Tuesday, May 31, 2011

Pay your Medical Expenses with an HSA

A health savings account (HSA), is a tax-advantaged medical savings account available to taxpayers who are enrolled in a High Deductible Health Plan (HDHP). Contributions to these plans made on an employer reduces the taxpayer’s taxable income and are reported on Form W-2, box 12, code W. Taxpayers who make contributions directly to their HSA will receive Form 5498-SA and can deduct the contribution on Form 1040, line 25 of their tax return.

Dollars withdrawn from an HSA can be used to pay for qualified medical expenses tax-free. Unlike a flexible spending account (FSA), funds roll over and accumulate year to year if not spent. Withdrawals for non-medical expenses are treated very similarly to those in an Individual Retirement Account (IRA) in that they may provide tax advantages if taken after retirement age, and they incur penalties if taken earlier. The taxpayer should receive Form 1099-SA from the trustee showing the amount of distributions during the year.

All contributions to an HSA become the property of the account holder, regardless of the source of the deposit. Funds deposited but not withdrawn each year will carry over into the next year. If the taxpayer ends their HSA-eligible insurance coverage, he or she loses eligibility to deposit further funds, but funds already in the HSA remain available for use. All contributions and distributions from an HSA is reported on Form 8889 Health Savings Accounts (HSAs).

Both an employer and the taxpayer can make contributions to the same HSA in a given year. Total contributions are limited based on the following table.

Contribution Limit
Individual with self-only coverage
Contribution Limit
Individual with family coverage
Catch-up contribution
(55 or older)
(Single and Family)
2012 $3,100 $6,250 $1,000
2011 $3,050 $6,150 $1,000
2010 $3,050 $6,150 $1,000
2009 $3,000 $5,950 $1,000
2008 $2,900 $5,800 $900
2007 $2,850 $5,650 $800
2006 $2,700 $5,450 $700
2005 $2,650 $5,250 $600
2004 $2,600 $5,150 $500

To be an eligible individual and qualify for an HSA, you must meet the following requirements.
  • You must be covered under a high deductible health plan (HDHP), 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 tax return.
A High deductible health plan (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.
The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs:
Self-only coverage Family coverage
Minimum Annual Deductible $1,200 $2,400
Maximum annual deductible and other out-of-pocket expenses $6,050 $12,100
Minimum Annual Deductible $1,200 $2,400
Maximum annual deductible and other out-of-pocket expenses $5,950 $11,900
Minimum Annual Deductible $1,150 $2,300

For more information, please reference Publication 502, Medical and Dental Expenses and Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

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