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Health Savings Account

Health Savings Account (HSA)

Do you know about HSA?

HSA is a type of health care savings grows without tax. If you want to open HSA, you should have High Deductible Insurance Policy. A HSA can function like a form of secondary 401 (k). A good thing about this is you can withdraw the amount at the age of retirement without any penalty or tax for medical purposes, and you need not to fall ill for this. HSA is regarded as a retirement plan by the government. HSA falls under Employee Retirement Income Security Act.

To what extent HSA can be a money saver?

Contribution to this plan save you from taxation. You don’t have to pay income till the money stays in the account. Your withdrawal for medical purposes is tax free. According to the reports of US Treasury Department, by contributing $2500 to HSA, a person having one dependent child can go for federal income tax savings up to $756. And contributing $5450, a married couple can save up to $1417.

(Source: interest on the amount saved in the account grows tax free basis. And the mutual fund it carries is benefited with tax free capital gains. When you withdraw money from HSA for medical expenses, you do not need to pay penalties or taxes. If your age is sixty five, you can withdraw money from the HSA without penalties or taxes. In this case, you have to pay regular income tax on the withdrawls.

What is the amount you have to contribute to your HSA account on yearly basis?

If you have health insurance with 2006 deductible, you can contribute minimum $1050 for an individual and $2,100 for a family to the HSA. According to this plan, the amount of contribution is equal to the amount of deductible, there is another choice of contribution up to $2,700 for an individual and $5,450 for family coverage, whichever you find less, you can go for that. If your deductible is about $1500, your contribution to the account is $1500 and if your contribution rises around $10,000 then you can make contribution of $2,700. In the case of family, the contribution is about $5,450 except their deductible is lower.

How can you be eligible to open a HSA account?

You can open an HSA account, firstly, if you are having a high deductible health plan under HSA, and you do not have any other health plan without high deductible plan, secondly, you do not comes under Medicare planning, that is, your age should be less than sixty five, and thirdly, you do not depend upon the tax return of any other person.

What is the meaning of HSA qualified high deductible health insurance?

Health saving account should be used alongside high deductible health insurance. According to this plan, $1,050 is the minimum deductible for individual and $2,200 for the family. This plan consists of out of pocket expenses on yearly basis which is limited to $5,250 for individual and $10,500 for the family. These amounts are not static, it changes every year. The HSA qualified HDHP gives coverage to the preventive care with no deductibility.

What is the difference between state tax treatment of HSA and federal tax treatment?

HSA and the bodies created it are federal. So being federal, it is decided by the states that whether it will be complied with federal guidelines or have its own state guidelines for the tax treatment of HSAs. So some incomes that are tax free at the state level are not necessarily to be the same in federal level. You may approach your tax professional for detail.

In which states do the tax treatment of HSA has been harmonized with the federal government?

The states are: Colorado, Arkansas, Arizona, New Mexico, Nebraska, Connecticut, Hawaii, Georgia, Idaho, Kansas, Louisiana, Maryland, Missouri, Indiana, Iowa, Indiana, Kentucky, Oklahoma, North Carolina, North Dakota, Oregon, Rhode Island, Virginia, Utah, Vermont, Mississippi, Pennsylvania, South Carolina, New York, Delaware.

What are the states that have differentiated HSA from federal government?

California, Illinois, Michigan, Maine, Massachusetts, Minnesota, New Hampshire, New Jersey, Washington DC, Wisconsin, West Virginia, Tennessee and Ohio. Above written are the states according to which legislation should be passed before the HSA get the tax benefits at the state level. Tennessee and New Hampshire do not get the tax benefit but it these states are benefited with tax dividends and interest. Alabama has not been figured out as the achiever of state level benefits of HSA. Alaska, Florida, South Dakota, Texas, Nevada, Wyoming and Washington are the states which are not indicated by federal income tax guidance.

What is the percentage of tax penalty one has to pay the year when the Archer Medical Savings Account is turned over into a Health Savings Account in California?

The turning over of HSA into MSA funds will become non qualified distribution and matter to state income tax with 10% penalty.

Can a person with the coverage of Medicare and Medicaid open a HSA account?

You cannot open a HSA account till you have non high deductible health plan coverage. And if you have any veterans Administration Health Benefits in last three months, you cannot go for HSA. You may become ineligible due to Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangement (HRA) in two conditions, firstly, limited purpose like dental, vision or preventive care and secondly, post deductible (payment for medical expenses after the deductible is met). When HRA save some amount for the health expenses for retired people, it is acceptable.

How do HSA and Group Insurance Plans work together?

A health saving account helps the members of insurance plan to prepare the future health care expenditure in a tax advantaged way. In this account, a member has to contribute the amount of high deductible to this account year to year. A HSA account is like a form of “back up 401k”which is saving for retirement. You have to save the money in HSA for expenses before retirement; otherwise you have to pay the penalty. But you can withdraw the same amount without paying for the penalty after retirement. HSAs are taken under Employee Retirement Income Security Act and are considered as a retirement plan by the Government. Employees have to be with high deductible insurance plan to open HSA. But if you want to provide your employees with group health insurance plan that is HSA compatible, you will be able to give better health coverage to your employees. And they will be able to keep HSA and be able to grow unlike a 401k account, after they live the company.

Can cosmetic surgeries be paid with HSA?

Cosmetic surgeries are not deductible under medical expenses.

In which site can I get the IRS guideline for the HSAs?

We can get it by downloading the Guide to Medical and Dental Expenses from IRS’ official website.

Being a citizen of a state without harmonization between federal government and health savings account (HSA) tax treatment, what should I do to compute my federal taxes and state taxes correctly?

Being the owner of HSA, you have to maintain record which will be appropriate to HSA contribution and the accounts earnings which will be considered as the state income tax, this will lead the distribution to be tax free because the contributions have already been taxed in state level. You have to maintain a permanent record of : the deduction made to HSA at the federal level; the amount of income produced within the given year and finally the income amount reported every year for state income tax purposes.

In which way does the federal form of government treat the Archer Medical Savings Account for tax purposes?

If you withdraw the funds from MSA, it can be rolled over to HSA within two months. These roll over are of two types: one is Trustee to Trustee and another is Actual roll over. Funds can be transferred from the old MSA Trustee to the new HSA Trustee directly in the Trustee to Trustee roll over. A roll over means, the funds were to be distributed to the participant but in this case the participant does not touch the money, so it is not counted as a roll over. This roll over is not needed to be tax maintaining. In the case of Actual roll-over, it happens when the Trustee transfer the MSA amount directly to the participant. And the assets must be transferred to the new Trustee within a couple of month after the receipt of the distribution. If the person misses the two months deadline, an IRS reporting requirement and potential tax penalties will be imposed. Individuals are allowed to transfer one MSA to HSA within one year duration. Additionally, roll-over of assets within the previous year are not qualified for the roll over. If the MSA for roll over does not fulfill the condition given above, it is considered as disqualified distribution. It will be included in the account holder’s gross income and becomes the matter to tax of additional 10%.


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