Health Savings Accounts - HSA's

Are your medical insurance premiums increasing? Congress recently passed legislation approving Health Savings Accounts. The combination of a high deductible health plan for affordable insurance, with a pre-tax Health Savings Account for day to day expenses. The HSA is used for routine medical expenses like prescription drugs and office visits. If not used, it is rolled over each year and later used for retirement.

For every health care dollar you spend, your paying state taxes, federal taxes and healthcare expenses. Assuming a 35% tax rate, that leaves you with only 65¢ on every $1 spent on health care. With an HSA, you have 100% of every dollar deposited to spend on qualified health care. And unused funds roll over to the next year.

What are the benefits?

• HSA contributions - by employer or employee - reduces taxable income 
• HSA interest and investment earnings are tax deferred 
• Pre-tax contributions to an HSA reduces taxable income
• Premiums for HSA compatible plans are substantially lower than traditional plans 
• Money in the HSA not used accumulates tax defered (no use it or lose it clause)
• Retirees may continue to use HSA funds tax-free for medical expenses, or withdraw the funds and pay ordinary income tax.

What expenses qualify?

• Actual medical expenses, including physician visits, prescription drugs, hospital bills
• Dental and Vision Exams and Procedures (including eyeglasses, Lasek and Orthodontia)
• Chiropractic, Psychological, Physical Therapy, Acupuncture
• Premium for Long-term care insurance, Disability Insurance, Dental and Vision Insurance

Who's eligible?

• Must be covered by a high-deductible health plan that is HSA - compatible
• Not covered by another health plan that is not a high-deductible health plan
• Not eligible for Medicare § Not eligible to be claimed as a dependent on another persons tax return

What about health care plans?

Blue Shield offers two high deductible health plans qualifying for HSA's which include annual physicals and lifetime maximums of $6 million.

Call Hans Kardel today at 805.922.5283 or E-Mail for more information.

HSA Frequently Asked Questions

What are Health Savings Accounts?
Health Savings Accounts are a tax-favored savings plan created by the 2003 Medicare Act. The accounts work similarly to an individual retirement account: eligible participants can deposit money in an HSA, and deduct the amount of the deposits from taxable income.

Does this account replace the Archer Medical Savings Account (MSA)?
Yes. For tax years after 12/31/04, the Archer MSA sunsets and the HSA replaces it. Rollovers from Archer MSA's to HSA's are permitted

Is there an enrollment cap or restriction on who can have a Health Savings Account?
No. There are not enrollment caps as with the MSA. They are available to anyone covered by a qualified high deductible health plan.

Who is eligible?
To receive a tax deduction for contributions to the account, an individual must be covered under a qualified high-deductible health plan. The person must also be below Medicare eligibility age (65), and not covered under any other health plan which duplicates any benefits in the qualified high-deductible plan. Exception: Individuals may maintain coverage for accidents, disability, dental care, vision care and long term care.

Who owns the account?
Individual or employee.

Who funds the account?
Taxpayer and/or employer. If the employer contributes to the employee's account, the contribution must be the same for all employees, and the employer receives a tax deduction as a normal business expense.

How is the account funded?
Money is deposited directly into the account. Contributions must be made directly in cash or through 125 Cafeteria plans.

Is it a personal account?
Yes.

Does interest accrue?
Interest can be accrued tax free in qualified HSA's.

Is the account portable?
Rollover is allowed. The individual owns the HSA and takes it when leaving employment but the rollover must be completed within 60 days.

What is the tax treatment?
Account distributions are tax free for qualified medical expenses as defined by 213(d) of the IRC. Tax-free distributions to pay premiums for long-term care insurance, COBRA continuation, and health insurance while unemployed are allowed. Qualified expenses also include prescription drugs, qualified long term care services, Medicare expenses (but not Medigap), and retiree health expenses for individuals age 65 and older.

Can funds be used for non-medical expenses?
Non-medical distributions are included in gross income, and therefore taxed, as well as subject to 10% penalty. Only exception allowed is non-medical distributions for those individuals age 65 and over or who are disabled or deceased. Those distributions are included as taxable income but are not subject to the 10% penalty.

Is there a tax on excess contributions?
Yes.

Is there a "catch-up" provision for older workers?
Individuals age 55 or older may contribute more to the account per year. Starting in 2004, an additional $500 contribution is allowed, increasing $100 per year, up to $1,000 per year in 2009 and thereafter.