What is a Health Savings Acount?
A Health Savings Account is a tax deductible, interest bearing account designed to assist in paying your medical expenses tax free. An HSA is designed to work with a qualified High Deductible Health Plan (HDHP). The funds in your HSA can help pay for medical expenses both covered and not covered by your health plan, including your deductible and co-insurance on the qualified plan. An HSA is your account. When used to pay your medical expenses, all of the money you contribute is tax-deductible and goes with you when you retire or change jobs. In this way, an HSA is portable.
DOWNLOAD: United States Treasury HSA Brochure (pdf)
A High Deductible Health Plan (HDHP) is a full major medical health insurance plan with maximum out-of-pocket limits and minimum annual deductibles. The requirements of a qualifying High-Deductible Medical Plan are determined by the Internal Revenue Service (IRS). These requirements are subject to change each year.
Tax Benefits of an HSA
There are several tax benefits of an HSA:
- Cash contributions made to an HSA during a tax year are deductible from your federal gross income.
- Contributions made through a payroll deduction are made, free of tax, by employees.
- Contributions made by an employer are also not included in your gross income for tax purposes.
- Withdrawals from your Health Savings Account for qualified medical expenses are free from federal income tax. With the average American being taxed at 28%, this can translate into a tremendous savings.
- If your HSA is interest bearing, the earnings are tax-deferred, and you will never pay federal taxes on them if the money is used on qualified medical expenses
- Tax benefits for individuals and families may vary from that of employers. Check with a licensed agent to find out which tax benefits apply to you.
A Qualified Medical Expense is defined by IRS Code Section 231(d), the expenses must be to primarily alleviate, or prevent, a physical or mental defect or illness.
Some samples are listed below:
- Prescription Drugs
- Physicians office visit
- COBRA and long term care premiums
- Durable medical equipment
- Eyeglasses, contact lenses, LASIK and other vision care
- Birth control pills
- Chiropractor services
- Dental and Vision care
- Hearing aids
- Smoking cessation, and weight-loss program
HSAs were created by the Medicare bill signed by President Bush on December 8, 2003, and is designed to expand access to health care by helping individuals save for future qualified medical and health expenses on a tax-free basis. An individual who is covered by a High Deductible Health Plan can make a tax deductible contribution and use it to pay for out-of-pocket medical expenses. This allows more American families to get the health care they need, at a price they can afford.
Adjusted items for HSAs for 2007-2008
Annual Contribution Limitation
For calendar year 2007, the limitation on deductions under section 223(b) (2) (A) for and individual with self-only coverage under a high deductible health plan is $2,850. For calendar year 2008, the limitation on deductions under section 223(b) (2) (B) for an individual with family coverage under a high deductible health plan is $5,650.
For calendar year 2008, the limitation on deductions under section 223(b) (2) (A) for and individual with self-only coverage under a high deductible health plan is $2,900. For calendar year 2008, the limitation on deductions under section 223(b) (2) (B) for an individual with family coverage under a high deductible health plan is $5,800.
IRS 2009 Adjusted HSA Amounts
Eligible individuals with self-only coverage under a high-deductible health plan (HDHP) may contribute an annual maximum of $3,000 to their Health Savings Account (HSA) for 2009. Eligible individuals with family coverage (coverage for two or more individuals) under a HDHP may contribute up to $5,950 to their HSA. Individuals age 55 or older who are not enrolled in Medicare may contribute more to the account per year. In 2009, an additional $1,000 contribution will be allowed. In 2008, the catch-up contribution was $900.
To be considered qualified for an HSA, the HDHP must meet certain IRS regulations. For 2009, to qualify as a HDHP:
- The minimum deductible amount must be $1,150 for self-only coverage and $2,300 for family coverage; increased from 2008 requirements.
- The out-of-pocket maximum must be no higher than $5,800 for individual or $11,600 for family coverage; increased from 2008 requirements.The HDHP must be set up with a combined medical/pharmacy deductible.
- This deductible must apply to the out-of-pocket maximum; no change from 2008 requirements.
- All medical and pharmacy services must be subject to deductible and out-of-pocket maximum except for preventive services.
- Under recent legislation, these amounts are the maximum HSA contribution amount regardless of the amount of the HDHP deductible.
- These estimates are adjusted annually based on changes in the Consumer Price Index (CPI).
