Tax-Advantaged Tools Part Two: Health Savings Accounts

Created in 2003, Health Savings Accounts (HSAs) help individuals save for future qualified medical and retiree health expenses on a tax-free basis.

The biggest advantages of HSA accounts are the tax benefits: you put in pretax dollars, it compounds free of taxes, and withdrawals are tax free if they are used for qualified expenses. If the money is used for other than qualified medical expenses, the expenditure will be taxed and, for individuals who are not disabled or older than 65, subject to a 10% penalty.

Another advantage is any HSA money not spent by the end of the year rolls over to the next year, in contrast to Flexible Spending Accounts (FSA). Also, there are no income limits on who may contribute to an HSA.

To be eligible for an HSA you must be enrolled in, or covered under, an HSA-eligible health plan or what is called a High Deductible Health Plan (HDHP). The HDHP is an inexpensive plan that will cover you should your medical expenses exceed the funds you have in your HSA. The deductible in 2009 is at least $1,150 for an individual and $2,300 for family coverage.

Opening an HSA is a two-step process: you must have the HDHP, and then you can sign-up for an HSA. An HSA-eligible health plan does not have to be an employer-sponsored arrangement. Banks, credit unions and insurance companies also provide HSAs.

There are additional requirements for eligibility: you cannot be claimed as a dependent on anyone else’s tax return; you cannot be entitled to Medicare benefits; and you cannot be enrolled in an FSA or be covered under a spouse’s FSA. You are allowed to have automobile, dental, vision, disability and long-term care insurance at the same time as an HDHP.

Some additional things you need to know about HSAs:

• For 2009, the maximum HSA contribution is $3,000 for individual coverage and $5,950 for family coverage. Those who’ll be 55 or older as of December 31, 2009, can contribute an extra $1,000.
• Once funds are deposited into the HSA, the account can be used to pay for qualified medical expenses tax free, even if you no longer have HDHP coverage. The funds in your account roll over automatically each year and remain indefinitely until used. There is no time limit on using the funds.
• You can use your HSA to pay health insurance premiums if you are collecting Federal or State unemployment benefits, or have COBRA continuation coverage through a former employer

The content of this email is for informational purposes only. Be sure to speak to your financial or tax advisor before making important decisions about your personal finances.