductible" health plan (see
below) and cannot be claimed as a dependent on
someone else’s tax return may have an HSA.
The account holder may have certain permitted
coverage in addition to the high deductible health
plan, but generally cannot have other health
coverage.
A high deductible health plan in 2006
has an annual deductible of at least
$1,050 for
individual
coverage, or an annual deductible
of at least $2,100 for family coverage.
Also, the maximum
out-of-pocket expenses with respect
to allowed costs, including the deductible,
cannot exceed
$5,250 for individual coverage and
$10,500 for family coverage. These amounts may
be increased
for the cost-of-living in future
years.
Contributions to an HSA are deductible,
within limits, "above the
line," for
computing adjusted gross income
for federal income tax
purposes. Employer contributions
are excludible from employees'
gross income within the same
limits. Earnings on amounts in
an HSA are not currently taxable,
nor
are distributions from
an HSA that are used to pay qualified
medical expenses.
The maximum
annual contribution to an
HSA for 2006 is the lesser
of the annual
deductible
under
the high deductible health
plan or $2,700 for individual coverage,
or $5,450 for
family coverage.
For individuals
who have attained age 55 by the end
of the taxable
year, the
annual
contribution
limit is increased by
$700 in 2006.
Distributions from an
HSA to pay the medical
expenses
of the
individual
and
his or her
spouse or dependents
are excludible from income.
Distributions
not used to pay medical
expenses are subject
to income tax
and
an additional
10% penalty
unless the distributions
are made on account of
the account holder’s
death or disability or
the account holder is
at least
age 65.
Consult your tax advisor
about the potential
tax saving benefits
HSA’s
may offer you.
Tax
Topic is provided
by Jeremy Watson,
CPA, Jones & Company,
Ltd. Paragould.
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