Keeping Health Saving Accounts Tips

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Predict Your FSA Future

Add up your co-pays, deductibles and other out-of-pocket medical expenses from last year to figure out how much to put into your flexible spending account (your benefits department can tell you what's eligible). For every $1,000 you put in, you'll slash about $300 in taxes.

   

The FSA – Use It; Done't Lose It

You will forfeit any funds in your FSA that you don't use them by the end of the year or the following year, depending on when you or your company signed up. If you find that you have some extra cash in your FSA and need to use it before the end of the year, stock up on over-the-counter medical supplies like Band-Aids, cold and flu tablets and aspirin; order a six-month supply of contact lenses and solution; or schedule an extra session with your therapist.
There are also programs such as Quicken's Medical Expense Manager, at www.quicken.com, that can tell you when you've met your deductibles or how much money is left in your health FSA as well as alert you to potential savings such as overlooked tax deductions and possible billing errors

   
Does the HDHP have to be in my name?

HSA Eligibility Part II

A high deductible health plan (HDHP) does not need to be in your name to qualify you for a health savings account (HSA). Just like with traditional health insurance, if your spouse is the subscriber to the HDHP and you are covered by the HDHP, you qualify to set up an HSA. You may make pre-tax deposits to and tax-free withdrawals from the HSA to pay for qualified medical expenses. However, if you can be claimed as a dependent on someone else's tax return, you do not qualify for an HSA.

   
What happens if I have money in my health savings account but I no longer have a high deductible health plan?

Health Savings Account Balances

Once money has been deposited into your health savings account, it is yours to do with as you please, as long as the money is not used for unqualified expenses. Even if you terminate your high deductible health plan for some reason, the money that is in your HSA will still belong to you. Once you reach age 65, you can withdraw the money tax-free and use it for any purpose, medical or otherwise, without being subject to a 10% penalty. Keeping health savings accounts for long periods of time without using them can work to your advantage. As long as the money sits in your HSA, it continues to earn interest and rolls over automatically each year. If you die before using the money in your HSA, the account will go to your spouse who can use it as if it were his or her own HSA. In the event that you do not have a spouse, the account ceases to be treated as an HSA and the money passes on to your beneficiary or is included in your estate.

   
Can I have both a flexible spending account and a health savings account?

Health Savings Accounts and Flexible Savings Accounts

A flexible spending account (FSA) is an account to which you make pre-tax contributions to pay for approved out-of-pocket medical expenses. Any money you contribute during the calendar year must go to pay for expenses incurred in that same calendar year. Any money left in the account at the end of the year is forfeited. Because contributions to FSAs and HSAs are tax-advantaged, or made on a pre-tax basis, federal regulations do not permit you to have both an FSA and an HSA in the same calendar year. This is something to keep in mind as you plan your benefits during your employer's open enrollment.

   
How much can I deposit in my health savings account in one calendar year?

Contribution Limits

The maximum amount you are allowed to deposit when keeping health savings accounts (HSA) in any given calendar year depends on the type of insurance coverage you have and your deductible amount. Your annual contribution cannot exceed your deductible amount. For example, if you have a single-person high deductible health plan (HDHP) with a $1,000 deductible, you can deposit a maximum of $1,000 for the calendar year. If you want to save more, you need to increase your deductible. For those with single-person coverage, the most you can deposit in a calendar year is $2,700. If you have family coverage, the most you can deposit in a calendar year is $5,450. These amounts will increase annually to account for inflation. There is also a "catch up" feature for people 55 years and older that allows them to deposit additional amounts each calendar year. For 2006, that amount is $700. By 2009, it will max out at $1,000 per year. For married couples where both spouses are 55 years or older, each spouse must have their own HSA in order to double up on the catch-up contributions.

   
What is a high deductible health plan or HDHP?

High Deductible Health Plans

A high deductible health plan (HDHP), also known as a catastrophic health insurance plan, is a relatively inexpensive health plan that has a high deductible ranging from $1,000 to thousands of dollars. The premiums for HDHPs are usually considerably lower than those for traditional health insurance plans. You must have a HDHP in order to have a health savings account (HSA). To qualify for an HSA, your deductible must be at least $1,000 for single-person coverage or $2,000 for family coverage.

   
Who is eligible to open a health savings account?

Health Savings Account Eligibility Part I

To qualify for a health savings account, or HSA, you must have a high deductible health plan (HDHP) with a deductible of at least $1,000 for singles and at least $2,000 for families. The annual out-of-pocket maximum expenses on the plan cannot be more than $5,250 for individuals or $10,500 for families. You can purchase your HDHP coverage through your employer or, if you are unemployed or self-employed, directly from a broker that handles HDHPs. If you are covered by another health insurance plan that is not an HDHP, you are not eligible for an HSA. Other types of insurance that you may have and that will not affect your HSA eligibility include auto, dental, vision, disability, long-term care insurance, coverage for a specific disease or illness as long as it pays a specific dollar amount when the policy is triggered, and wellness programs offered by your employer as long as they do not pay significant medical benefits. Medicare recipients are not eligible for HSAs. Individuals who can be claimed as a dependent on another's income tax return are also ineligible for an HSA.

   
What is a health savings account or HSA?

Health Savings Accounts

Having a health savings accounts (HSA), sometimes incorrectly referred to as a health care savings account, is an alternative to traditional health insurance that works in conjunction with a high deductible health plan. They work in this way: Instead of paying huge premiums for health insurance coverage you may or may not use, you purchase a high deductible health plan (HDHP) at a lower premium. This results in savings from the beginning due to the reduced premium. The next step is to deposit the savings (up to federally preset maximums) into the HSA on a pre-tax basis. A married couple with two children with a gross income of $100,000 can reduce their federal income tax bill by $1,300. Therefore, when you need routine medical care, you can use the money in your HSA to pay it, tax-free. The other great feature of health savings accounts is that there is no "use it or lose it" component as is common with a medical or a flexible savings account. If you do not use the money deposited in your HSA during the calendar year it is deposited, it sits there until you need it earning interest on a tax-free basis. If you leave it in there until you are 65 or become disabled, you will be able to withdraw the funds tax-free regardless of what you use the money for. However, if you withdraw money from an HSA before you turn 65 and use it for other than qualified medical expenses, you must pay a 10% penalty.

   
What medical expenses are considered "qualified" medical expenses?

Qualified Expenses

IRS publication 502 includes a partial list of what expenses are considered qualified medical expenses for health savings account purposes. The list is not exhaustive as there are many shades of gray when it comes to interpreting what constitutes a medical expense. According to federal rules, the expense has to be "primarily for the prevention or alleviation of a physical or mental defect or illness." There is no way to monitor what you spend your HSA money on. You are the one who ultimately decides whether to pay for an expense with funds from your HSA. If you are audited by the IRS at a later date, and the expense cannot be documented and proven to be a qualified medical expense, you will likely be fined. Keep all your receipts for tax purposes to avoid this possibility. You can use the money in your own HSA to pay for medical care not only for yourself but also for your spouse or dependent. You can even use your HSA funds to pay for medical services provided in other countries. However, you cannot use the money in your HSA to pay your insurance premiums unless you are unemployed.

   
How can I find a high deductible health plan?

Finding A High Deductible Health Plan

Numerous health insurance brokers and agents are selling high deductible health plans, (HDHPs) because of its increasing popularity. If employed, the first place to check would be your employer. Most employers offer HDHPs as an option during open enrollment periods. If you are self-employed, unemployed, or your employer does not offer an HDHP, check with your state's insurance commission to receive a list of companies approved to offer and sell HDHPs in your state.

   
How can I get a health savings account?

Setting Up A Health Savings Account

Opening a health savings account (HSA) is very similar to opening any other bank account. You can probably open a health savings account at your existing bank or credit union. Health savings accounts are also available through insurance companies and other approved companies as well as through many employers. As with any other banking service, do some homework before deciding where to open your account. There should not be opening fees associated with opening a HSA, but there may be other service fees associated with maintaining the account similar to those with checking accounts and savings accounts. The interest paid on the account will vary from institution to institution, sometimes considerably. Finally, some institutions may offer greater conveniences linked to your HSA such as debit cards that allow you to pay for medical expenses at the point of purchase. That way you will not have the hassle of submitting receipts. If you open your HSA through your employer, your contributions will be made on a pre-tax basis directly through paycheck deductions. If you are opening an HSA on your own, you will need to keep all documentation of contributions made during the calendar year so you can claim them as a direct deduction to your gross income when you prepare your income taxes.

   
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