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HSA Information

Health Savings Accounts (HSAs) were created by Public Law 108-173, the "Medicare Prescription Drug, Improvement and Modernization Act of 2003," signed into law by President Bush on December 8, 2003. Health Savings Accounts will change the way millions meet their health care needs because they are designed to help individuals save for qualified medical and retiree health expenses on a tax-advantaged basis.

The concept of Health Savings Accounts combines an affordable qualified High Deductible Health Plan (HDHP) and a tax-favored health savings account (HSA). The combination results in savings through lower health care premiums and a reduction in taxable income. The HSA grows tax-deferred, and if you use your HSA funds for eligible medical expenses, you never have to pay taxes on those funds!

With an HSA, you control your health care decisions! 

 

Overview
There are two parts to the HSA concept. Before a health savings account can be opened, a qualified High Deductible Health Plan (HDHP) must be in place to cover the individual or family. An HDHP provides health coverage for an individual or family with an affordable premium. The guidelines for an HDHP are determined by the Internal Revenue Service each year. To determine if your plan qualifies, please contact your health plan representative. The current requirements of an HDHP are as follows:


2012 IRS Limits

 

Single Plan

Family Plan

Maximum Contribution Limit

$3,100

$6,250

Minimum Deductible

$1,200

$2,400

Maximum Out-of-pocket

$6,050

$12,100

Catch-up Contribution (55+)

$1,000

$1,000

 

  • As of age 65, funds can be used for non-eligible medical expenses subject to ordinary income tax without any IRS penalty.
  • Prior to age 65, funds can be used for non-eligible medical expenses subject to ordinary income tax and a ten percent IRS penalty.
  • Upon the accountholder’s death, the assets in the HSA become the property of their named beneficiary. If there is no beneficiary named, the assets go to the accountholder’s estate.
    - If the beneficiary is a spouse, the HSA may be treated as their own account.
    - If the beneficiary is a non-spouse, the HSA must be treated as ordinary income for taxation purposes.

 

Tax Advantages
Health Savings Accounts create unique tax benefits for accountholders/individuals.

  • Contributions are 100% tax-deductible
  • Funds grow on a tax-deferred basis, and if the funds are used for an eligible medical expense, the funds are tax-free
  • Funds roll over from year to year, and funds used after age 65 are able to be used tax-free for eligible medical expenses or at your normal tax rate for any other reason

Over the life of your Health Savings Account, you could save thousands of dollars in taxes.   

Example: If you had a deductible of $3,000, contributed your maximum amount ($3,000) each year, estimate you will use $500 each year on medical expenses, fell in the 28% tax bracket, have a state sales tax of 5%, you were 40 years old, planned to contribute to your HSA until you were 65 years old and anticipated a three percent average interest rate, you could expect a tax savings of $9,453.89.

 

Federally qualified Health Savings Accounts are tax-deductible, tax-deferred and tax-free:

Tax-deductible – Contributions to your HSA are able to be deducted from your gross income.

Tax-deferred – HSA funds grow without being subject to taxes until they are used for non-eligible medical expenses.

Tax-free – The funds in an HSA are completely tax-free when used for eligible medical expenses.

 

 

 

Federal vs. State Tax Benefits
Health Savings Accounts are made available through the federal government on a tax favored basis.  Not all states provide tax benefits for Health Savings Accounts.

2012 Qualified High Deductible Health Plan IRS Requirements
The IRS requires an individual or family to have a high deductible health plan in order to open an HSA. The deductible and maximum out-of-pocket amounts are subject to change each year.

 

2012 IRS Limits

 

Single Plan

Family Plan

Minimum Deductible

$1,200

$2,400

Maximum Out-of-pocket

$6,050

$12,100


Contribution Limits
Health Savings Accounts (HSA) provide tax benefits for the funds that you contribute. However, the Internal Revenue Service limits the amount you are able to contribute to an HSA for each tax year. If you contribute more than the IRS allows, you could incur tax penalties. To avoid making excess contributions, coordinate your contributions with any other contributions that are being made to your account by an employer or another third-party.

What are Limits?
The Internal Revenue Service (IRS) reviews and determines the HSA contribution limits on an annual basis. An accountholder is able to contribute 100% of their qualified HDHP deductible up to the IRS contribution limit. The limits for 2012 are listed below. An additional catch-up contribution is available to individuals over the age of 55 who are not enrolled in Medicare.

2012 IRS Contribution Limits
An accountholder is able to contribute 100% of their qualified HDHP deductible up to the IRS contribution limit. This limit is subject to change each year.


2012 IRS Limits

 

Single Plan

Family Plan

Maximum Contribution Limit

$3,100

$6,250

Catch-up Contribution (55+)

$1,000

$1,000

 

Eligible Medical Expenses

Eligible medical expenses are defined as those expenses paid for care as described in the Internal Revenue Code (Quick Reference List). Non-prescription medicines (other than insulin) purchased in tax years beginning after December 31, 2010, are not considered qualified medical expenses.  An over-the-counter medicine or drug can be a qualified medical expense if you get a prescription for it.

HSA Bank™ has created the following lists to help you determine whether an expense is eligible or not. The lists are provided with the understanding that HSA Bank is not engaged in rendering tax advice. These lists are to serve as a quick reference. For more detailed information, please refer to IRS Publication 969 and IRS Publication 502 or contact a tax professional.

Health Insurance may not be purchased with HSA Funds. There are 3 situations which are exceptions whereby HSA funds can be used to pay for:

1) A health plan during any period of continuation coverage required under any Federal law.
2) A qualified long-term care insurance contract.
3) A health plan during a period in which the individual is receiving unemployment compensation under any Federal or State Law.

Select this link to see a comparison between the HSA, HRA and FSA: HSA, HRA and FSA Comparison

 

Select the link for more detailed information about the HSA: U.S. Treasury

Revenue Ruling 2003-102, 2003-38 I.R.B. 559

Copyright 2012 PCIS. All rights reserved.

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