HEALTH SAVINGS ACCOUNTS

Winter, 2009

Health savings accounts (HSAs) were created in the Medicare Prescription Drug, Improvement, and Modernizations Act of 2003. Individuals can set up these accounts if they have high deductible medical insurance. High deductible means at least $1,150 in the case of individual coverage or $2,300 in the case of family coverage. Contributions to an HSA are tax deductible and the annual contribution is equal to the deductible amount of the insurance coverage, not to exceed $5,600 for single coverage and $11,200 for family coverage. Individuals age 55 or older can make an additional “catch up” contribution of $1,000 in 2009. However, no contribution can be made once an individual is age 65.

An HSA can be used to pay medical expenses not covered by medical insurance with unused amounts left in the account and carried forward. Yearly contributions are deductible whether you itemize or not and money in the HSA grows tax-free. When you withdraw funds to pay medical expenses, there is no income tax.

If you withdraw money from an HSA for reasons other than medical purposes, you will pay income taxes on the withdrawal plus a penalty. When you reach 65, you can withdraw the money and use it for other purposes penalty free, but not tax free. As you can see, it works something like an IRA.

Contributions to an HSA can be made in three ways: an individual and family members can make tax deductible contributions even if the individual does not itemize deductions, an individual’s employer can make contributions that are not taxed to either the employee or employer, and employers with cafeteria plans can allow employees to contribute untaxed salary through a salary reduction plan.

The trustee of your account can be a bank, an insurance company or another person who will administer the trust. No part of the assets can be invested in life insurance. The assets of the trust cannot be commingled with other property except in a common trust fund or common investment fund. The balance in the account is nonforfeitable, meaning it is portable.

As the name implies, an HSA is a tax deductible way to save for medical expenses. If you have any additional questions, please give G.R. Starbuck & Co. a call.