Toast to Health … Savings Account

Created under the 2003 Medicare Act, a Health Savings Account is a tax-favored savings plan offered by many banks, insurance companies, brokerages and other financial institutions that can be used to pay for qualified medical expenses.

According to the Pennsylvania Institute of Certified Public Accountants, HSAs offer significant tax benefits to individuals who qualify.

But first, to establish an HSA, you must have health-care coverage under a high-deductible health plan. For 2007, these plans are defined as having deductibles of at least $1,100 for individuals and $2,200 for families.

HSAs are designed, in part, to help those with high-deductible policies pay for health expenses until insurance benefits kick in.

To be eligible for a HSA, you cannot be covered by any other type of medical plan.

Each year, you, your employer or both can contribute up to the amount of the deductible for your high-deductible health plan. An individual who is age 55 or older and not enrolled in Medicare may make a catch-up contribution of $800 for 2007.

HSA funds can be used to pay for qualified health expenses that the account owner, and his or her spouse or dependents incur. Qualified expenses include costs for doctor visits, prescription drugs, over-the-counter remedies, Medicare premiums — but not supplemental Medicare benefits — and more.

Once you meet your deductible, your health-insurance policy covers your medical expenses according to your policy provisions.

Funds withdrawn before age 65 for nonmedical purposes are subject to a 10 percent penalty, as well as taxes on the amount withdrawn. Taxpayers who are 65 and older have to pay taxes, but not a penalty, on amounts withdrawn for nonmedical reasons.

Be aware that funds remain in your HSA from year to year. This means the HSA funds continue to accrue tax-free until needed.

If you had an HSA in 2006, you may deduct up to the amount of your policy's deductible, but not more than $2,700 if you have individual coverage or $5,450 for family coverage. For 2007, the maximum HSA deduction will move up to $2,850 for individuals and $5,650 for families.

The HSA deduction is an above-the-line deduction, meaning you don't have to itemize to benefit from it. There is also no income or phase-out limit.

If your employer makes an HSA contribution for you, it is excluded from income and not subject to income tax or FICA. Additionally, Pennsylvania allows you to take a state income-tax deduction for HSA contributions.

Dividends and interest in the account are tax-exempt, which means the account grows tax-free until funds are withdrawn. 



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