Health Saving Accounts Giving Consumers a Choice

To be eligible to make or receive an HSA contribution, people must be insured through a High-Deductible Health Plan (HDPD). The deductible must be at least $1,000 for single coverage or $2,000 for family coverage. Additionally, the maximum out-of-pocket expenses, including deductibles and copays, cannot exceed $5,000 for single coverage and $10,000 for family coverage. These amounts are subject to cost of living allowances (COLAs).

If you meet the eligibility requirements, you, your employer, your family member and anyone else may contribute to your HSA. This is true whether you are self-employed or unemployed.

By opting for a HDHP, both employers and individuals save money by paying lower monthly health insurance premiums. The savings may then be used to fund the Health Savings Account.

There are several other advantages to the Health Savings Accounts. Employers and employees making a contribution to an HSA can realize a tax deduction. For employees, contributions and withdrawals are tax-free. Tax-free withdrawals must be used for qualified medical expenses.

The maximum annual contribution amount is generally the lesser of 100 percent of the annual deductible under the HDHP or a specific amount (subject to COLAs). For 2005, the specific amount is $2,650 for single coverage and $5,250 for family coverage.

Individuals with HSAs also have the benefit of a year-to-year rollover of unused funds that will accumulate interest. There is no “use-it-or-lose-it” provision.

An individual is not eligible for a HSA if he or she is also covered by a non-HDHP health plan, enrolled in Medicare or if the person can be claimed on another person’s tax return.

HSAs are likely to grow in popularity in the coming years. According to a survey of employers released in November by Mercer Human Resource Consulting, 23 percent of large companies plan to offer HSAs in 2005 or 2006. Only 4 percent of employers with 500 or more employees currently offer them, but that is expected to grow to 14 percent in 2005 and 26 percent in 2006.

How HSAs work

• A person who is covered under a high-deductible health plan may open a Health Savings Account to pay for qualified medical expenses. (However, the individual cannot also be covered by another non-HDHP plan, enrolled in Medicare or claimed as a dependent on another person’s tax return).
• A person uses the Health Savings Account to set aside pre-tax funds to pay for qualified medical expenses (Section 213(d) of the IRS Code).
• At the end of each year, the money left in the account earns tax-free interest. There is no “use-it-or-lose it” provision.
• A Health Savings Account is portable. The account belongs to the individual and stays with him or her regardless of the employer. If the employee dies, it passes to the designated beneficiary as a Health Savings Account.  
• Contributions to an HSA are fully deductible, the earnings grow tax deferred, and distributions for qualified medical expenses are tax-free.
• Contributions may be made by the employer, the employee or others on behalf of the account holder. Contributions must stop once the account holder is enrolled in Medicare.
• Individuals over the age of 55 can make a catch-up contribution. For 2005 that contribution amount is $600. An account holder who is 65 or older and not enrolled in Medicare can continue to make catch-up contributions.
• At age 65, the account owner can continue to spend money from the account for any reason without penalty, and the funds withdrawn are taxed at ordinary income tax rates. The HSA funds for healthcare expenses and long-term care can be withdrawn at 65 and taxed at ordinary income tax rates without penalty.

For more information on Health Savings Accounts, contact your insurance agent or visit the U.S. Treasury website,, and click on the Health Savings Accounts link.

Ronda Thompson is vice president of retail banking and business development officer with Capitol National Bank.








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