Sander & Associates, P.A.

For calendar year 2006, $2,700 is the maximum amount you can set aside as an individual not covered by medicare, and $5,450 is the maximum annual contribution for a family account. Obviously you could contribute less if anticipated medical expenses were less, but then some of the plan's most attractive features would not be fully realized.

HSAs are open to anyone whose health insurance plan is an HDHP . . . that's a plan with an annual deductible of at least $1,050 for individual coverage and $2,100 for family coverage. Employer sponsored plans can provide an HDHP option so that employees can choose between traditional health insurance coverage or the combination of HDHP and HSA. Employees might even secure their own HDHP using funds deferred through the employer's Cafeteria plan if the employer does not make an HDHP option available.

You cannot contribute to an HSA after age 65 if covered by Medicare, or if you do not first have an HDHP for your basic health insurance. In other words, if you currently have traditional health care coverage, you must switch to an HDHP plan before you can have an HSA. If your annual health care costs are less than your contribution to the plan, it will be possible to use an HSA to accumulate funds to pay for long-term care insurance, medical expenses during a period of unemployment or after retirement, or even to pay medical expenses of a surviving spouse. If you can't afford an annual HSA deposit at least equal to the deductible, you should probably remain in a traditional health insurance plan.

For those who can afford to fund them, however, HSAs have many advantages. Contributions to HSAs are tax deductible . . . regardless of your income level . . . and amounts withdrawn for medical expenses are tax-free. Funds in the account accumulate during years when you are healthy, and may be drawn down tax free to pay qualified medical expense when illness strikes... even after retirement. So, the HSA could be thought of as an additional opportunity for retirement savings.

HSA funds can be used to cover the health insurance deductible, any co-payments for medical services, prescriptions, or other medical requirements. In addition, HSA funds can be used to purchase over-the-counter drugs and long-term care insurance, and to pay health insurance premiums during any period of unemployment.

Both an HSA and an HDHP may be offered as options under a cafeteria plan. That means you could elect to have amounts contributed as employee contributions to an HSA and an HDHP on a salary-reduction basis. HDHPs can be offered as an elective option under employer sponsored health insurance plans, and most underwriters of employer-sponsored plans are offering the option.

Contributions to the HSA by your employer are not included in your taxable income. Contributions you make are tax deductible. You, your employer, or both can contribute tax-deductible funds each year up to the amount of your policy's annual deductible, subject to a 2006 cap of $2,700 for individuals and $5,450 for families.

When you are over age 55, you can make extra, tax deductible, contributions to your HSA account. In 2006, an additional $700 can be added to the HSA, bringing the total that can be set aside, tax free, to $3,400 for individual coverage. By 2009, an additional $1,000 can be added to the annual HSA contribution.

Investment earnings generated in the HSA account are not taxable. Neither are amounts distributed, as long as you use them to pay for qualified medical expenses, such as prescription and over-the-counter drugs and long-term care services, including the purchase of continued health care coverage for an unemployed individual (via COBRA). Amounts distributed that are not used to pay for qualified medical expenses will be taxable, and subject to an additional 10% tax in order to prevent abuse of an HSA for non-medical purposes.

HSAs are portable, so you are not dependent on a particular employer to enjoy the advantages of having an HSA. Like an individual retirement account (IRA), you own your HSA, not your employer. In addition, any amount remaining in the HSA when you die can be left to your spouse, who can use the funds for medical care tax free, or to another beneficiary who would treat the account proceeds as income in respect of a decedent.

We have studied the new law and IRS rules for implementing HSA plans. Whether you are an employer considering making this benefit available to your employees (and to yourself), or an employee seeking to understand how you can make the switch to an HDHP and an HSA, we can help you understand and get maximum benefit from this new tax saving opportunity.