Guam Business Magazine

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May - June 2013 Issue

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Know more about Health Savings Accounts
By Joseph Arnett

Health Savings Account is a tax-advantaged plan for funding personal medical expenses.

Any individual can set one up if he or she has a high-deductible health plan. A high-deductible health plan is one in which the required deductible, including copayments, is $1,200 per year for single individuals, and $2,400 for family health plans.

In 2011, individuals who qualify may set aside up to $3,100 with an individual, self-only health plan, or $6150 for an individual with family coverage. These amounts are adjusted annually for inflation. Those individuals age 55 or older can contribute an additional $1,000 to either HAS plan, if they are not covered by Medicare. Be careful not to contribute more than the annual limit to an HSA. Any excess contributions over these limits are subject to a 6% excise tax and income tax. One other rule, contributions cannot be made by any individual who is enrolled in Medicare.

For purposes of an HSA, an eligible dependent under a family plan is anyone who meets the dependency tests in the tax code. However, some of these requirements are waived. For purposes of HSA coverage the dependent may claim his or her own exemption, file a joint return, or even exceed the gross income limitation.

The money deposited into the HSA account is fully tax deductible. The money sits in an Individual Retirement Account-type invested account and the earnings on the money deposited are also not subject to tax. When medical expenses occur, withdrawals from the HSA to pay these expenses are not taxable. If there is money left in the account at the end of the year, the balance can be rolled over to pay medical expenses of the next year. Continued (tax deductible) contributions to the HSA (within the annual contributions limits) can grow year after year and provide a growing sum to meet even future health care needs.

There are several ways in which funds in an HSA can be withdrawn. Some HSAs include a debit card, some supply checks for account holder use, and some allow for a reimbursement process similar to medical insurance. Most HSAs have more than one possible method for withdrawal. Checks and debits do not have to be made payable to the provider. Funds can be withdrawn for any reason, but withdrawals that are not for documented qualified medical expenses are subject to income taxes and a 20% penalty. The 20% tax penalty is waived for persons who have reached the age of 65 or have become disabled at the time of the withdrawal. Then, only income tax is paid on the withdrawn amount. In effect the account has grown free and tax deferred (similar to an IRA) without the withdrawal penalties.

An HAS is an effective way to save money on medical expenses and reduce your income tax bill at the same time. The money contributed to your HSA is tax-deductible, and withdrawals from the account for qualified medical expenses are tax free.

(Joseph Arnett is a tax partner at Deloitte & Touche.)