CARL WATTS & ASSOCIATES

December 13, 2010

www.carlwatts.com
office@carlwatts.com
Washington DC
 tel/fax 202 350-9002
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In one of our previous newsletters we talked about flexible spending accounts, including the health care flexible spending account. There is another alternative, namely the health savings account (HSA), which may be a more suitable choice for you to save for health-related expenses on a tax-free basis.

In order to be eligible for a health savings account, you need to:

  • Have a high deductible health plan (HDHP);
  • Have no other health insurance coverage, including Medicare;
  • Not be claimed as a dependent on someone else’s tax return.

A qualifying HDHP is a health insurance plan with lower premiums and higher deductibles than a traditional health plan; it’s a sort of catastrophic coverage plan. An HDHP does not cover you for the first several thousand dollars of health expenses. HDHPs pay nothing except for preventive care until the deductible is met. A deductible is the amount you must pay out-of-pocket each year for health-related expenses before your insurance policy begins to pay.

To qualify for an HSA in 2010 for instance, your HDHP minimum deductible must be at least $1,200 for self coverage and $2,400 for family coverage.

Your annual out-of-pocket expenses (including your deductibleand co-payments) for 2010 cannot exceed $5,950 if single and $11,900 for family coverage. These amounts are usually adjusted annually according to inflation.

Any company that sells health insurance may offer you an HDHP.

When you enroll in Medicare, you cannot make any more contributions to your HSA, but you can still keep the account and use the money to pay for medical expenses tax-free.

You are allowed to have other types of health-related insurance, such as accident, disability, dental care, vision care, or long-term care.

So, once you establish that you are eligible for an HSA, you surely want to know how you can get one and how it works. If your employer doesn’t have such a plan set up, banks, credit unions, insurance companies and other financial institutions are permitted to offer and oversee HSAs.

Contributions to your HSA can be made by you, your employer, or any other person. The total amount of contributions is capped by the IRS; for 2010 and 2011 you can contribute up to $3,050 if you are single, and $6,150 for family coverage. Catch-up contributions of $1,000 are allowed if you are 55 years or older.

Contributions through an employer may be made on a pre-tax basis. If this option is not available, contributions may be made on a post-tax basis and then used to decrease gross taxable income on your following year’s tax return. If you are self-employed, you have to pay self-employment tax on your contributions.

Contributions can only be made in cash, contributions of stock and property are not allowed. Depending upon the state, HSA contributions and earnings may or may not be subject to state taxes.

Funds deposited to your HSA are your property, available to be used immediately, and money not withdrawn each year will carry over into the next year. There is no “use it or lose it” rule.
Your HSA funds can be invested in a manner similar to investments in an IRA, but they cannot be rolled over or receive rolled over funds from 401(k)s or IRAs, except for a one-time rollover of IRA assets to fund up to one year’s maximum HSA contribution..

Withdrawals from your HSA are allowed at any time tax-free as long as they are used for qualified medical expenses.

Qualified medical expenses include services and items covered by the health plan but subject to cost sharing such as a deductible and coinsurance or co-payments, expenses not covered under medical plans, such as dental, vision and chiropractic care, durable medical equipment such as eyeglasses and hearing aids, and transportation expenses related to medical care.

As a result of Health Care Reform, starting January 1, 2011, HSA funds can no longer be used to buy over-the-counter drugs without a doctor’s prescription. Some HSAs supply a debit card, others provide checks to use for your withdrawals.

There is no need for any kind of approval and checks and debits do not have to be made payable to the provider. But withdrawals that are not for documented qualified medical expenses are subject to income taxes and a 10% penalty. As of January 1, 2011 the penalty will be increased to 20%. Always remember to keep all necessary documentation for all your qualified medical expenses.


You cannot deduct your qualified medical expenses as an itemized deduction on Schedule A if they are equal to the tax-free distribution from your HSA.

Distributions from your HSA can be used to pay for premiums for long-term health insurance, health care continuation coverage (such as under COBRA), and other health care coverage if you are 65 or older (other than Medicare and supplemental Medicare policy).

Over time, with low medical expenses and regular contributions, your HSA can accumulate significant assets that can be used for health care tax-free or for retirement on a tax-deferred basis.


And there are more advantages to having an HSA:

  • You have some protection against unexpected medical bills;
  • It may be more affordable due to lower health insurance premiums;
  • It is your decision how much money to put into your account, how much and which medical bills to pay;
  • Your HSA is portable, you can keep it even if you change jobs, medical coverage, become unemployed, move to another state, or change your marital status;
  • You can make withdrawals for non-medical expenses after retirement age;
  • Your HSA funds go to your designated beneficiary without any transfer taxes. If there’s no designated beneficiary, the funds in your account become part of your estate.

There are proponents and, of course, opponents and criticisms of HSAs but it is our intention to provide unbiased information in our newsletters.

As with all financial decisions you must make, professional help and advice is always beneficial.
Health Savings Account