Health Savings Account

A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers.  HSA contributions may be made under tax-favored circumstances by employers, employees or both. Funds residing in a HSA are held in an interest bearing account and may later be withdrawn tax-free for qualified medical expenses.

Deposits

Deposits to an HSA may be made by any policyholder of a Qualified High Deductible Health Plan (HDHP), or by an employer on behalf of a policyholder.

The annual maximum deposit to an HSA is the lesser of the HDHP deductible or specified IRS limits. In 2006, the IRS limits are $2,700 for individual plans and $5,450 for family plans.

If a person is a participant in an HDHP for less than an entire year, the maximum deposit is prorated based on the number of months the person is enrolled in the HDHP. A catch-up provision also applies for HDHP participants who are age 55 or over, allowing the IRS limit to be increased. In 2006, the maximum catch-up amount is $700 (catch-up amounts are also prorated for partial-year participants).

Withdrawals

HSA participants do not have to obtain advance approval from their HSA custodian or their medical insurer in order to withdraw funds, and the funds are not subject to income taxation if made for qualified medical expenses. These include deductibles and coinsurance as well as many other expenses not covered under medical plans, such as dental, vision and chiropractic care; durable medical equipment such as eyeglasses and hearing aids; purchase and use of over-the-counter medication; and transportation expenses related to medical care.

Generally, if funds are withdrawn for a reason other than a qualified medical expense, those funds become subject to income tax and a 10% penalty. Once a person reaches the age of 65 or becomes disabled, however, funds can be withdrawn from an HSA for any reason without penalty. For funds that are used for non-medical expenses, regular income tax needs to be paid.

When a person dies, the funds in their HSA are transferred to the beneficiary named for the account. If the beneficiary is a surviving spouse, the transfer is tax-free.