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DRAMATIC GROWTH OF HEALTH SAVINGS ACCOUNTS (HSAs)

Health Savings Accounts

A Health Savings Account (HSA) is an account that you can put money into to save for future medical expenses. There are certain advantages to putting money into these accounts, including favorable tax treatment. HSAs were signed into law by President Bush on December 8, 2003.

Who Can Have an HSA

Any adult can contribute to an HSA if they:

• Have coverage under an HSA-qualified "high deductible health plan" (HDHP)

• Have no other first-dollar medical coverage (other types of insurance like specific injury insurance or accident, disability, dental care, vision care, or long-term care insurance are permitted).

• Are not enrolled in Medicare

• Cannot be claimed as a dependent on someone else's tax return.

Contributions to your HSA can be made by you, your employer, or both. However, the total contributions are limited annually. If you make a contribution, you can deduct the contributions (even if you do not itemize deductions) when completing your federal income tax return.

Contributions to the HSA must stop once you are enrolled in Medicare. However, you can keep the money in your account and use it to pay for medical expenses tax-free.

Advantages of HSAs

Security - Your high deductible California health insurance plan and HSA protect you against high or unexpected medical bills.

Affordability - You should be able to lower your California health insurance premiums by switching to health insurance with a higher deductible.

Flexibility - You can use the funds in your account to pay for current medical expenses, including expenses that your California health insurance may not cover, or save money in your account for future needs, such as:

• Health insurance or medical expenses if unemployed

• Medical expenses after retirement (before Medicare)

• Out-of-pocket expenses when covered by Medicare

• Long-term care expenses and insurance

Savings - You can save the money in your account for future medical expenses and grow your HSA dollars through investment earnings.

Control - You make all the decisions about:

• How much money to put into the HSA

• Whether to save the HSA dollars for future expenses or pay current medical expenses

• Which medical expenses to pay from the HSA

• Which company will hold the HSA account

• Whether to invest any of  the money in the account

Portability - HSA accounts are completely portable, meaning you can keep your HSA even if you:

• Change jobs

• Change your health insurance coverage

• Become unemployed

• Move to another state

• Change your marital status

Ownership - Funds remain in the HSA account from year to year, just like an IRA. There is no "use it or lose it" rules for HSAs.

Tax Savings - An HSA provides you triple tax savings:

1. tax deductions when you contribute to your HSA account

2. tax-free earnings through investments; and

3. tax-free withdrawals for qualified medical expenses.

What Happens to My HSA When I Die?

If your spouse becomes the owner of the account, your spouse can use it as if it were their own HSA. If you not married, the account will no longer be treated as an HSA upon your death. The account will pass to your beneficiary or become part of your estate (and be subject to any applicable taxes).

Opening your Health Savings Account

Banks, credit unions, insurance companies and other financial institutions are permitted to be trustees or custodians of these accounts. Other financial institutions that handle IRAs or Archer MSAs are also automatically qualified to establish HSAs.

High Deductible Health Plans

You must have coverage under an HSA-qualified "high deductible health plan" (HDHP) to open and contribute to an HSA. Generally, this is health insurance that does not cover first dollar medical expenses. Federal law requires that the health insurance deductible be at least:

• $1,200* -- Self - only coverage

• $2,400* -- Family coverage

In addition, annual out-of-pocket expenses under the plan (including deductibles, co-pays, and co-insurance) cannot exceed:

• $5,950* -- Self-only coverage

• $11,900* -- Family coverage

In general, the deductible must apply to all medical expenses (including prescriptions) covered by the plan. However, plans can pay for "preventative care" services on a first dollar basis. (with or without a co-pay). "Preventative care" can include routine pre-natal and well-child care, child and adult immunizations, annual physicals, mammograms, pap smears, ect.

Finding HDHP Coverage

Any company that sells health insurance coverage in your state may offer HDHP policies. Although Treasury cannot recommend any specific names of  California health Insurance companies selling these policies, you should be able to find a California qualified policy by contacting Matt Lockard or by clicking on the "Instant Quote" link above.  There you can compare several different HSA qualified California health insurance plans.

HSA Contributions

You can make a contribution to your HSA each year that you are eligible. For 2010, you can contribute up to $3050* if you have a Self-only California health insurance and $6,150* if you have Family California health insurance coverage.

The following table illustrates how this works.

Individuals age 55 and older can also make additional "catch-up" contributions. The maximum annual catch-up contribution is as follows:

• 2007 - $800

• 2008 - $900

• 2009 and after - $1,000

Determining Your Contribution

Your eligibility to contribute to an HSA is determined by the effective date of your California health insurance HDHP coverage. If you do not have a California health insurance HDHP for the entire year, you will not be able to make the maximum contribution. All contributions (including catch-up contributions) must be pro-rated. Your annual contribution depends on the number of months you had your California health insurance HDHP during the year (count only the months where you have a California health insurance HDHP on the first day of the month). For years after 2006 a special rule allows you to contribute the maximum amount for the year as long as you have coverage for December. However if you remain covered for 2008, the extra contribution above the pro rated amount is included in income and subject to an additional 10 percent tax.

Contributions can be made as late as April 15 of the following year.

Using your HSA

You can use the money in the account to pay for any "qualified medical expenses" permitted under federal tax law. This includes most medical care and services, and dental and vision care, and also includes over-the-counter drugs such as aspirin.

You can generally not use the money to pay for medical insurance premiums, except under specific circumstances, including:

• Any health plan coverage while receiving federal or state unemployment benefits.

• Cobra continuation coverage after leaving employment with a company that offers health insurance coverage.

• Qualified long-term care insurance.

• Medicare premiums and out of pocket expenses, including deductibles, co-pays, and coinsurance for:
  
  } Part A (hospital and inpatient services)
  } Part B (physician and outpatient services)
  } Part C (Medicare HMO and PPO plans)
  } Part D (prescription drugs)

You can use the money in the account to pay for medical expenses of yourself, your spouse, or your dependent children. You can pay expenses of your spouse and dependent children even if they are not covered by your HDHP. Any amounts used for purposes other than to pay for "qualified medical expenses" are taxable as income and subject to an additional 10% tax penalty. Examples include:

• Medical expenses that are not considered "qualified medical expenses" under federal tax law (e.g., cosmetic surgery).

• Other types of health insurance unless specifically described above.

• Medicare supplement insurance premiums.

• Expenses that are not medical or health-related.

After you turn 65, the 10% additional tax penalty no longer applies. If you become disabled and/or enroll in Medicare, the account can be used for other purposes without paying the additional 10% penalty.

*2010 amounts: adjust annually for inflation.

Matthew Lockard
Independent Health Insurance Agent
6633 Telephone Road Suite 200 Ventura CA 93003
California License #0B51503
Texas License #1271775