|
In December 2003, President Bush signed into law the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Among other provisions, this law created the health savings account (HSA), which offers tax-advantaged benefits for medical care similar to the way that IRAs provide tax-advantaged savings for retirement. You can put money into an HSA for anticipated medical expenses and receive immediate tax benefits because the amount contributed is deductible. If you don’t spend the money in your HSA each year, it can be carried forward and invested for use in future years. HSAs are an alternative to conventional health insurance. By allowing taxpayers to accumulate savings tax free for future healthcare needs, the government hoped to give consumers more control over their healthcare without relying on a third party or health insurer. The HSA won’t replace health insurance, but it may alter the way people shop for and purchase their health insurance.
A key provision of HSA rules is in the type of health insurance a taxpayer must have to be eligible to contribute to an HSA: A taxpayer must be covered by a high deductible health plan (HDHP). An HSA HDHP is a health insurance policy that has a minimum deductible of $1,100 for self-only coverage and $2,200 for family coverage (for 2007). This means that the taxpayer must generally first pay $1,100 ($2,200 for family) of their medical expenses out of pocket before receiving any benefits from the policy.
Such policies typically cost considerably less than a health insurance policy that does not have a high deductible, because the insurer has a lower liability, and the amount that the insured individual saves in lower premiums, in many cases, will cover expenses incurred before the deductible is satisfied. In theory, the insured would deposit the cost savings on the lower premiums into an HSA as a contribution. These contributions are tax-deductible and grow tax deferred.
The HSA owner then has assets in reserve to pay for non-reimbursed medical expenses in the future. Any distributions from the HSA used to pay for qualified medical expenses are tax free.
As mentioned previously, to be eligible to contribute, one must have an HDHP with either self-only or family coverage that qualifies under the IRS rules. In addition, three other eligibility requirements are that the taxpayer not be covered by any other health insurance (with few exceptions), not be enrolled in Medicare, and not be able to be claimed as a dependent. The contribution limit per year is the policy’s deductible amount up to $2,850 for self-only coverage and $5,650 for family coverage in 2007. Participants age 55 and older may also make a catch-up contribution of up to $800 (2007).
If you are considering opening an HSA, you may want to learn more about it. Cinfed is now offering HSAs for qualifying members. You can invest your HSA funds into an interest bearing checking account or certificate. For more details, call our HSA Specialist Kasey Ibrahim at 513-333-3883 or visit www.cinfed.org and click on the ‘What’s New’ section.
|
