A: Health Savings Accounts (HSAs) are a new option for health care coverage and they have two parts. The first part is a health insurance policy that covers large hospital bills, known as a high-deductible health plan (HDHP). The second part of the HSA is an investment account or retirement account from which you can withdraw money tax-free for medical care. Otherwise, the money accumulates with tax-free interest until retirement, when you can withdraw it for any purpose and pay normal income taxes.

A: According to the IRS, to be eligible to receive a tax deduction for an HSA, an individual must meet the following requirements: 1) is covered under a high-deductible health plan (HDHP); 2) is not also covered by any other health plan that is not an HDHP (Exception: individuals may maintain coverage for accidents, disability, dental care, vision care and long-term care or "permitted insurance.") ; 3) is not yet enrolled Medicare (generally, has not yet reached age 65); and 4) may not be claimed as a dependent on another person’s tax return.To receive a tax deduction for contributions to the account, an individual must be covered under a qualified high-deductible health plan. The person must also be below Medicare eligibility age (65), and not covered under any other health plan which duplicates any benefits in the qualified high-deductible plan.

A: Money is deposited directly into the account by an individual and/or an employer. Contributions may be made directly in cash or through §125 Cafeteria Plans. If an employer contributes to the HSA, it must be "comparable" for all employees participating in the HSA - if not, there is an excise tax equal to 35% of the amount contributed to the HSA. Interest can be accrued tax free.

A: Generally, a high-deductible health plan (HDHP) is a health plan that satisfies certain requirements with respect to deductibles and out-of-pocket expenses. Specifically, total costs to the insured cannot exceed $5,100 for an individual and $10,200 for a family, including both the deductible and copayments, but not premiums. (Penalties for going out of the PPO network do not count toward the total costs to the insured.) Since the law does not specifically detail a maximum deductible, the out-of-pocket spending cap in effect becomes the maximum deductible. Thus, a plan that pays 100% of all costs above the deductible could have a deductible as high as $5,100 for an individual or $10,200 for a family. All amounts are indexed for inflation.

High-deductible health plans are permitted to offer first-dollar coverage for preventive care and still qualify as an HDHP. However, except for preventive care, a plan may not provide benefits for any year until the deductible for that year is met. In the case of family coverage, a plan is an HDHP only if, under the terms of the plan and without regard to which family member or members incur expenses, no amounts are payable from the HDHP until the family has incurred annual covered medical expenses in excess of the minimum annual deductible.

Specialty insurance including accidents, disability, dental care, vision care and long-term care plans cannot be considered qualifying high-deductible health plans. These can, however, serve as secondary insurance. IRS guidance released May 11, 2004, states that eligible individuals may continue to contribute to an HSA while also covered by the following types of employer-provided plans that reimburse medical expenses: limited purpose FSAs/HRAs that restrict reimbursements to certain permitted benefits such as vision, dental or preventive care; suspended HRAs where the employee has elected to forgo health reimbursements for the covered period; post-deductible FSAs/HRAs that only provide reimbursements after the minimum annual deductible has been satisfied; and retirement HRAs that only provide reimbursements after an employee retirees.

A: Beginning January 1, 2004, any eligible individual can establish an HSA with a qualified HSA trustee or custodian, in much the same way that individuals establish IRAs or Archer MSAs with qualified IRA or Archer MSA trustees or custodians. No permission or authorization from the Internal Revenue Service (IRS) is necessary to establish an HSA.

A high-dedcutible health plan (HDHP) is purchased through an insurance agent, broker or company. Some insurers offer both the high-deductible health insurance policy and the HSA.

An eligible individual who is an employee may establish an HSA with or without involvement of the employer.

A: According to IRS bulletin 2004-2, any insurance company or any bank (including a similar financial institution as defined in section 408(n) of the IRS code) can be an HSA trustee or custodian. In addition, any other person already approved by the IRS to be a trustee or custodian of IRAs or Archer MSAs is automatically approved to be an HSA trustee or custodian. Other persons may request approval to be a trustee or custodian in accordance with the procedures set forth in Treas. Reg. § 1.408-2(e) (relating to IRA nonbank trustees).

HSA trustees or custodians are not required to determine whether HSA distributions are used for qualified medical expenses. Individuals who establish HSAs make that determination and should maintain records of their medical expenses sufficient to show that the distributions have been made exclusively for qualified medical expenses and are therefore excludable from gross income.

In addition, information reporting for HSAs will be similar to information reporting for Archer MSAs. The IRS will release forms and instructions, similar to those required for Archer MSAs, on how to report HSA contributions, deductions, and distributions. (Click here for HSA-related forms from the IRS.)

A: There are no restrictions on deposits to HSAs based on income, however, there is a maximum annual contribution limit. For details on the annual contribution limit please see IRS bulletin 2004-2, page 5, Q12. Excess contributions are taxed.

A: Account distributions are tax free for qualified medical expenses as defined by §213(d) of the IRC (further explanation may be found in IRS Publication 502, "Medical and Dental Expenses"). Tax-free distributions to pay premiums for long-term care insurance, COBRA continuation, and health insurance while unemployed are allowed. Qualified expenses also include prescription drugs, qualified long-term care services, Medicare expenses (but not Medigap), and retiree health expenses for individuals age 65 and older. Tax-free distributions may be made for medical expenses for persons covered by a high-deductible health plan, but they may also make tax-free distributions for their spouse or any dependent even if such individuals are not covered by the high-deductible health plan.

If the amount distributed is used for something other than qualified medical expenses, the amount distributed will be taxed and, for individuals who are not disabled or over age 65, subject to a 10% tax penalty.

A: Generally, a high-deductible health plan cannot provide benefits before the deductible is satisfied, but there is an exception for preventive care benefits. The IRS guidance issued March 30, 2004, provides a "safe-harbor" list of benefits that can be provided by a high-deductible health plan, generally clarifying that traditional preventive care benefits - such as annual physicals, immunizations and screening services - are preventive care for purposes of HSAs, as well as routine prenatal and well-child care, tobacco cessation programs and obesity weight-loss programs. The March 30 guidance clarifies that preventive care generally does not include treatment of existing conditions.

A: There are two criteria that must be met in order to establish an HSA: 1) an individual needs to be an “eligible individual” as defined by the HSA law; and 2) the high deductible health policy needs to fit within the parameters set by the HSA law (see "What is a high-deductible health plan?" above). If both these criteria are met, then the existing policy should qualify.

A: There is no maximum annual carryover, however there is a maximum annual contribution. For details on the annual contribution limit please see IRS bulletin 2004-2, page 5, Q12. Excess contributions are taxed.

A: Each year, the federal government factors inflation and certain other amounts into the tax rate, which protects taxpayers from losing the value of various benefits, such as HSAs. The IRS publishes its update of inflation-adjusted tax items for the upcoming tax year in the late fall.