MONEY MANAGEMENT

HEALTH SAVINGS ACCOUNTS: WHAT YOU NEED TO KNOW

(February 1, 2007) -- Health care consumers may realize significant financial benefits from Health Savings Accounts (HSAs). Created under the 2003 Medicare Act, an HSA is a tax-favored savings plan offered by many banks, insurance companies, brokerages and other financial institutions and can be used to pay for qualified medical expenses. According to the Virginia Society of CPAs, Health Savings Accounts offer significant tax benefits to individuals who qualify.

Eligibility

To establish an HSA, you must have coverage under a high-deductible health plan. For 2007, these are defined as having a $1,100 deductible for individuals and $2,200 or more for families, up from $1,050 and $2,100 respectively for 2006. HSAs are designed, in part, to help those with high-deductible policies to pay for health expenses until insurance benefits kick in. To be eligible for a HSA, you cannot be covered by any other type of medical plan.

Contribution limits

Each year that you are eligible, you, your employer or both of you can contribute up to the amount of the deductible for your high-deductible health plan. An individual who is age 55 or older and not enrolled in Medicare may make a catch-up contribution of $700 for 2006 and $800 for 2007. Like Individual Retirement Accounts (IRAs), contributions for 2006 may be made through April 15 of this year.

Qualified expenses and distributions

HSA funds can be used to pay for qualified health expenses that the account owner and his or her spouse or dependents incur. Qualified expenses include costs for doctor visits, prescription drugs, over-the-counter remedies, Medicare premiums (but not supplemental Medicare benefits) and more. Once you meet your deductible, your health insurance policy covers your medical expenses according to your policy provisions.

Funds withdrawn before age 65 for non-medical purposes are subject to a 10 percent penalty, as well as taxes on the amount withdrawn. Taxpayers who are 65 and older pay taxes, but not a penalty, on amounts withdrawn for non-medical reasons.

Be aware, too, that funds remain in your Health Savings Account from year to year. This means your HSA funds continue to accrue tax-free until needed.

Tax benefits

For 2006, you may deduct up to the amount of your policy’s deductible, but not more than $2,700 if you have individual coverage or $5,450 for family coverage. (In 2007, the maximum HSA deduction moves up to $2,850 for individuals and $5,650 for family coverage.) The HSA deduction is an above-the-line deduction, meaning you don’t have to itemize to benefit from it. There is also no income or phase-out limit.

If your employer makes an HSA contribution for you, it is excluded from income and not subject to income tax or the Federal Insurance Contributions Act (FICA) tax. Some states allow you to take a state income tax deduction for Health Savings Account contributions.
Dividends and interest in the account are tax-exempt, which means the account grows tax-free until funds are withdrawn. Withdrawals are tax-free for qualified expenses.

Contingencies

Should you change jobs, become unemployed or retire, your HSA account stays with you. Upon death, any balance remaining in your Health Savings Account becomes the property of the beneficiary you name.

Advice

A CPA can help you understand the value of Health Savings Accounts and determine if an HSA makes sense for your particular situation.

The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.