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Health Savings Accounts

Not covered in Pub 4491 (text book) Publication 969 (Health Savings Accounts

and Other Tax-Favored Health Plans) Mandatory training and certification

module available on Link and Learn website (http://www.irs.gov/app/vita/)

These slides on www.w2in.com/aarp

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Health Savings Accounts

Do not include ... Archer Medical Savings Accounts Medicare Advantage MSAs Health Reimbursement Arrangements

These are Out-of-Scope

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HSA Basis Concepts

Taxpayer has a high-deductible medical insurance policy to pay for catastrophic expenses

Taxpayer also has a special savings account (HSA) used to pay for ordinary medical expenses

Taxpayer and/or employer make contributions to this HSA

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HSA Benefits

Contributions to HSA account are deductible if paid by taxpayer; excluded from income if paid by employer

Effectively lets you deduct all medical expenses without Sch A or 7.5% floor

Earnings of HSA are tax free HSA is yours; not tied to your employer

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HSA Restrictions

Require hi-deductible insurance to qualify to contribute to a HSA

Amount of contributions is limited Types of medical expenses limited Deductible limits are limited Contributions and distributions

require reporting on 1040

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HSA limits for 2010Individual policy Family Policy

Maximum Contribution

$3,050 $6,150

Catch-up Contribution (>=55)

$1,000 $1,000

Minimum deductible $1,200 $2,400

Maximum deductible or out-of-pocket

$5,950 $11,900

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Example – contribution made by employer

Contribution made by employer is shown in box 12 as code W

Contribution is carried to form 8889

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Example – contribution made directly by

employee

Contribution made by employee is shown on form 5498-SA

Contribution is manually entered on form 8889, line 2

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Total contributions analyzed on Form 8889

(note this is a 2009 form)

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HSA deduction taken as adjustment to income Direct contributions to a HSA are

adjustments to income Employer contributions to a HSA

were excluded from the W2

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Distributions from a HSA Distributions

from a HSA are shown on a 1099-SA

Amount is entered on form 8889, line 14a

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Example – qualified distributions

Joe used his HSA debit card to pay for some dentist bills and OTC drugs at the drugstore. All of the $408 was used for qualified purchases

He also paid $57 cash for some Rxs Enter $465 on form 8889 line 15

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Form 8889 Qualified Distributions

None of the distributions are taxable

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Example non–qualified distributions

Joe used his HSA debit card to pay for some OTC drugs and other things at the drugstore. He admits that $156 of the $408 was used to buy the newspaper every Sunday. The remaining $252 was for qualified purchases

He also paid $57 cash for some Rxs Enter $309 on form 8889 line 15

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Form 8889 with non-qualified Distributions

Form shows taxable income and penalty

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Excess distribution is taxable

Excess distribution carries to 1040 line 21 automatically

You must manually add ‘type’ caption

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Penalty is shown as “other taxes”

Carries to 1040 line 59 automatically

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What happens if I contribute more than I use? Any excess of contributions over

disbursements remains in your HSA and rolls over to the next year

Any earnings also accumulate in your HSA

There is no time limit for using the money in the HSA

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What happens if I no longer qualify for a HSA? You no longer qualify to make

contributions to a HSA if you don’t have a high deductible plan Employer offers regular health

insurance Qualify for Medicare

You use the remainder of your HSA funds for qualified purchases – no time limit

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What happens if I die? Spouse inherits – converts to his

HSA Someone else inherits – taxable

income

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How does all this tie in to the new Affordable Care Act No effect in 2010 See http://www.healthcare.gov/

Remember – You must be specifically trained and certified in Health Savings Accounts to do these returns