The Ins and Outs of Health Savings Accounts
Texas CPAs Say HSAs May Offer Big Tax Breaks for Those Who Qualify

DALLAS — Healthcare 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 and that can be used to pay for qualified medical expenses. According to the Texas Society of Certified Public Accountants, HSAs offer big 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 begin. 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 age 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Funds withdrawn before age 65 for non-medical purposes are subject to a 10 percent penalty, as well as taxes on the amount withdrawn. Taxpayers who are 65 and older pay taxes, but not a penalty, on amounts withdrawn for non-medical reasons.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 HSA 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. 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 an HSA makes sense for your particular situation.

PERSONAL FINANCE INFORMATION
For more information about personal finance issues, visit www.ValueYourMoney.org. While there, sign up to receive a free monthly electronic newsletter with personal finance tips on variety of topics.

ABOUT TSCPA
TSCPA (http://www.tscpa.org) is a nonprofit, voluntary, professional organization representing Texas CPAs. The society has 20 local chapters statewide and has 27,000 members, one of the largest in-state memberships of any state CPA society in the United States. TSCPA is committed to serving the public interest with programs that advance the highest standards of ethics and practice within the CPA profession.