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Health Savings Accounts
Questions and Answers
What is a Health Savings Account?
A Health Savings Account (HSA) is a tax-exempt trust or custodial account established exclusively for the purpose of paying or reimbursing qualified medical expenses for you, your spouse, and your dependents.
Am I Eligible for an HSA?
You are eligible to make or receive an HSA regular contribution if, with respect to any month, you:
- Are covered under a high-deductible health plan (HDHP);
- Are not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing preventive care and limited types of permitted insurance and permitted coverage);
- Are not enrolled in Medicare; and
- Cannot be claimed as a dependent on another person’s tax return.
What is an HDHP?
An HDHP is a plan with an annual deductible of at least $1,000 for single (self-only) coverage or $2,000 for family coverage. These amounts are subject to cost-of-living adjustments (COLAs).
Are There Other Requirements for the HDHP?
Yes. For HSA purposes, the HDHP must limit out-of-pocket expenses. For 2004, the maximum out-of-pocket expenses, which include money applied to your deductible and your coinsurance for covered charges, must be no more than $5,000 for single coverage and no more than $10,000 for family coverage. These amounts are subject to COLAs.
How is an HSA Established?
An HSA is established by you which is similar to establishing an IRA—with a qualified trustee or custodian.
Who Can Contribute to My HSA?
If you meet the eligibility requirements for an HSA, you, your employer, your family members and any other person (including non-individuals) may contribute to your HSA. This is true whether you are self-employed or unemployed.
How Much Can I Contribute to My HSA?
The maximum annual contribution amount is generally the lesser of 100 percent of the annual deductible under the HDHP or a specified amount (subject to COLAs). For 2005, the specified amount is $2,650 for single coverage $5,250 for family coverage.
Additionally, a “catch-up” contribution is available for eligible individuals who are age 55 or older by the end of their taxable year and have not enrolled in Medicare. The chart that follows shows these additional amounts.
Tax Year |
Catch-Up Amount |
2004 |
$500.00 |
2005 |
$600.00 |
2006 |
$700.00 |
2007 |
$800.00 |
2008 |
$900.00 |
2009 and after |
$1,000.00 |
What are the Federal Tax Benefits of an HSA?
Contributions to an HSA are fully deductible, the earnings grow tax deferred and distributions for qualified medical expenses are tax-free. Consult with your tax or legal professional for guidance.
How Do I Claim the Federal Tax Deduction for My HSA Contribution?
Contributions made by you, your family members and any other person on your behalf, which doesnot exceed the maximum annual contribution amount, are deductible by you when determining your adjusted gross income for your federal income tax return. You cannot deduct employer contributions and these contributions will not count as wages for federal income tax purposes.
When is the Contribution Deadline for Funding an HSA?
Regular and catch-up HSA contributions can be made at any time for a taxable year up to and including your federal income tax return due date, excluding extensions for that taxable year. The due date for most taxpayers is April 15.
How are HSA Distributions Taxed?
Distributions from your HSA used exclusively to pay for qualified medical expenses of you, your spouse or your dependents are excludable from your gross income. Any other distributions are includable in your gross income and are subject to an additional 10 percent tax on the amount includable, except in the case of distributions made after your death, your disability, or your attainment of age 65. HSA distributions that are not rolled over will be taxed as income in the year distributed unless they are used for qualified medical expenses. HSA custodians/trustees are not required to determine whether HSA distributions are used for qualified medical expenses.
The qualified medical expenses must be incurred only after the HSA has been established. However, for calendar-year 2004, an HSA established by you on or before April 15, 2005, may pay or reimburse on a tax-free basis an otherwise qualified medical expense if that expense was incurred on or after the later of: (1) January 1, 2004, or (2) the first day of the month that you became eligible for an HSA.
What Happens to My HSA in the Event of My Death?
Spouse Beneficiary
If your spouse is the beneficiary of your HSA, the HSA becomes his/her HSA.
Non-spouse Beneficiary
If your beneficiary is not your spouse the HSA ceases to be an HSA as of the date of your death. If your beneficiary is your estate;the fair market value of the HSA, as of the date of your death, is taxable on your final return. For other beneficiaries; the fair market value of your HSA, is taxable to that person, in the tax year that includes such date.
This information is effective for tax-year 2004 and thereafter. This information is intended to provide general information concerning federal tax laws governing HSA's. It is not intended to provide legal advice or to be a detailed explanation of the rules or how such rules may apply to your individual circumstances. For specific information, you are encouraged to consult your tax or legal professional. The IRS’s web site, www.irs.gov, may also provide helpful information.
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