Health Savings Account Information (HSA)

Reduce Taxes and Save for Retirement with an HSA

A Health Savings Account (HSA) has a variety of financial and tax savings benefits and can even be used for retirement planning. Following are the issues and steps to consider for opening an HSA.

If you struggle to make your health insurance premium payments and yet rarely use the insurance, then a high deductible health insurance plan combined with a Health Savings Account deserves your serious consideration.

Review your current health conditions and your past two or three years of medical bills and insurance claims to get a good idea of what type of health insurance is appropriate for you.

The first step, is to determine if you are eligible to have a health savings account. There are four conditions that you must meet:

1) You must have a health insurance plan that has a high deductible, called a High Deductible Health Plan (HDHP). This plan must meet the guidelines for both the deductible amount and the maximum out-of-pocket amount. For 2011 the minimum deductible is $1,200 (single) or $2,400 (family). The 2011 maximum out-of-pocket amount is $5950 (single) or $11,900 (family). (Your insurance company should be able to tell you if your plan qualifies.)

2) You cannot be covered by any other health insurance plan other than the High Deductible Health insurance Plan.

3) You cannot be covered by Medicare.

4) You cannot be claimed as a dependent on someone else's tax return.

So if you have determined that you qualify for a Health Savings Account, the next step is to select the participating bank, credit union, or savings and loan company to maintain your account. Your health insurance provider may also have options, but you should not be obligated to use their bank. Compare rates, fees, and services first. Select by comparing interest rates on your earnings, monthly service fees and any per transaction fees, and whether you will need to use a debit card or a check to withdraw funds. Open your account at your selected bank, making sure that it is classified as a Health Savings Account.

Now, make your contributions to your health savings account. For 2011, the maximum contribution is $3,050 (single) and $6,150 (family). If you were not covered by a high deductible health plan for the entire year, then you may need to pro-rate the maximum, based on the number of months of coverage. If you are 55 or over, you may contribute up to an additional $1,000.00.

Note that deposits may be made up to April 15th for the prior year. For example, you may make 2011 contributions through April 15, 2012.

Keep a record of the amounts and dates of your deposits and which year they are to be credited. You will need this information to prepare your tax return.

You may also roll over certain funds into your HSA - see IRS Publication 969 for more information.

Now, reimburse or direct pay your medical expenses from this account. Be very careful that you use the funds only for qualified medical expenses for yourself, (and possibly your spouse, and your dependents.) Qualified medical expenses in general treat a specific, non-cosmetic condition. Use IRC section 213(d), Publication 969, and Publication 502 as a guideline. This may include prescription drugs, doctor visits, hospital stays, lab tests, and medical equipment. In addition, the HSA allows reimbursement for qualified over the counter items. Most large chain drugstores and many other retailers now flag their eligible items on the cash register receipt. Be aware that the IRS has greatly limited the over the counter items that are qualified medical expenses for 2011. In general in 2011 and later, qualified over-the-counter medical expenses are either insulin related or items that your doctor has written a prescription for.

Please note that the premiums for your HDHP are not qualified medical expenses for HSA reimbursement purposes. Sometime the HSA is incorrectly called a health insurance savings account. This is not correct. In general, health insurance premiums cannot be paid from the HSA without penalty, although certain types of health insurance, such as long term care premiums, may be eligible. Refer to Publication 969.

Save your receipts - you must be able to prove that you used the money only for qualified medical expenses. Otherwise you will be subject to a 20% penalty (up from 10% in 2010) plus income tax on the amounts you withdrew from the HSA.

Finally, report the health savings account activity on your tax return. You will receive Form 5498-SA which shows the amount of your contributions, but note that this will probably not arrive until after May 15th. You will also receive Form 1099-SA which reports the amount of distributions from your HSA. Report both of these figures on tax Form 8889 and attach it to your Form 1040.

For 2010, the contributions are reported and deducted on Line 25 of the Form 1040.

The amount that was distributed from your health savings account and used to pay for medical expenses is used only on Form 8889 to verify that the amounts were used for qualified medical expenses. The qualified withdrawals are not taxable.

Note you may NOT deduct medical expenses paid with HSA funds on your Schedule A.

A Health Savings Account is quite easy to use once you get through determining whether it is right for you and getting the account set up. Review Publication 969, discuss this with your financial planner or CPA, and then consider yourself ready to make a decision regarding whether a health savings account is the right financial move for you.

Remember that the HSA can also be used to fund a retirement plan. You are not required to use the money to pay current medical expenses - you can choose to leave the money in the account for later use. After retirement age, you may make non-medical withdrawals, but they will be taxable, so it is still better to use the funds for medical expenses. (Note that withdrawals for non-medical expenses before retirement age will be subject to both income tax plus a 20% penalty)

Keep good records of withdrawals from the account - you are responsible for proving that the money was used for qualified medical expenses. Otherwise you risk a 10% penalty in addition to paying income tax on the withdrawal.

Required IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Department guidelines, any federal tax information contained in this article, or any attachment, does not constitute a formal tax opinion. Accordingly, any federal tax advice contained in this communication, or any attachment, is not intended or written to be used, and cannot be used, by you or any other recipient for the purpose of avoiding penalties. Consult your tax professional for specific information about how participation in this plan may benefit you. This article is not intended to provide specific individual tax advice.

Resources

IRS Publication 969 - Health Savings Accounts and Other Tax Favored Health Plans
IRS Publication 502 - Medical and Dental Expenses
IRS Form 8889 (2010)
Instructions to IRS Form 8889 (2010)

Patricia Tokar, CPA - call us or contact us for financial consulting, individual tax return preparation, small business tax help, small business tax preparation, QuickBooks assistance, and small business tax advice

Legal and IRS required notice:

This article is not intended to be specific tax advice. It is intended as a general guideline only. Any specific advice should be sought from your tax professional.

CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Department guidelines, any federal tax information contained in this article, or any attachment, does not constitute a formal tax opinion. Accordingly, any federal tax advice contained in this communication, or any attachment, is not intended or written to be used, and cannot be used, by you or any other recipient for the purpose of avoiding penalties