Health Savings Account

An HSA (Health Savings Account) is a tax-exempt trust or custodial account established for the purpose of paying medical expenses in conjunction with a high-deductible health care plan.

There must be a written plan agreement which creates a trust or custodial account. The HSA must be created or organized in the U.S. and must meet the following requirements:

1. The trustee or custodian must be a bank, an insurance company, or a nonbank trustee as defined for IRA purposes.
2. No part of the HSA assets may be invested in life insurance contracts.
3. The HSA assets cannot be commingled with other assets unless pursuant to a common trust fund or common investment fund.
4. The account owner’s interest in the HSA is nonforfeitable.
5. The contributions must be in the form of cash unless a rollover contribution is made.

An “eligible individual” can establish an HSA. An “eligible individual” means, with respect to any month, an individual who:

1. Is covered under a high-deductible health plan (HDHP); to make the maximum annual contribution to HSA’s at any point in a given year;
2. Is not also covered by any other health plan that is not an HDHP;
3. Is not controlled in Medicare;
4. May not be claimed as a dependent on another person’s tax return; and
5. Is eligible to contribute amounts that are equal to the annual contribution limit, regardless of their plans’ deductible limits.

The person for whom the HSA is established is generally called an “account owner.” The tax code uses the term “account beneficiary,” but the IRS has chosen to use the term account owner, because it is less confusing, since an HSA account owner will normally designate a beneficiary(ies) to receive the HSA funds upon his or her death.

What are the favorable tax attributes of the HSA? Contributions will be made to an HSA on behalf of the account owner, who is the individual on whose behalf the HSA was established.

A deduction will generally be able to be claimed by the account owner for the amount of the contributions. If the employer has made the contribution, then such contribution will generally be excluded from the account owner’s income and not deductible by the account owner.

The earnings realized within the HSA are not taxed. Distributions to the account owner from the HSA will be tax free if the funds are used to exclusively pay for qualifying medical expenses. If the withdrawn funds are not used exclusively for qualifying medical expenses, then the person will have to include the distribution in his or her income.

For further information, please contact us.