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HEALTH SAVINGS ACCOUNTS (H.S.A.)
HSA - Health Savings Accounts - Idaho.Insurance companies have developed health insurance plans that meet IRS requirements that allow you, as owner of one of these policies, to go to a bank or credit union and open a Health Savings Account (H.S.A.). Owners of these accounts are then allowed to make pre-tax deposits into these accounts (employers may also deposit money into an individual’s account, if a group insurance plan is in place).

Owners of H.S.A. accounts are allowed to withdraw money from these accounts (frequently by using a debit card provided for that purpose) to pay for medical expenses not covered by their health insurance plan. Such costs include, but are not limited to all expenses that go against the deductible of the insurance plan, prescription drugs, eye exams and glasses or contacts, and dental exams and dental procedures.

H.S.A owners are limited in the amount they can deposit into these accounts per year. Money not used in this account in a calendar year rolls over into the following year and is not forfeited.

The following information is from Publication 969 from www.irs.gov. Individuals are encourage to consult their accountants when establishing an H.S.A for situations that may be unique to them.

Health Savings Accounts (HSAs)

A health savings account (HSA) is a tax-exempt trust or custodial account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA.

No permission or authorization from the IRS is necessary to establish an HSA. When you set up an HSA, you will need to work with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider.

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 2005 tax return.

If you meet these requirements, you are an eligible individual even if your spouse has non-HDHP family coverage, provided your spouse's coverage does not cover you.

If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an HSA contribution. This is true even if the other person does not actually claim your exemption.

Each spouse who is an eligible individual who wants an HSA must open a separate HSA. You cannot have a joint HSA.

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.

The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2005.

Type of Coverage Minimum
Annual
Deductible
Maximum Annual Deductible
and Other Out-of-Pocket Expenses *
Self-only $1,000 $5,100
Family $2,000 $10,200

 * This 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.

Self-only HDHP coverage is an HDHP covering only an eligible individual. Family HDHP coverage is an HDHP covering an eligible individual and at least one other individual (whether or not that individual is an eligible individual).

Prescription drug plans. You can have a prescription drug plan, either as part of your HDHP or a separate plan (or rider), and qualify as an eligible individual if the plan does not provide benefits until the minimum annual deductible of the HDHP has been met. If you can receive benefits before that deductible is met, you are not an eligible individual. However, for 2005, you can qualify as an eligible individual even though you can receive benefits under a separate prescription drug plan (or rider) before you meet the minimum annual deductible of the HDHP.

Contributions to an HSA

Any eligible individual can contribute to an HSA. For an employee's HSA, the employee, the employee's employer, or both may contribute to the employee's HSA in the same year. For an HSA established by a self-employed (or unemployed) individual, the individual can contribute. Family members or any other person may also make contributions on behalf of an eligible individual.

Contributions to an HSA must be made in cash. Contributions of stock or property are not allowed.

Limit on contributions. The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have and your age. For 2005, if you have self-only coverage, you can contribute up to the amount of your annual health plan deductible, but not more than $2,650. If you have family coverage, you can contribute up to the amount of your annual health plan deductible, but not more than $5,250. See Rules for married people (discussed later).

Additional contribution. For 2005, if you are an eligible individual who is age 55 or older, your contribution limit is increased by $600. For example, if you have self-only coverage, you can contribute up to the amount of your annual health plan deductible plus $600, but not more than $3,250. For 2006, the additional contribution amount is $700.
If both spouses are 55 or older and not enrolled in Medicare, each spouse's contribution limit is increased by the additional contribution. If both spouses meet the age requirement, the total contributions under family coverage cannot be more than $6,450.

A plan will not qualify as an HDHP if either the umbrella deductible or the embedded deductible is less than the minimum annual deductible ($2,000) for family coverage. If there is no umbrella deductible, the deductible for each family member multiplied by the number of family members cannot exceed the maximum annual deductible and other out-of-pocket expenses ($10,000) for family coverage.

Enrolled in Medicare. Beginning with the first month you are enrolled in Medicare, you cannot contribute to your HSA.

Rollovers. You can roll over amounts from Archer MSAs and other HSAs into an HSA. Rollover contributions do not need to be in cash. Rollovers are not subject to the annual contribution limits.

You must roll over the amount within 60 days after the date of receipt. You can make only one rollover contribution to an HSA during a 1-year period. You cannot roll over amounts from an IRA, an HRA, or a health FSA into an HSA.

When To Contribute

You can make contributions to your HSA for 2005 until April 17, 2006.

Reporting Contributions on Your Return

Contributions made by your employer are not included in your income. You can claim contributions you made and contributions made by any other person, other than your employer, on your behalf, as an adjustment to income.

Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. The contributions are treated as a distribution of money and are not included in the partner's gross income. Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are deductible by the partnership and includible in the partner's gross income. In both situations, the partner can deduct the contribution made to the partner's HSA.

Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are deductible by the S corporation and includible in the shareholder-employees gross income. The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA.

Form 8889. Report all contributions to your HSA on Form 8889, Health Savings Accounts (HSAs), and file it with your Form 1040. You should include all contributions made for 2005, including those made by April 17, 2006, that are designated for 2005. Contributions made by your employer are also shown on the form.

You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount contributed to your HSA during the year. Your employer's contributions also will be shown in box 12 of Form W-2, Wage and Tax Statement, with code W. Follow the instructions for Form 8889. Report your HSA deduction on Form 1040, line 25.

Excess contributions. You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier. Excess contributions are not deductible. Excess contributions made by your employer are included in your gross income. If the excess contribution is not included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return.
Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, to figure the excise tax.

You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions.

  • You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
  • You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.

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.

If you are no longer an eligible individual, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses.
A distribution is money you get from your health savings account. The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, an Archer MSA, or Medicare Advantage MSA.

Qualified medical expenses. Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. These are explained in Publication 502, Medical and Dental Expenses. Examples include amounts paid for doctors' fees, prescription and non-prescription medicines, and necessary hospital services not paid for by insurance. Qualified medical expenses are those incurred by the following persons.

  • Yourself and your spouse.
  • All dependents you claim on your tax return.
  • Any person you could have claimed as a dependent on your return if that person had not received $3,200 or more of gross income or had not filed a joint return.
  • Any person you could have claimed as a dependent except that you, or your spouse if filing jointly, were claimed as a dependent on someone else's 2005 return.

You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your HSA.

Special rules for insurance premiums. Generally, you cannot treat insurance premiums as qualified medical expenses for HSAs. You can, however, treat premiums for long-term care coverage, health care coverage while you receive unemployment benefits, or health care continuation coverage required under any federal law as qualified medical expenses for HSAs. If you are age 65 or older, you can treat insurance premiums (other than premiums for a Medicare supplemental policy, such as Medigap) as qualified medical expenses for HSAs.

Recordkeeping. You must keep records sufficient to show that:

  • The distributions were exclusively to pay or reimburse qualified medical expenses,
  • The qualified medical expenses had not been previously paid or reimbursed from another source, and
  • The medical expenses had not been taken as an itemized deduction in any year.

Do not send these records with your tax return. Keep them with your tax records.
 

Reporting Distributions on Your Return

How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined earlier).

  • If you use a distribution from your HSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8889. Follow the instructions for the form and file it with your Form 1040.
  • If you do not use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution. Report the amount on Form 8889 and file it with your Form 1040. If you have a taxable HSA distribution, include it in the total on Form 1040, line 21, and enter “HSA” and the amount on the dotted line next to line 21. You may have to pay an additional 10% tax on your taxable distribution.

Additional tax. There is an additional 10% tax on the part of your distributions not used for qualified medical expenses. Figure the tax on Form 8889 and file it with your Form 1040. Report the additional tax on Form 1040, line 63, and enter “HSA” and the amount on the dotted line next to line 63.

Exceptions. There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.

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.

The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death.

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