User:Sonria/HSA Sandbox

A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States. HSAs were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act which was signed into law by President George W. Bush on December 8, 2003. These accounts are a component of Consumer Driven Health Plans.

HSA contributions may be made under tax-favored circumstances by employers, employees or both. Funds residing in an HSA account can be invested in a manner similar to a 401(k) account. Funds may later be withdrawn tax-free for qualified medical expenses such as deductibles, co-insurance, dental and vision care, and many other items not covered under a particular health insurance plan. Because contributions, earnings and withdrawals are all handled on a tax-sheltered basis, HSAs represent a unique benefit under the Internal Revenue Code.

Deposits
Deposits to an HSA may be made by, or by the employer on behalf of, any policyholder of a Qualified High Deductible Health Plan (HDHP). If an employer makes deposits to an HDHP on behalf of its employees, non-discrimination rules apply; that is, all employees must be treated equally. The only exceptions to the non-discrimination rules are that employers may treat full-time and part-time employees differently; and employers may treat individual and family participants differently. (Employer treatment of employees who are not enrolled in a HDHP is not a factor in non-discrimination considerations.)

The deposits may be made on a pre-tax basis through an employer if the employer's fringe benefits plan permits such deposits under its setup. If this option is not available through the employer, contributions may be made on a post-tax basis and then used to decrease taxable income on the following year's Form 1040. Regardless of the method or tax savings associated with the deposit, the deposits may only be made in association with a HDHP. Deposits cannot be made on behalf of persons who are not on an HDHP.

The annual maximum deposit to an HSA is the lesser of the HDHP deductible or specified IRS limits. In 2006, the IRS limits are $2,700 for individual plans and $5,450 for family plans. All contributions to an HSA, regardless of source, count toward the annual maximum.

If a person is a participant in an HDHP for less than an entire year, the maximum deposit is prorated based on the number of months the person is enrolled in the HDHP. A catch-up provision also applies for HDHP participants who are age 55 or over, allowing the IRS limit to be increased. In 2006, the maximum catch-up amount is $700 (catch-up amounts are also prorated for partial-year participants).

All deposits to an HSA become the property of the policyholder, regardless of the source of the deposit. If the policyholder ends participation in the HDHP, he/she loses eligibility to deposit further funds but funds already in the HSA remain available for use. Funds deposited but not withdrawn each year will carry over into the next year.