Many of my self employed clients are facing the challenge of increased healthcare costs and being able to pay for health insurance. One of the ways to counter this problem is through the HSA or Health Savings Account.
These accounts were established in 2003 under the Medicare act. They are tax-free savings accounts that can be used to pay for medical expenses incurred by the account owner, or immediate family members.
HSA’s can be set up by any one who is already covered by what the IRS calls a “High Deductible Health Plan� This plan must have a deductible of $1050 for individuals and $2,100 for families. The minimum deductibles will rise in the coming years. As of 2007 the amounts are $1,100 for individuals and $2,200 for families.
With an HSA, you can fund it with tax deductible contributions for the full amount of the annual deductible each year for a maximum of $2,700 for individuals, and $5,450 for families. These deductible amounts will also go up. If you are over age 55, you can add even more. Presently this is an extra $700. You still have the deductibility provision on the extra $700.
The thing to remember is that an HSA is almost like an IRA. The interest and earnings in this account are not taxable as long as they remain in the account. When you take money out, you do not need to pay taxes IF the money is used for qualified medical expenses.
These can include: payments for co-payments, insurance deductibles, prescriptions, over the counter drugs, health insurance premiums, and far more.
You can use the money for other reasons but it is not a good idea. Taking out distributions for other than qualified medical expenses will be subject to a standard 10% penalty.
The HSA in our arsenal to lower the eternal tax bite.
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