Medical expenses are an ever increasing drain on a families budget and a financial uncertainty for retirement. In 2004 health savings accounts first became available. These HSAs allows taxpayers to set aside tax-deferred money for future health needs. The HSA is a marked improvement over the Archer MSA and is available to anyone who is under the age of 65 and who is not covered by another employer sponsored health plan.
Contributions to HSAs are deductible and earnings on the amount in the HSA are not taxed. Withdraws are tax-free to the extent of allowable medical expenses, including long term care. Balances in the HSA that are not used may be withdrawn, after the owner reaches 65 as a taxable supplement to retirement income. If employers contribute to employee HSAs, the payments are excluded from the employees’ gross income and are not subject to withholding or payroll taxes. If a taxpayer makes a HSA contribution, it is deductible even if the taxpayer does not itemize medical expenses. The employee’s HSA is also portable, if the employee changes jobs.
Many insurance companies now carry the required HDHP or high-deductible health plan. For 2005, the HDHP must have a $1,000 minimum annual deductible for self-only coverage, and a $2,000 for family coverage. The maximum allowable deductibles and out-of-pocket costs for 2005 is $5,100 for self-coverage and $10,200 for a family. Any eligible individual may have an HSA. For an employees HSA, the employee, the employees employer, or both may contribute to
the employees HSA in the same year. If an HSA is established by a self-employed (or unemployed) individual, the individual can contribute. The 2005 contribution limits are: monthly 1/12th of the lesser of the HDHP deductible or $2,650 for an individual or $5,250 for family coverage. Additional contributions are allowed for those ages 55-65 at $600 for 2005 and $700 in 2006.
The lower premiums of a HDHP may be nearly enough to fund a HSA. For younger people, financially stable and in good health, the health savings account is an attractive alternative to lower-deductible type health plans that carry higher premiums. For more information, contact your health insurance provider and your income tax advisor.