Health Savings Accounts

Our last post discussed the use of Medical Expense Reimbursement Accounts. This post will discuss another much more popular option your self-employment health insurance needs.

Health Savings Accounts (“HSAs”) let you buy high-deductible health insurance to cut monthly premiums, then establish deductible savings accounts for routine medical costs. You (and your employees, if any) can establish HSAs if you meet four tests:

· 1. You’re covered by a high deductible health plan (“HDHP”) with deductibles of at least $1,000 (singles) or $2,000 (families) and out-of-pocket limits up to $5,100 (singles) or $10,200 (families). The plan can’t provide any benefit, other than certain preventive care benefits, until the deductible for that year is satisfied. This means no drug card—you’re not eligible if you’re covered by a separate plan or rider offering prescription drug benefits before satisfying your policy deductible.)

· 2. You’re not covered by any plan that isn’t an HDHP, either individually, as a spouse, or as a dependent.

· 3. You’re not eligible for Medicare.

· 4. You can’t be claimed as a dependent on anyone else’s return.

If you qualify to open an HSA, you can contribute 100% of the insurance deductible up to $2,650 (singles) or $5,250 (families). If you or your spouse is age 55 or older, you can make extra “catch up” contributions up to $600 in 2005. (This amount climbs $100 annually to $1,000 in 2009.) If you and your spouses are covered by different HDHPs, you can contribute up to the lower deductible.

Withdrawals for “qualified medical costs” are tax-free. These include any deductible medical expense or nonprescription drug that isn’t reimbursed by insurance. You can use your HSA to pay for qualified long-term care premiums, COBRA continuation coverage, health insurance while you receive unemployment compensation, and Medicare premiums (but not “medigap” coverage). Withdrawals for any other purpose are taxed as ordinary income plus a 10% penalty.

MERPs and HSAs won’t make your visit to the doctor less painful. But they may be the best kind of tax strategies because they give you new deductions for money you’re already spending. For more information about the tax benefits of HSA’s, please give us a call at 1-866-627-7654