• Insurance Protection
• How Much Do I Need?
• Knowing What to Buy

• Designing a Health Plan
• Health Insurance Terms
• Health Savings Accounts (HSAs)
• Apply for Coverage

• Who Needs It?
• Reviewing Life Insurance Needs
• Knowing How Much You Need
• Knowing What to Buy
• Smart Buying Tips

Summary

Health Savings Accounts or HSAs are special tax-exempt trust or custodial accounts established under Internal Revenue Code Section 223 that are used for paying medical expenses. A High Deductible Health Plan (HDHP) must be purchased in order to qualify for establishing an HSA.

In some ways, HSAs are very similar to IRAs. For example, as with IRAs, the money in HSAs cannot be invested in life insurance and is non-forfeitable. However, HSAs are not identical to IRAs in all respects. Taxpayers cannot combine IRA and HSA contributions into the same account or move assets from one to another.

Depending on an individual's situation, contributions to an HSA may be made by the individual, employer or both. Contributions are deductible or excludable from the individual's gross income. Individuals, rather than the account custodians, need to determine whether funds from HSAs are used for qualified medical expenses.

HSA HIGHLIGHTS

• Contributions are tax deductible, even if individuals do not itemize deductions on tax form 1040.
• Account holders may make tax-free withdrawals from their account for qualified medical expenses not covered by the HDHP.
• The interest or other earnings on the assets in the HSA accumulate tax-free.
• If an account holder, at a future time, is no longer covered by a HDHP, the account holder may still make tax-free withdrawals from the account for qualified medical expenses, but may not contribute additional amounts to the HSA.
• Employer contributions are excluded from taxable income, and employment taxes do not apply.
• Contributions remain in the HSA from year to year until they are used. There is no "use it or lose it" provision as there is with a flexible spending account.
• Employers, individuals or both (as stated above) can make contributions to the HSA.
• The assets in the account, regardless of the source of the contribution, always belong to the account holder.
• The amount an individual or employer can contribute is based on the annual deductible of the HDHP, to a maximum in 2004 of up to $2,600 for individual and up to $5,150 for family.
• People age 55 through 64 years old can contribute an additional $500 above the maximum in 2004. This amount increases $100 each year through 2009 to a maximum of $1,000 at that time.
• Account holders may make withdrawals (or distributions) at any time. When receiving a distribution for qualified medical expenses not covered by the HDHP, account holders do not pay taxes on the distribution.
• The account holder is responsible to report the contributions and distributions to the IRS, and is ultimately responsible for ensuring that account transactions are within the allowed regulations. Penalties apply for over funding or for withdrawals used other then for qualified medical expenses.
• The federal law clearly allows both an HSA and FSA if the medical components of the FSA are limited to vision and dental expenses when an HSA is in place.

The above information is provided as a summary only. Please refer to Internal Revenue Code Section 223 for complete details regarding HSAs and their tax treatment.