| | | © McCauley, Nicolas & Company, LLC | Spring 2007
Go back to E-letter | Printer-friendly version | | Tax TipsMisty Schraer, CPA,
Manager | Health Savings Accounts: Better than Ever?The new Tax Relief and Health Care Act of 2006 may give Health Savings Accounts (HSAs) a much-needed shot in the arm. Effective for 2007, the new law revises the rules in an attempt to open up HSAs to more of the general public.
Background: An HSA is like an IRA for medical expenses. Your contributions can be deducted above-the-line or your company may make tax-deductible contributions on your behalf—or both. There’s no current income tax on the earnings within your account.
Best of all, distributions are tax-free if the funds are used to pay for qualified medical expenses. However, other distributions are taxable, plus a 10% penalty applies for withdrawals before you reach the Medicare-eligibility age.
Who can participate? HSAs are available to anyone who is not yet eligible for Medicare (i.e., someone under age 65), participates in a high-deductible plan and does not receive coverage under another health insurance plan. For 2007, a “high-deductible” plan is defined as a plan with a deductible of at least $1,100 and out-of-pocket maximum of $5,500 for individual coverage; a deductible of at least $2,200 and out-of-pocket maximum of $11,000 for family coverage.
Prior to the new law, the maximum contribution you could deduct on your tax return was limited to the lesser of the amount of the annual health insurance deductible or an indexed dollar amount. For 2007, the thresholds are $2,850 for individuals; $5,650 for family coverage. In addition, a “catch-up contribution” of $800 is permitted for individuals age 55 or over.
The new law eliminates the contribution limit based on your health plan deductible. Instead, only the higher dollar threshold applies. This could be a bonanza for taxpayers with health insurance deductibles at or near the required minimum levels (see above). This change, by itself, is expected to spur greater interest in HSAs.
One-time opportunity
Among various other changes, the new law authorizes tax-free rollovers from a traditional IRA to an HSA. Normally, such distributions are taxable and subject to the penalty for early withdrawals. The new rollover break is only available once in your lifetime. Similarly, you can roll over funds tax-free from a flexible spending account (FSA) for health care expenses.
What happens to unused funds in an HSA? Any amount left over at the end of the year may be used to pay medical expenses in future years. Thus, HSAs have a critical edge over FSAs. Reason: Under the “use-it-or-lose-it” rule, any amount remaining in an employee’s FSA at the end of the year is forfeited, except for qualified expenses paid during the following 21⁄2-month “grace period.”
Make sure you have all the information you need about the “new, improved” HSA before you make any decisions.
Email Misty at Misty_Schraer@mnccpa.com.
|  | | | © McCauley, Nicolas & Company, LLC | Spring 2007
Subscribe |Unsubscribe | Industry Ideas | 812-288-6621 | |
|
