Health savings accounts: What you need to know

Health care consumers may realize significant financial benefits from health savings accounts (HSAs).

Created under the 2003 Medicare Act, an HSA is a tax-favored savings plan offered by many banks, insurance companies, brokerages and other financial institutions that can be used to pay for qualified medical expenses. According to the Maryland Association of CPAs, HSAs offer significant tax benefits to individuals who qualify.

Eligibility
To establish an HSA, you must have coverage under a high deductible health plan. For 2007, these are defined as having a $1,100 deductible for individuals and $2,200 or higher for families, up from $1,050 and $2,100 respectively for 2006.

HSAs are designed, in part, to help those with high-deductible policies to pay for health expenses until insurance benefits kick in. To be eligible for a HSA, you cannot be covered by any other type of medical plan.

Contribution limits
Each year that you are eligible, you, your employer or both of you can contribute up to the amount of the deductible for your high-deductible health plan. An individual who is 55 or older and not enrolled in Medicare may make a catch-up contribution of $700 for 2006 and $800 for 2007. Like IRAs, contributions for 2006 may be made through April 15 of this year.

Qualified expenses and distributions
HSA funds can be used to pay for qualified health expenses that the account owner and his or her spouse or dependents incur. Qualified expenses include costs for doctor visits, prescription drugs, over-the-counter remedies, Medicare premiums (but not supplemental Medicare benefits) and more. Once you meet your deductible, your health insurance policy covers your medical expenses according to your policy provisions.

Funds withdrawn before age 65 for non-medical purposes are subject to a 10 percent penalty, as well as taxes on the amount withdrawn. Taxpayers who are 65 and older pay taxes (but not a penalty) on amounts withdrawn for non-medical reasons.

Be aware, too, that funds remain in your Health Savings Account from year to year. This means your HSA funds continue to accrue tax-free until needed.

Tax benefits
For 2006, you may deduct up to the amount of your policy’s deductible, but not more than $2,700 if you have individual coverage or $5,450 for family coverage. (In 2007, the maximum HSA deduction moves up to $2,850 for individuals and $5,650 for family coverage.) The HSA deduction is an above-the-line deduction, meaning you don’t have to itemize to benefit from it. There is also no income or phase-out limit.

If your employer makes an HSA contribution for you, it is excluded from income and not subject to income tax or FICA. Some states allow you to take a state income tax deduction for HSA contributions.

Dividends and interest in the account are tax-exempt, which means the account grows tax-free until funds are withdrawn. Withdrawals are tax-free for qualified expenses.

Contingencies
Should you change jobs, become unemployed or retire, your HSA account stays with you. Upon death, any balance remaining in your HSA becomes the property of the beneficiary you named.

Advice
A CPA can help you understand the value of HSAs and determine if one makes sense for your particular situation.

Only CPAs are equipped to address your full range of financial needs with integrity and insight. In Maryland, CPAs must pass a rigorous two-day examination, adhere to strict ethical and professional standards, and, beyond college, complete 80 hours of continuing education every two years to be certified by the state — accountants do not.

Your doctor is certified; your lawyer is certified. Make sure your accountant is a certified public accountant.

For CPA referrals in your area, contact the MACPA at (410) 296-6250 or click here.

The Maryland Association of Certified Public Accountants (MACPA) is a statewide professional association that provides leadership, information and services for its nearly 10,000 CPA members, who are employed in private practice, industry, government and education. CPAs are business and financial professionals who have passed a rigorous two-day examination in order to be licensed by the state. CPAs are committed to protecting the public interest, and must adhere to stringent ethical and professional standards and continuing professional education requirements.

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