Health Savings Accounts (HSAs) and High Deductible Health Plans (HDHPs) - Revised 2007

HSA's - (also referred to as expanded MSA's) were approved and signed into law effective 1/1/04 under the Medicare Prescription Drug Improvement and Modernization Act of 2003.

How does an HSA work?

An HSA is actually a two-step approach to providing health coverage to eligible persons. Before an "account" can be opened the participant must be enrolled in a federally qualified High Deductible Health Plan (HDHP). For a single person, the deductible can range from $1,100.00 to $2,850.00. For a family, $2,200.00 to $5,650.00. It is important to note on the family plan that the deductible is a total family or policy deductible and not a per person deductible. Most plans either pay 100% of covered expenses after the deductible or 80%. In any case, out-of-pocket expenses (including the deductible) may not exceed $5,500.00 for individuals and $11,000.00 for families.

The second step of the HSA health insurance approach allows an individual or family to open an IRA-like savings account. Annually, an individual and spouse or the employer, may contribute up to $2,850.00 for single and $5,650.00 for family coverage. Individuals age 55 or older may each contribute an additional $800.00 for the year 2007, increasing $100.00 per year after that up to $1,000.00 / yr. in 2009 and thereafter. This is called the catch up provision.

The concept behind the program is that people can reduce their insurance premiums by taking a high deductible while saving to pay the smaller portions of health care expenses from their own funds (via the HSA). In this way, when spending their own dollars, insureds will become better consumers of health care. As people become active consumers and shop for medical services rather than expecting insurance companies to pay at any cost, they help bring health care and insurance costs under control through market forces.

Who is eligible?

Anyone covered under a qualified high deductible health plan, below Medicare eligibility age, and not covered under any other health plan.

Contributions to an HSA:

Contributions to a Health Savings Account are excludable from income. The account can be made up of funds contributed by either an employer, an employee or an individual not in a group. The account is treated much the same as an IRA with the exception that funds may be used to pay certain medical expenses (as defined in Sections 213 (d) . Like an IRA, HSA funds are excludable from income, any interest or earnings are tax-deferred, and funds may be used to pay qualified long-term care insurance premiums.

Amounts not used to reimburse medical expenses can be carried forward and a new contribution made each year. In effect, this money can be invested in a manner similar to a self-directed IRA.

HSA Advantages

• Both for single and/or family tax deductible per year may contribute up to - ($2,850.00 or $5,650.00)
• Premiums for a high deductible plan are approximately 40 to 50% less than a $1,000.00 deductible PPO Co pay plan
• Any amount contributed to an HSA (under the applicable limits) is excludable or deductible from income. The accounts are separately owned and controlled by the employees.
• Earnings on an HSA are tax-deferred and tax free if used for certain medical expenses (sec. 213(d))

Example: $1,000 PPO vs. $5,000 HSA Family Coverage

* Less - Any funds withdrawn from your HSA account to cover eligible medical expenses. Clients may place more money in the HSA savings account (i.e. $5,650) and the catch up provision for those over age 55 i.e. ($800 each).

Improvements Effective January 1, 2007

• Sec. 302 FSA and HRA termination allow rollovers into HSA's one time only before January 1, 2012
• Sec. 303 Repeal of annual deductible limitation on HSA contributions to the maximum of $2,850.00 for single coverage and $5,650.00 for family.
• Sec. 305 Allows a full year's contribution to an HSA for partial year's coverage, provided the taxpayer maintains a high deductible plan for at least 12 months.
• Sec. 306 Allows employers to provide additional contributions to lower paid workers.
• Sec. 307 Allows a one time distribution from IRA'S to fund HSA's.

The information provided above is for informational purposes only. For detailed clarification, please contact your personal accountant or an IRS representative.