James R. Kay, CPA

Helping you keep more of what you earn !

home page

2006 Health Savings Accounts

Health Savings Accounts (HSAs) are a new way of paying for health care expenses.  They are an attractive alternative to MSAs (medical savings account) and FSAs (flexible spending arrangements).

Who can set up an HSA?  Individuals who are employed, un-employed, or self-employed.

Where can I set up an HSA?  A bank, insurance company, brokerage or other institution that is a qualified HSA trustee or custodian.

Are you required to have health insurance?  Yes.

What kind of health insurance is required?  Health insurance with a plan deductible of $1,050 to $2,700 for individual-only coverage, or $2,100 to $5,450 for family coverage.

When I make a contribution to my HSA, do I get an income tax deduction?  Yes.  It doesn't matter if you itemize or not, you get a deduction at the bottom of page one of your Form 1040.  Family members can make contributions to your HSA and you still get the deduction.  If your employer makes a contribution to your HSA you do not get a deduction for his contribution.

How much can I contribute to my HSA?  For individual-only coverage, you may contribute up to 100% of your deductible or $2,700, whichever is less.  For family coverage, you may contribute up to 100% of your deductible or $5,450, whichever is less.  If you are age 55 or older you may add $700 to these limits as a catch-up contribution.

When am I eligible to make a contribution?  Eligibility is determined on the first day of each month.  If you qualify for that month, you can make a contribution of 1/12th of the allowed amount.  See the limits discussed in the previous Question and Answer.

Do I have to make a contribution each month?  No.  You can make a contribution early in the year, or late in the year, or wait until April 15th of the following year.  However, the total contribution for the year cannot exceed the sum of your monthly eligibility amounts.  See the limits discussed in the previous Question and Answer.

What do I do if I have an excess contribution?  The excess contribution and the associated earnings on the excess contribution must be removed from the HSA by the filing deadline of the HSA account holder's tax return (including extensions).

If my employer makes a contribution to my HSA, is that additional taxable compensation to me?  No.  Those contributions are exempt from federal income, social security, medicare, and FUTA taxes.

If my employer makes a contribution to my HSA, is he required to make a comparable contribution for the other employees?  Generally, yes.

How late can I make my contribution to the HSA and still get a deduction?  You have until April 15th of the following year to make your contribution and still get a deduction for the current year.

If I have money left over in my HSA at the end of the year, what happens?  You don't lose it.  It carries over to the next year.

Can I make a tax-free rollover of my HSA balance from one HSA to another?  Yes, but only once every 12 months.

Who owns the HSA account?  The individual or family owns the HSA, even if your employer makes contributions.

If I change jobs, what happens to my HSA?  It's your account.  It follows you.

Do I have to set up the HSA with the insurance company that is providing the health insurance?  No.

Other Important HSA Rules:

  • The health insurance premium cannot be paid from the HSA.
  • Higher deductibles and higher out-of-pocket maximums for out-of-network health services cannot be paid from the HSA.
  • If you are eligible for Medicare you may not open an HSA.
  • If you are claimed as a dependent on someone else's tax return you may not open an HSA.
  • HSA account holders age 55 to 64 are allowed a catch-up contribution increase of $700.

Caution - Content on this page is general in nature.  More specific rules and limitations may apply to your situation.  Always seek the advice of a tax professional and/or insurance agent before making important financial decisions of this nature.

home page

2006 CPAWEBservices.com