13.3.4 Health Savings Accounts (HSA)
Health savings accounts (HSAs) are designed to assist the small business owner and the self-employed set aside tax-advantaged funds to help defray health care costs. As long as the HSA contributions are used to cover qualified medical expenses incurred by the HSA owner, the spouse, and dependents, the funds remain tax free. If the funds are used for any other purpose, however, they become taxable and subject to a 10% penalty fee.
Assets can accumulate over the years and ownership can be transferred to a spouse tax free upon the death of the HSA owner.
HSAs are based on a high-deductible contribution plan.
Individual participants must be under age 65 and must be enrolled in a qualified health plan with a high deductible.
For an individual, a qualified high-deductible health plan is one with a minimum deductible of $1,200 and a $6,050 cap on out-of-pocket expenses (limits indexed annually) (2012; $5,950 cap in 2011).
Family deductibles and out-of-pocket expense caps are twice the individual figures.
Individuals with HSAs who are age 55 and older may make additional annual contributions (catch-up contributions) of $1,000 (2012, same as 2011).
Earnings grow tax free and account beneficiaries can make tax-free withdrawals to cover current and future qualified healthcare costs. Non-qualified withdrawals are subject to income taxes and a 10% penalty tax. HSAs are fully portable and assets can accumulate over the years. Upon death, HSA ownership may be transferred to a spouse tax free.
Qualified health care expenses include the following services and products.
- Doctors' fees
- Prescription and non-prescription medicines
- Necessary hospital services not paid for by insurance
- Retiree health insurance premiums
- Medicare expenses (not Medigap)
- Qualified long-term care services
- COBRA coverage
