Health Savings Accounts

A health savings account (HSA) is a tax-exempt trust or custodial account that you set up with a U.S. financial institution (such as a bank or an insurance company) which allows you to pay or be reimbursed for certain qualified medical expenses, including the cost of prescription drugs, nursing homes, physical therapy, eyeglasses and contact lenses. This account must be used in conjunction with a high deductible health plan (HDHP). health savings account's were created in December of 2003 as part of the Medicare-prescription drug legislation

One of the biggest benefits of a Health Savings Account is that your contributions, investment gains and withdrawals are all tax-free, provided the money is used for qualified medical expenses. You do not forfeit your contributions if you have not used them by year-end, unlike a flexible spending account. Any unused money is rolled over to the next year. Once you reach age 65, you can use the money you have accumulated for both medical and non-medical expenses without penalty.

Non-medical expenses are subject to income taxes. Prior to age 65, if you use any of the money in your Health Savings Account for non-qualified expenses, your withdrawals are subject to income taxes as well as a 10 percent penalty.

If you have an Archer MSA, you can generally roll it over into a Health Savings Account tax free.

What are the benefits of a Health Savings Account?

You can claim a tax deduction for contributions you make to your health savings account even if you do not itemize your deductions on Form 1040.
Contributions made by your employer (including contributions made to your health savings accountthrough a cafeteria plan) may be excluded from your gross income.
The contributions remain in your health savings account from year to year until you use them.
The interest or other earnings on the assets in the health savings account are tax free.
Distributions may be tax free if you pay qualified medical expenses.
A Health Savings Account is "portable" so it stays with you if you change employers or leave the work force.

Qualifying for an Health Savings Account

To qualify for an Health Savings Account, you must meet the following requirements.

You have a single, "high deductible health plan" (see below for definition)
You are not entitled to Medicare benefits.
You cannot be claimed as a dependent on someone else's 2005 tax return.

If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for a Health Savings Account contribution, even if the other person does not actually claim the deduction.

High deductible health plan (HDHP)

. A High deductible health plan has:

A higher annual deductible than typical health plans, an annual deductible of at least $2,000 for a family and $1,000 for an individual; and
A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses (deductibles, co-payments and other amounts but NOT premiums) do not exceed $5,100 for individual or $10,200 for family.

Limits.

For 2005 the Monthly limit on deductions for an individual is 1/12 of the lesser of:(1) the annual deductible or (2) $2,650. For Family it is 1/12 of the lesser of:(1) the annual deductible or (2) $5,250.

The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for High deductible health plans 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.

Some Family plans do not meet the High deductible health plan rules.

There are some family plans that have deductibles for both the family as a whole and for individual family members. Under these plans, if you meet the individual deductible for one family member, you also have to meet the higher annual deductible amount for the family. If either the deductible for the family as a whole or the deductible for an individual family member is below the minimum annual deductible for that year, the plan does not qualify as an High deductible health plan.

Example.

Lets say, Mr. Smith has family health insurance coverage with his company. The annual deductible for his family plan is $3,500. This plan also has an individual deductible of $1,500 for each family member. Mr. Jones's wife had $2,200 of covered medical expenses. They had no other medical expenses for 2005. The plan paid $700 to Mr. Jones because Mrs. Jones met the individual deductible of $1,500, even though the Joneses did not meet the $3,500 annual deductible for the family plan. The plan does not qualify as an High deductible health plan because the deductible for Mrs.Jones is below the minimum deductible amount.

Other health insurance.

You (or your spouse if you file jointly) generally cannot have any other health plan that is not an High deductible health plan. However, this rule does not apply if the other health plan(s) only covers the following items.

Accidents.
Disability.
Dental care.
Vision care.
Long-term care.
Benefits related to workers compensation laws, tort liabilities, or ownership or use of property.
A specific disease or illness.
A fixed amount per day (or other period) of hospitalization.

Plans in which substantially all of the coverage is through the above listed items are not High deductible health plans. For example, if your plan provides coverage substantially all of which is for a specific disease or illness, the plan is not a High deductible health plan for purposes of establishing a Health Savings Account.

When To make Contributions

You can make contributions to your Health Savings Account for 2004 until April 15, 2005.

Amount of Contribution

On a yearly basis, you can contribute the lesser of your deductible or $5,250 for a family and $2,650 for an individual. Those aged 55 to 65 years old can contribute an additional $500 of "catch-up" contributions to their Health Savings Accounts in 2004.

This means if your deductible is $3,000 for your family, you can contribute only $3,000. Contributions can be made by an individual, their employer or both. You must have a Health Savings Account all year to contribute the full amount.

For each full month you did not have an High deductible health plan, you must reduce the amount you can contribute by one-twelfth. You must also reduce the amount you can contribute to a Health Savings Account by any (a) amounts contributed to your Archer MSA (including employer contributions) and (b) employer contributions to your Health Savings Account that were excluded from income.

Example.

Lets assume that in 2004, Mr Smith has a High deductible health plan for his family for June 2 through December 31 (6 full months). The annual deductible of his High deductible health plan is $4,000. He can contribute up to $2,000 ($4,000 ÷ 12 months × 6 months) to his Health Savings Account for the year. If his annual deductible is $6,000 and he is under the age of 55 at the end of 2004, he can contribute up to $2,575 ($5,150 ÷ 12 months × 6 months) to his Health Savings Account for the year. If he has more than one Health Savings Account in 2004, his total contributions to all the Health Savings Accounts cannot be more than the limits above. Contributions in excess of the limits above may be included in his gross income and may be subject to a 6% excise tax.

Rules for married people.

If either spouse has family coverage, both spouses are treated as having family coverage. If both spouses have family coverage, you are treated as having family coverage with the lower annual deductible of the two health plans. The contribution limit is split equally between you unless you agree on a different division.

If both spouses are age 55 or older by the end of 2004, each spouse can contribute an additional amount to his or her Health Savings Account. Therefore, if both spouses were age 55 or older by the end of the year and had their Health Savings Account for the full year, the total contributions to the Health Savings Accounts when both spouses have family coverage cannot be more than $6,150.

Example.

Mr. and Mrs. Smith both have family coverage under separate HDHPs. Mr. Smith is 58 years old and Mrs. Smith is 53. Mr. Smith has a $3,000 deductible under his HDHP and Mrs. Smith has a $2,000 deductible under her High deductible health plan. Mr. and Mrs. Smith are both treated as being covered under the High deductible health plan with the $2,000 deductible. Mr. Smith can contribute $1,500 to a Health Savings Account (one half of the deductible of $2,000 + $500 additional contribution for people age 55 or older) and Mrs. Smith can contribute $1,000 to a Health Savings Account (unless Mr. and Mrs. Smith agree to a different division).

Medicare eligible individuals.

Beginning with the first month you are entitled to benefits under Medicare (the month you turn age 65), you cannot contribute to a Health Savings Account.

Example.

Lets say Mr. Smith turned age 65 on July 30, 2004 and became eligible for Medicare benefits. He had self-only coverage under an High deductible health plan with an annual deductible of $1,000. You cannot contribute to a Health Savings Account from July 2004 on. Your monthly contribution limit is $125 ($1,000/12 + $500/12 for the catch up contribution for people age 55 or older). You can make contributions for January through June totaling $750 ($125 × 6), but cannot make any contributions for July through December.

Setting Up an HSA

No special permission or authorization from the IRS is necessary to establish a Health Savings Account. When you set up your Health Savings Account, you will need to work with a trustee who may be a financial planner, a bank, a life insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer Medical Savings Accounts. The Health Savings Account can be established through a trustee that is different from the High deductible health plan provider.

Advanced Corporate Planning may be a trustee if necessary; Normally it is the company whose Health Savings Account is used (i.e. the Bank, Investment or Medical or Insurance Company whose plan you purchase)

Rollovers.

You can roll over amounts from Archer Medical Savings Accounts and other Health Savings Accounts into an Health Savings Account. Rollover contributions do not need to be in cash. Rollovers are not subject to the annual contribution limits. Rollovers from an IRA, a health reimbursement arrangement, or a flexible spending arrangement are not allowed.

Distributions

You can make tax-free withdrawals from your Health Savings Account to pay or be reimbursed for qualified medical expenses you incur after the Health Savings Account has been established (discussed later). If you make withdrawals for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 10% tax as well. You do not have to make withdrawals from your Health Savings Account each year.

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 High deductible health plan, you can ask the trustee of your Health Savings Account to send you a distribution from your Health Savings Account.

Qualified medical expenses.

Qualified medical expenses are those that qualify for the medical and dental expenses deduction. These are explained in IRS 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 must be incurred after the Health Savings Account has been established.

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

Special rules for insurance premiums.

Generally, you cannot treat insurance premiums as qualified medical expenses for Health Savings Accounts. You can, however, treat premiums for long-term care coverage (click here), health care coverage while you receive unemployment benefits, or health care continuation coverage required under any federal law as qualified medical expenses for Health Savings Accounts.

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 Health Savings Accounts.

Required Record keeping.

For each qualified medical expense you deduct as an itemized deduction on IRS Form 1040, Schedule A; or pay with a distribution from your Health Savings Account, you must keep a record of the name and address of each person you paid and the amount and date of the payment. Do not send these records with your tax return. Keep them with your tax records.

If you are interested in setting up a Health Savings Account, please contact us at Advanced Corporate Planning.

Our Primary Service Area is the Portland Oregon / Vancouver Washington Metro area Including Portland, Gresham, Beaverton, Hillsboro, Lake Oswego, Tigard, Milwaukie, Salem, Vancouver, Camas, Washougal, and Longview. We operate in the states of Washington, Oregon, Arizona, California and Nevada. Some services may not be available in some areas.