IRS publication 969 provides information on health savings accounts (HSA) and other tax-favored health plans. If you have a health savings account, you obtain more control and flexibility over your health care costs. The HSA account helps you in making your own decisions on your health care. HSAs are mainly available and useful if you have high deductible health care plans. All contributions to HSA are deductible and the earnings from that account accumulate on tax-deferred basis. If you use your HSA account for medical expenses qualified under IRS publication 969, then all distributions from your health care account are tax-free.
What are the Limits on Tax-Free Health Care Accounts?
IRS 969 has fixed a limit of $2,500 on all flexible spending arrangements (FSAs) in 2012. For all health care plans that begin after December 31, 2012, an employee would not be able to request any contributions that come out of salary before taxes under cafeteria plan for health FSAs exceeding $2,500. Further, taxpayers would not be able to make HSA distributions that are qualified.
IRS 969 explains various programs designed to provide tax advantages for those individuals for offsetting the cost of health care. The programs that 969 lists are
- Health Flexible Spending Arrangements
- Medical Savings Accounts
- Health Savings Accounts
- Health Reimbursement Arrangements
How Can I Get Money Into These Tax-Favored Health Plans?
A health savings account (HSA) could be added to through any eligible individual, including a member of the family or an employer making contributions for that eligible individual. All contributions to HSA are eligible for tax deduction on the return of the individual and the individual could itemize the deductions or mentions the total deductions alone. However, contributions from the employer aren’t considered as income and they are not eligible for tax deduction under the rules of IRS publication 969. Further, the IRS does not tax the distributions from HSA when the account holder uses the amounts for paying medical expenses that qualify.
Archer MSA could receive contributions from either eligible individuals or their employers but not from both in the same year. The contributions of the individuals are tax deductible and all distributions from this account for payments to qualified medical expenses are not taxable. However, employer contributions are not considered as income. Medicare Advantage MSAs are Archer MSAs assigned by Medicare. Such accounts are useful only for payments to qualified medical accounts of the respective account holders enrolled with Medicare. Only Medicare could make contributions and they are not considered as income of the account holders. Distributions from this account are also not taxed.
Health FSAs could get contributions from eligible individuals as well as employers. One cannot include these contributions in the income of the individuals.
HRAs should get contributions only from the individual’s place of employment and employees are prohibited from contributing to HRA. Such contributions to HRAS are not includable in the income of the individuals. Further, like other accounts, reimbursements from HRAs for medical expenses are exempted from tax.
How Do I Set One Up?
You need not obtain authorization or permission from IRS to establish an HSA but you should work with a trustee, such as a bank, insurance company, or anyone else that IRS has approved. The trustee should be different from the health plan provider of the individual.