The Medicare Prescription
Drug, Improvement and Modernization Act of 2003 created special savings accounts
known as Health Savings Accounts, or HSAs. The new HSAs will allow those with
high healthcare deductibles (regardless of age) to use pre-tax dollars to cover
health care costs.
An HSA is similar to
an individual retirement account, but is designed to provide for the qualified
medical expenses of an individual rather than for retirement. Contributions you
make to an HSA are tax deductible and any earnings grow tax-free. In addition,
any distributions you take to pay for qualified medical expenses are also tax-free.
However, if you take a distribution and do not use the distribution to pay for
qualified medical expenses, you will be subject to tax on the distribution in
addition to a 10% penalty on the distribution amount.
In
order to be eligible to establish an HSA, you must satisfy several conditions.
First, you must be covered under a high deductible health insurance plan (HDHP).
If the coverage is only for you, the plan must have an annual deductible of at
least $1,100 and annual out-of-pocket expenses not exceeding $5,500. This includes
deductibles, co-payments, and other amounts, but not premiums. If the coverage
is for your family, the plan must have an annual deductible of at least $2,200
and annual out-of-pocket expenses not exceeding $11,000. Other than providing
benefits for preventive care, the plan may not pay benefits until you or your
family has incurred covered medical expenses in excess of the minimum annual deductible.
In addition, you may not be claimed as a dependent on another person's tax return.
Second, you may not be covered by any other
health plan that is not a HDHP, including your spouse's plan, your parent's plan,
or Medicare. However, you may still be covered under workers' compensation laws;
home and auto insurance, insurance for specified diseases or illness, insurance
that pays a fixed amount per day of hospitalization, and insurance covering accidents,
disability, dental care, vision care, or long-term care.
Medical
expenses that qualify for payment through your HSA are those that would be deductible
for tax purposes as medical expenses. These expenses may be for you, your spouse,
or your dependents, but they cannot be covered by insurance. In addition, you
cannot have your HSA pay your health insurance premiums because they are not qualified
medical expenses. However, your HSA can pay for your qualified long-term care
insurance, COBRA health care continuing coverage, and your spouse's or dependent's
premiums for Medicare Part A or B coverage.
Once
you reach Medicare eligibility age (65 under current law), HSA withdrawals that
are not used for medical expenses will not be subject to the 10% premature withdrawal
penalty tax. However, you will owe federal income tax (and maybe state income
tax too). There is no 10% penalty tax on withdrawals after death or disability
either. This makes the tax rules for withdrawals similar to a deductible IRA.
If your HSA still has a balance when you
pass away, your surviving spouse can take over your account and treat it as his
or her own HSA. Just make sure to name your spouse as the account beneficiary
in the event of your demise.
The maximum
deductible contribution you can make to your HSA is the lesser of your annual
deductible under the HDHP or $2,850 for coverage for yourself. If the coverage
is for your family, this amount increases to $5,650. If you are age 55 or older,
you may contribute an additional $900 to your HSA in 2008 and $1,000 in 2009.
Along
with contributing for yourself or your family, your employer may contribute to
your HSA and can pay the premiums for your HDHP on a deductible basis. The contributions
made by your employer on your behalf are not taxable to you.
Right
now there is no big hurry because — like with an IRA — you will be
allowed to make your 2007 HSA contribution as late as April 15, 2008. With this
setup, you can contribute to the account after you know how much your annual medical
expenses amounted to, although, you might want to contribute more than that, if
it is tax deductible.
If you have any questions
regarding HSAs, please contact our offices at 770-428-4025 at your convenience.
