Health Savings Accounts (HSAs)

From TaxAlmanac

A Health Savings Account (HSA) is a tax-exempt trust or custodial account set up with a U.S. financial institution (such as a bank or an insurance company) in which money is saved exclusively for future medical expenses. This account must be used in conjunction with a High Deductible Health Plan (HDHP), discussed later.

Important Note. An Archer Medical Savings Account (MSA) can be rolled into a Health Savings Account tax-free.

What are the Benefits of a Health Savings Account?

• The interest or other earnings on the assets in the account are tax free.
• A tax deduction can be claimed for contributions made, even if not itemizing deductions on Form 1040.
• Distributions may be tax-free if used to pay qualified medical expenses.
• The contributions remain in the account from year to year until used.
• A Health Savings Account is "portable" so it stays with the individual, even if employers change.

Qualifying for a Health Savings Account

To qualify for a Health Savings Account, an individual must meet the following requirements.

• Have a high deductible health plan (HDHP), described later, on the first day of the month.
• Have no other health coverage except what is permited under Other Health Coverage, described later.
• Cannot be enrolled in Medicare.
• Cannot be claimed as a dependent on someone else's tax return.

High Deductible Health Plan (High Deductible Health Plan)

To be eligible for a Health Savings Account, the individual must have a High Deductible Health Plan. A High Deductible Health Plan has:

• A higher annual deductible than typical health plans, and
• A maximum limit on the sum of the deductible and the annual out-of-pocket medical expenses that must be paid for covered expenses.

2006 Limits

For self-only coverage, a high deductible health plan is one with a minimum annual deductible of $1,050 and maximum annual deductible and out-of-pocket expenses of $5,250. For family coverage, a high deductible health plan is one with a minimum annual deductible of $2,100 and maximum annual deductible and out-of-pocket expenses of $10,500. The upper limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies.

Family Plan Exceptions

There are some family plans that have deductibles for both the family as a whole and for individual family members. Refer to IRS Publication 969 for special rules regarding such plans.

Other Health Coverage

An individual (or individual's spouse if family coverage) generally cannot have any other health plan that is not a High Deductible Health Plan. However, this rule does not apply if the other health plan(s) only covers the following items.

• Accidents.
• Disability.
• Dental care.
• Vision care.
• Long-term care.
• Benefits related to workers' compensation laws, tort liabilities, or ownership or use of property.
• A specific disease or illness.
• A fixed amount per day (or other period) of hospitalization.

Amount of Contribution

The amount that can be contributed to a Health Savings Account depends on the nature of the coverage and the person's age. For self-only coverage, a contribution up to the amount of the annual health plan deductible, but not more than $2,650 for 2005 ($3,150 if age 55 or older) is allowed. For family coverage, a contribution up to the amount of the annual health plan deductible, but not more than $5,250 for 2005 ($5,750 if age 55 or older) is allowed. The insurance policy must cover the entire year in order to contribute the full amount. For each full month in which there was no High Deductible Health Plan coverage, the amount contributed must be reduced by one-twelfth.

Example. John Smith has a High Deductible Health Plan for his family for the entire months of July through December 2005 (6 months). The annual deductible is $4,000. John can contribute up to $2,000 ($4,000 ÷ 12 months × 6 months) to his Health Savings Account for the year.

Tip. If both spouse's have a family plan, they are treated as having family coverage with the lower annual deductible of the two health plans. The contribution limit is split equally between them unless they agree on a different division.

Note. The limits described above must be reduced by any amount contributed to a Medical Savings Account or other Health Savings Account.

Medicare Eligible Individuals. Beginning with the first month that a person is entitled to benefits under Medicare, contributions cannot be made to a Health Savings Account.

When To Contribute

Contributions to a Health Savings Account for 2006 can be made until April 15, 2007.

Sources:

• Notice 2004-50
• IRS Publication 969

Lacerte Input

The following explains how to enter most common HSA situations in the Lacerte Tax program.

All entries should be made in the entry screen titled HSA/MSA (screen number 32.1).

Contributions

1. Enter the type of coverage (self-only or family) for the taxpayer and/or spouse in the first line (the boxes in the image below containing the numbers 3 or 53).
2. Enter the amount contributed in the boxes below containing the numbers 5 or 55.
3. Enter the annual deductible in the boxes below containing the numbers 6/8 or 56/58.

Distributions

1. Enter the amount distributed in the boxes below containing the numbers 15 or 65.
2. Enter the qualified expenses in the boxes below containing the numbers 17 or 67.

Is some rare cases, the limitation may need to be overridden. An example would be if the deductible changed mid-year.