by Michael Wiener, E.A.
HSAs were established under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 thus making 2004 the first year these accounts were available. Under Code Sec. 223, the Tax relief and Health Care Act of 2006 added taxpayer friendly changes.
An HSA is a tax-exempt trust or custodial account exclusively for the purpose of paying qualified medical expenses of an eligible individual. HSAs are designed to allow eligible individuals to save for current medical expenses on a tax-free basis. Contributions are tax- deductible if made by an individual, or excluded from income if paid by an employer. The earnings in HSAs are not taxable. Distributions are not included in income if used to pay for qualified medical expenses. Amounts contributed to an HSA belong to the individual and continue to be available to an individual that changes employers or leaves the work force. HSAs may be available through cafeteria plans.
The HSA is in structure an account much like an IRA. The account must be established and maintained by a qualified trustee or custodian such as banks, trust companies, brokerage houses, and insurance companies. HSAs are available to individuals who meet the following four requirements:
- Covered by a high-deductible health plan (HDHP);
- Not be covered under any other non-HDHP;
- Not enrolled in Medicare benefits (generally, has not ye treached age 65); and
- Cannot be claimed as a dependent on another person’s tax return.
For 2016 and 2017 a high-deductible policy is defined as one with a deductible of at least $1,300 for self-only coverage and $2,600 for family coverage, with out-of-pocket maximum up to $6,550 for self only coverage or $13,100 for family coverage. An individual will not be eligible for HSA coverage if the individual is covered by another health plan that is not an HDHP, although there are exceptions (such as liability auto insurance) that do not jeopardize eligibility.
Contributions to an HSA are deductible as an AGI adjustment.
This means that the contribution is deductible even if the individual does not itemize deductions. Annual contributions must be in cash and must be made by the due date of the individuals tax return not including extensions (April 15 following the end of the tax year.) For 2016 the maximum regular HSA contribution is limited to$3,350 for self-only coverage and $6,750for family coverage. The contribution ceiling is increased by $1,000 for individuals aged 55 or older.
When a HSA distribution is used to pay for qualified medical expenses, the distribution is excludable from income.
A “qualified” medical expense is any Code Sec. 213(d) medical expense (with a few exceptions) for the account owner, his or her spouse or tax dependents.
Distributions that are not for qualified medical expenses are includible in income and subject to an additional 20 percent tax unless the distribution was made because of death, disability, or after the individual enrolls in Medicare. Also, distributions to reimburse medical expenses do not have to be made in the year the expense is paid.
An HSA can be a tax efficient tool to help with the cost of providing health care for you and/or your family. But as with most tools, care must be used.
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