Health Savings Accounts (HSAs)

The HSA can reduce your health insurance premiums by as much as 70%, while you set aside funds to pay for current and future medical expenses. HSA contributions are tax deductible (subject to limitations), and withdrawals are tax free when used for qualifying medical expenses.

Why Should I Open an HSA?

If you want to take control of your health care costs—avoiding high premiums and complicated health plans—then an HSA could be the right plan for you. These are just some of the benefits of a self-directed HSA:

• Lower premium costs than those for low-deductible health plans—enrolling in the mandatory high deductible health plans will reduce your monthly premiums, in some cases by 70%.
• Contributions are tax deductible (subject to limitations).
• Contributions can be invested (similar to a self-directed IRA)—funds can be invested in the same way as a self-directed IRA, with the possibility of accumulating tax-free or tax-deferred profits in investments that you know best.
• Assets are never taxed if they're used for qualifying medical expenses.
• Contributions can be carried over from one tax year to the next—forget about the "use it or lose it" requirement imposed upon flexible spending accounts. Plus, when money is withdrawn to pay for qualified medical expenses, the distribution is tax free.

Eligibility

In order to be eligible to set up an HSA, an individual must first be covered under a high-deductible health plan (HDHP). Furthermore, the individual is generally prohibited from possessing other types of health insurance coverage unless such coverage is cosidered disregarded coverage. Disregarded coverage includes insurance related to accident, disability, vision, dental care or long-term care and also includes insurance providing coverage regarding a special disease or illness or insurance paying a fixed amount per day for hospitalization coverage. In addition, an individual is not an eligible individual for purposes of an HSA with respect to any month during which the individual is enrolled in Medicare Part D or in any other Medicare benefit program.

It is important to note that an HDHP can offer either self-only or family coverage. For 2008 an HDHP is a health insurance plan with a minimum deductible of $1,100 for self-only coverage or $2,200 for family coverage. Annual out-of-pocket expenses, including deductibles, cannot exceed $5,600 for self-only coverage or $11,200 for family coverage.

For 2009 an HDHP is a health insurance plan with a minimum deductible of $1,150 for self-only coverage or $2,300 for family coverage. Annual out-of-pocket expenses, including deductibles, cannot exceed $5,800 for self-only coverage or $11,600 for family coverage. It is also important to note that an HDHP can impose higher out-of-pocket expenses (co-pays and co-insurance) for any services provided by non-network providers.

Generally, an HDHP cannot provide benefits before the stated deductible is satisfied; however, there is an exception for coverage provided for so-called "preventive care." Among the types of care that the IRS has indicated come within the spectrum of preventive care are:

• Coverage for Annual Physicals
• Immunizations and Screening Services
• Routine Prenatal and Well-Child Care
• Tobacco Cessation Programs
• Obesity Weight-Loss Programs

More information regarding the eligibility requirements imposed upon HSAs can be found in the guidance published by the IRS in Notice 2008-59: http://www.treas.gov/press/releases/reports/notice200859.pdf.

Contributions

• Contribution Limits - As discussed above, for 2008 an individual with self-only coverage may contribute up to $2,900 into an HSA and an individual with family coverage may contribute up to $5,800 into an HSA. For 2009 an individual with self-only coverage may contribute up to $3,000 into an HSA and an individual with family coverage may contribute up to $5,950 into an HSA. The contribution limit is subject to further adjustments in future years by the Treasure Department for cost-of-living increases.
• Catch-Up Contributions - As discussed above, an individual may also make an annual additional contribution to his or her HSA for each year that the individual is 55 years of age or older. For 2008, this so-called "catch-up contribution" was $900 and was increased to $1,000 for 2009 and years thereafter.
• Qualified HSA funding Distributions - A Qualified HSA Funding Distribution consists of a tax-free rollover of funds from either a Traditional IRA or a Roth IRA. A Qualified HSA Funding Distribution cannot be made with respect to distributions SIMPLE IRAs or SEPs. Generally, a Qualified HSA Funding Distribution is a one time tax-free transaction; however, two tax-free rollovers can be made in a single year if the first rollover occurred during a period when the individual had self-only coverage and the second rollover occurred during a period when the individual had family coverage, or vice versa. The Qualified HSA Funding Distribution rollover is counted against the individual's annual HSA contribution limit, including any available catch-up contribution amount. In addition, the Qualified HSA Funding Distribution rollover is subject to a 13-month testing period, which lasts from December 1 of the period, an individual must continue to be covered under a high-deductible health plan (HDHP) and not have any non-HDHP coverage. Thus, any individual who opens an HSA in 2008 will have a testing period that starts on December 1, 2008, and ends on December 31, 2009. Failure to maintain coverage under a HDHP or maintenance of any non-HDHP coverage makes the rollover amount taxable and subject to a 10% penalty tax. More information regarding a Qualified HSA Funding Distribution can be found in IRS Notice 2008-51: http://www.treas.gov/offices/public-affairs/hsa/pdf/n-08-51.pdf.
• Full Contribution for Partial Year Participation - An individual is permitted to make a full tax deductible contribution to an HSA up to the annual HSA contribution limits (as discussed above), including the ability to make a full catch-up contribution, even though the individual was not an eligible individual enrolled in an HDHP for the entire year, the individual must be an eligible individual participating in an HDHP on the first day of the last month of the tax year (generally December 1st). The contribution is subject to a 13-month testing period, which lasts from December 1 of the first year through December 31 of the following year. During the testing period, an individual must continue to participate in an HDHP and not have any non-HDHP coverage. This, any individual who opens and HSA in 2008 will have a testing period that starts on December 1, 2008, and ends on December 31, 2009. Failure to maintain HSA eligibility during the testing period makes a portion of the contribution taxable and subject to a 10% penalty tax. An exception to this 10% tax penalty exists if the failure is caused by the individual's death or disability For more information regarding the ability to make a Full Contribution for Partial Year Participation can found in IRS Notice 2008-51: http://www.treas.gov/offices/public-affairs/hsa/pdf/n-08-52.pdf.