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Date last modified: 12/27/07
 

Health Savings Accounts

The Health Savings Accounts (HSA) is a specialized account similar to a traditional IRA account.  You contribute funds specifically for medical expenses that are not covered by your insurance, such as co-pays, high deductibles or other out-of-pocket medical expenses.  Contributions to an HSA are tax deductible as an adjustment to income. Distributions are tax free if used to pay for qualified medical bills.  Distributions for non-medical reasons will be subject to income tax and early distributions will be subject to a 10% tax penalty, as well.  An HSA is portable between jobs.

To be eligible for an HSA, you must be covered under a high-deductible health plan . You must be under 65, cannot be covered by Medicare or any other health insurance plan except for plans that cover only long-term care, dental, vision or certain other medical costs.

Each year the maximum you may contribute to an HSA is the lesser of your insurance deductible or a “statutory” amount. For 2008, these statutory amounts are $2,900  for self-only coverage and $5,800  for family coverage.  Individuals between the ages of 55 and 65 are permitted an additional, "catch up" contribution of $900.

If you are an employee and you establish an HSA, you, your employer or both of you may contribute to it.  If you have a cafeteria plan at your place of employment you may also designate cafeteria plan funds for your HSA. Of course, you will not be able to deduct your employer's contribution on your personal tax return, but neither will you be required to report your employer's contribution as income on your return.

An insurance company, bank or any other institution qualified to be a trustee or custodian of IRAs can be an HSA trustee or custodian. Before you set up the account make sure you have your high deductible health plan in force. Then be sure that the money you contribute is invested in such a way that it will be reasonably easy to withdraw when you need to pay expenses. There may be other rules and fees; be sure to ask questions before signing any forms.

If you are an individual who typically has very few medical bills, and you have had to pay for your own medical insurance, the HSA gives you the advantage of the significantly lower premiums of a high deductible plan. The deductibles and co-pays can be covered by withdrawals from your HSA, and any funds not used from the HSA will be allowed to accumulate from year to year. Both current contributions and accumulated funds are invested; the earnings are tax-free and help build up the balance in the account. Distributions can be used for medical expenses, even after you reach age 65 and can no longer contribute to the account.

If you are an employer who has not been able to afford a comprehensive health care plan for your employees, you may be able to participate with your employees in funding an HSA program at a cost that is significantly lower than paying conventional medical premiums.