HSA Stands for Health Savings Account

Federally Qualified HSAs are tax-deductible, tax-deferred, and tax-free.

• Tax-deductible: Contributions to your HSA can be deducted from your gross income.
• Pre-tax: Contributions made to your HSA through payroll deductions.
• Tax-deferred: Your HSA money grows without being taxed.
• Tax-free: You can use your HSA money tax free for eligible medical expenses

Eligibility

To establish an HSA, you must have coverage under a high deductible health plan. For 2007, these are defined as having a $1,100 deductible for individuals and $2,200 or higher for families, with a maximum out-of-pocket of $5,600 for individuals and $11,200.00 for families. HSAs are designed, in part, to help those with high-deductible policies to pay for health expenses until insurance benefits kick in. To be eligible for a HSA, you can not be covered by any other type of medical plan.

Each year that you are eligible, you, your employer, or both of you can contribute up to the amount of the deductible for your high-deductible health plan. An individual who is age 55 or older and not enrolled in Medicare may make a catch-up contribution of $800 for 2007 and $900 for 2008. Like IRAs, contributions for 2007 may be made through April 15, 2008.

Qualified Expenses and Distributions ^*

HSA funds can be used to pay for qualified health expenses* that the account owner and his or her spouse or dependents incur. Qualified expenses include costs for doctor visits, prescription drugs, over-the-counter remedies, Medicare premiums (but not supplemental Medicare benefits) and more.

Once you meet your deductible, your health insurance policy covers your medical expenses according to your policy provisions.

Funds withdrawn before age 65 for non-medical purposes are subject to a 10 percent penalty, as well as taxes on the amount withdrawn. Taxpayers who are 65 and older pay taxes, but not a penalty, on amounts withdrawn for non-medical reasons. Be aware, too, that funds remain in your Health Savings Account from year to year. This means your HSA funds continue to accrue tax-free until needed.

Tax Benefits

For 2007, you may deduct up to the amount of your policy's deductible, but not more than $2,850 if you have individual coverage or $5,650 for family coverage. (In 2008, the maximum HSA deduction moves up to $2,900 for individuals and $5,800 for family coverage.)

The HSA deduction is an above-the-line deduction, meaning you don't have to itemize to benefit from it. There is also no income or phase-out limit.

If your employer makes an HSA contribution for you, it is excluded from income, and not subject to income tax or FICA. Some states allow you to take a state income tax deduction for Health Savings Account contributions.

Dividends and interest in the account are tax-exempt, which means the account grows tax-free until funds are withdrawn. Withdrawals are tax-free for qualified expenses.

Contingencies

Should you change jobs, become unemployed, or retire, your HSA account stays with you. Upon death, any balance remaining in your Health Savings Account becomes the property of the beneficiary you named.

 
^* Please refer to IRS Publication 502 titled, “Medical and Dental Expenses,” Catalog Number 15002Q. Publications can be ordered directly from the IRS by calling 1-800-TAX FORM.