1. What is a Health Savings Account (HSA?)
A Health Savings Account is a savings account which cn be used to pay medical expenses not covered by insurance. Contributions to the plan are dedctible from an account holders’ federal income tax, and, where permitted, from state income tax. Individuals can accumulate funds in the account from year to year. Anyone can open an HSA that has a qualified High Deductible Health Insurance Plan.
2. What is High Deductible Health Insurance Plan (HDHP)?
For the purposes of an HSA, an HDHP is a medical insurance plan that requires a $1,100 minimum deductible plan with a total out-of-pocket maximum of $5,500 per individual and deductibles of a $2,200 minimum with a maximum of $11,200 out-of-pocket for families. If an insurance plan has high deductibles, but is not an HDHP plan by IRS definitions, the policyholder does not qualify for an HSA.
3. What’s the difference between an HSA and a flexible spending account?
A flexible spending account is an employee benefit provided by an employer that can be used for medical expenses the employee or her family incurs during a plan year. Funds in a flexible spending account not used by the employee resort to the employer at the end of the plan year.
Most individuals save on taxes using HSAs because of the IRS limits on deducting medical expenses. How much will depend on your income bracket, any state taxes and whether your state allows a deduction for HSA funds. The HSA deduction is an adjustment to Adjusted Gross Income, which is not subject to deduction phase-out rules or Alternative Minimum Tax calculations.
From: Today’s CPA, January/February 2009.
