10/01/2012 What is a Health Savings Account (HSA)? Health savings accounts are tax favored accounts that can be contributed to by or on behalf of “eligible individuals” covered by certain high deductible health plans (HDHPs) to pay for certain medical expenses of eligible individuals and their spouses and/or tax dependents. An individual with a high deductible health plan (HDHP) can make contributions up to certain limits and get an “above the line” taxed deduction. This means that contributions reduce the individual’s gross income before itemized or standard deductions are considered. Investment earnings on Health Savings Accounts funds are generally tax free. HSA funds withdrawn for qualified medical expenses escape federal taxation entirely. Employers that contribute to HSA’s or offer HSA’s under a cafeteria plan get a federal tax deduction for those contributions. Employer contributions are treated as employer business expenses and are not included in an employee’s gross wages. These contributions are not subject to the normal payroll taxes such as FICA or FUTA. Who qualifies to participant in an HSA? An individual must be covered under a qualifying high deductible health plan to be eligible to contribute to an Health Sav. An individual may not be enrolled in Medicare and cannot be claimed as a tax dependent by another taxpayer. How does someone go about establishing an HSA? The first step in establishing an Health Savings Account is to find a qualified trustee or custodian and complete an HSA trust or custodian agreement/application. An HSA trustee or custodian must be an insurance company, a bank or other entity approved by the IRS. If there is a balance in the HSA account at the time of an account holder’s death, that balance will be passed his or her designated beneficiary. Therefore, a beneficiary designation form must be signed at the time the account is established. Once an HSA has been established, the amount of the contribution should be determined. For 2009, the limit for an individual is $3,000 and for family coverage it is $5,950. This is an indexed amount that will change from year to year. HSA participants will also have to decide where they would like to deposit their contributions. Subject to certain restrictions these funds may be invested in number of different types of investment approved for IRA investments such as bank accounts, certificates of deposits and mutual funds. Individuals participating in an HSA account should be careful not to pledge any portion of the HSA as security for a loan. If any amount of the HSA is pledged as security for loan, the amount of the pledge is treated as a taxable distribution. The 10% excise tax applicable to distributions not used for qualified medical expenses will also apply. HSA account holders are also responsible for determining whether HSA distributions are used for qualified medical expenses and should maintain appropriate records to establish their eligibility as a qualified medical expense.