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November 17, 2010 No Comments

Health Savings Accounts (HSA)

With the skyrocketing cost of health care, many investors are using Health Savings Accounts (HSAs) to supplement their lifetime health care expenses.  HSAs offer certain tax benefits and may play an important role in managing your long term financial health, as well.  However, not everyone is eligible to enroll in a HSA so it is important to understand who qualifies and how the account can be used in coordination with a long term financial plan.

Simply put, a Health Savings Account is a tax advantaged savings vehicle specifically designed to help cover lifetime medical expenses.  Tax deductible contributions made into the account grow tax deferred and may be withdrawn tax free to cover eligible medical expenses.  Balances remain in the account from year to year and at your death your spouse may continue to use the HSA for their benefit.  Where permitted by the custodian, funds may be invested in a wide variety of mutual funds potentially producing market returns.

In order to be eligible to open a HSA you must be enrolled in a High Deductible Health Plan (HDHP,) you cannot be enrolled in Medicare, you cannot be claimed as a dependent, and you cannot have any other primary health coverage.  However, vision, dental, disability, and long term care policies are allowed with a HSA.  In most circumstances, HSA owners may also have insurance against a specific illness or disease such as cancer.  Prescription drug plans are allowed but only if no benefits are paid until the annual deductible is met.  HSA accounts are opened as individual accounts; joint accounts are not allowed.

A HDHP is a health plan that has a higher than normal deductible and a maximum out-of-pocket expense within guidelines set annually by the IRS.  In 2011 the minimum annual deductible to be eligible is $1,200 with maximum out-of-pocket expenses set at $5,950.  In some cases, HSAs are made available to group plan participants but in many cases HSAs are used primarily by the self-employed and small business owners.  If you are a participant in a group plan, check with your Human Resources department to see if you are eligible.

Contributions made to an HSA are tax deductible if made by an individual and are considered excludable income if made by your employer.  The IRS sets annual contribution limits ($3,050 self, $6,150 family in 2011 with an additional $1,000 if over age 55) with any excess contribution subject to a 6% excise tax.  Contributions to a HSA must be made in cash and the IRS even allows a non-deductible funding distribution from a Traditional or Roth IRA.  You have until the tax filing deadline (April) to make prior year contributions.

Most medical treatments are eligible expenses and may be covered by your HSA balance.  Eligible expenses generally include any expenses that would qualify for the medical and dental expenses deduction on your tax return.  However in most cases, insurance premiums are not considered an eligible expense and must be paid for out-of-pocket.  Recordkeeping is important when using a HSA to ensure compliance with the IRS.

These benefits make Health Savings Accounts a valuable element to any prudent financial plan, if you are eligible.  Health care expenses may account for hundreds of thousands of dollars in your lifetime so establishing a long term funding vehicle with tax benefits may prove beneficial.

If you would like more information on HSAs or how to become eligible for a HSA please contact Scenic Wealth Management and be sure to discuss any tax questions with your accountant.