Health Savings Accounts

The topic of Health Savings accounts was raised recently, so I thought it would make an interesting discussion. I myself have only had experience with FSAs (Flexible Spending Accounts) that you have to "use or lose" the money each year. HSAs roll over each year and can be very effective when paired with a High-Deductible insurance plan.

Here is information taken directly from the IRS. Please post comments especially if you have experience with HSAs:



What are the benefits of an HSA? You may enjoy several benefits from having an HSA.

• You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on Form 1040.
  
• Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
  
• The contributions remain in your account from year to year until you use them.
  
• The interest or other earnings on the assets in the account are tax free.
  
• Distributions may be tax free if you pay qualified medical expenses. See Qualified medical expenses, later.
  
• An HSA is “portable” so it stays with you if you change employers or leave the work force.
  
  

Qualifying for an HSA

To be an eligible individual and qualify for an HSA, you must meet the following requirements.

• You have a high deductible health plan (HDHP), described later, on the first day of the month.
  
• You have no other health coverage except what is permitted under Other health coverage, later.
  
• You are not enrolled in Medicare.
  
• You cannot be claimed as a dependent on someone else's 2006 tax return.
  

High deductible health plan (HDHP). An HDHP has:

• A higher annual deductible than typical health plans, and
  
• A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. Out-of-pocket expenses include copayments and other amounts, but do not include premiums.
  

An HDHP may provide preventive care benefits without a deductible or with a deductible below the minimum annual deductible.

Distributions From an HSA

You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your HSA to send you a distribution from your HSA.
You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 10% tax. You do not have to make distributions from your HSA each year.

Balance in an HSA

An HSA is generally exempt from tax. You are permitted to take a distribution from your HSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions, earlier). Earnings on amounts in an HSA are not included in your income while held in the HSA.

Death of HSA Holder

You should choose a beneficiary when you set up your HSA. What happens to that HSA when you die depends on whom you designate as the beneficiary.

Spouse is the designated beneficiary. If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse's HSA after your death.

Spouse is not the designated beneficiary. If your spouse is not the designated beneficiary of your HSA:

• The account stops being an HSA, and
  
• The fair market value of the HSA becomes taxable to the beneficiary in the year in which you die.
  

If your estate is the beneficiary, the value is included on your final income tax return.