A column on personal finance prepared by the Virginia Society of Certified Public Accountants
HELP FOR HIGH MEDICAL COSTS
(March 18, 2004) – “HSA” is the newest acronym in health insurance savings. The Health Savings Account, created by the 2003 Medicare Act, is a tax-favored savings plan that can be used to pay for qualified medical expenses. In this column, the Virginia Society of CPAs answers frequently asked questions about HSAs.
Who is eligible to open an HSA?
Effective January 1, 2004, any one who is covered by a high-deductible health insurance policy and is not eligible for Medicare can open an HSA. Additionally, to qualify, you cannot be claimed as a dependent by another person. A high-deductible plan is defined as one with an annual deductible of at least $1,000 for individual coverage and at least $2,000 for family coverage. The HSA coverage must be your only health insurance.
How do HSAs work?
HSAs allow individuals and employers to make contributions each year that can be used to pay for qualified health expenses for you, your spouse and dependents. The account may be established with a bank or health insurer and employees, employers, or both can contribute to the plan.
What are the tax benefits of an HSA?
There are several tax benefits. First, the money you contribute to an HSA is tax-deductible up to the amount of the policy deductible, even if you don’t itemize. Next, the interest and investment earnings are not taxable, so the money in your HSA grows tax-free. Finally, you can take tax-free distributions to pay for qualified medical expenses.
How much can I contribute to an HSA?
The annual deposit limit is equal to the amount of the health insurance deductible. (HSA owners born before 1950 can contribute an additional $500). The tax write-off cannot exceed $2,600 for individuals and $5,150 for families. Contributions must be made in cash, not with stocks or other property and like IRAs, contributions may be made through April 15 for the previous tax year.
What expenses are qualified?
HSAs can be used to cover IRS-approved medical expenses not covered by insurance, including doctor visits, prescription drugs, over-the-counter remedies, and long-term care insurance. Funds can also be used to pay for the health insurance deductible, Medicare premiums (but not supplemental Medicare benefits), COBRA benefits, as well as for health insurance premiums you pay while you are unemployed.
To deter the use of HSAs for non-medical purposes, funds withdrawn before age 65 for non-medical purposes are subject to a 10 percent penalty, as well as taxes on the amount withdrawn. Taxpayers who are 65 are exempt from the penalty, but must pay taxes on amounts not used for medical purposes.
What happens if I don’t use the funds in my HSA by year-end?
Unlike flexible spending accounts (FSAs) that require employees to forfeit unused money at year-end, unused balances in an HSA can be carried over from year to year, accruing tax-free investment earnings.
What if I change jobs?
HSA balances belong to the individual account holder. Should you change jobs, become unemployed, or retire, the account stays with you.
What happens to the money in my HSA if I die?
Upon death, any balance remaining in the HSA becomes the property of the named beneficiary. A surviving spouse who is a beneficiary can withdraw funds tax free for his or her own medical expenses.
How does a HSA differ from a Medical Savings Account?
HSAs are more flexible and more individuals qualify for them. Archer Medical Savings Accounts (MSAs) required health insurance policies with much higher deductibles and were restricted to employees of small businesses with less than 50 employees and the self-employed. An individual with an existing MSA can either retain it or roll the amount over into a new HSA.
How can I find out if I should open an HSA?
A CPA can help you determine if an HSA makes sense for you.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
Lifetime Financial Planning, Inc.
Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional
2325 Dulles Corner Boulevard, Suite 500, Herndon, Virginia, 20171
208 South King Street, Suite 201, Leesburg, Virginia, firstname.lastname@example.org
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