Health Savings Accounts - A Basic Overview

Health Savings Accounts (HSAs) are becoming more and more a need than a luxury. You must be enrolled in a health care plan to qualify for a Health Savings Account. Since they have been around, millions of people have qualified and gotten one of these accounts. The trend should continue to raise as more employers and companies offer this benefit as a bonus to their medical plans. Some companies aren't quite there yet but many have jumped on the bandwagon. There are some basic rules that can help an individual or corporation decide to enter the HSA market.

To establish an HAS, there are some rules and regulations. It is like establishing an individual retirement account (IRA) in most cases. In fact the documents are very similar and the procedure as well. An HSA trustee can add terms to their agreement regarding the effecting policy and procedure of their HSA. These terms can include any of the following but that may not be all that is required. Included in your agreement could be definitions, fees and expenses, amendments, disqualifying provisions, investment options, distributions, transfers and rollovers, reports and records, termination and/or resignation, and liability protection. There might be more of less of these conditions depending on the insurer.



HSA eligibility requires you to have an Internal Revenue Code to even desire to be eligible. You must be enrolled in a high-deductible medical care plan. So, people who don't pay a deductible or it is very low, do not qualify for this benefit. Some exemptions do apply of course but you would need to contact the right person to find out. You must not be able to be claimed as a dependent for anyone else or on Medicare. To qualify your deductible needs to be for an individual a minimum or $1000, and your out of pocket expenses can't exceed $5,100 for that year. For a family, the deductible needs to be a minimum of $2000 and the out of pocket portion can't exceed $10,200 per year. There is a cost of living deduction as well and your agent to better save you money will adjust things. Many organizations require that you prove you are eligible prior to a contract. It is the individual asking for the HSA that must figure out that they qualify or might qualify.

The yearly contribution can't exceed the deductible amount or combination with out of pocket expenses. As long as the individual has the high-deductible health plan they are qualifying. If you lose this plan, you will not be eligible for that month or period of time. If you are married and have separate high-deductible health plan, it is the lowest deductible amount that the family as a whole can meet. There are no combining deductibles to get a higher benefit. If you qualify, you can establish a regular contribution, a rollover contribution, or a transfer contribution plan. For the money to be deductible for a specific tax year, one must file by the deadline to receive the benefits. If an eligible individual's employer contributes to his or her HSA, the employer, not the HSA owner, is entitled to a deduction.

An HSA custodian or trustee reports the contributions on IRS Form 5498-SA, HSA, Archer MSA, or Medicare Choice MSA Information. Copies of the report are due to each participant and the IRS by May 31, 2006. The owner is responsible for reporting the contribution amount on the proper forms to be submitted and file them with the income taxes that year. The distributions are to be made by the owner, if different than the participant. These will tax-free if used to pay for, or reimburse qualifying medical expenses that occurred after putting the plan into effect. These expenses include and could exceed the diagnosis, cure, treatment, or prevention of disease, prescription and certain nonprescription drugs, and transportation and certain lodging costs primarily for and essential to qualified medical care and certain qualified long-term care services. It is an HSA owner's responsibility to determine the taxability of an HSA distribution and whether it is legitimate. The guidance of a tax or legal professional may be necessary to determine whether an expense is a qualified medical expense to avoid penalties.