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What
is a Health Savings Account?
A Health Savings Account is a special savings plan authorized by the federal
government for consumers who
qualify to pay so called first dollar medical expenses (i.e., the annual
deductible on your health insurance plan).
This account is similar to an IRA account but, it is designed specifically
for covering qualified medical expenses
for the person who establishes the account and his or her dependents.
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What
are qualified medical expenses?
Health Savings Account savings retain their tax-free status if they are
used for the following expenses:
- Doctor and dentist
visits, prescriptions and transportation to receive medical or dental
care
- Healthcare coverage
while you are receiving federal or state unemployment compensation
if you are unemployed
- Qualified long-term
care insurance
- Certain continuation-of-benefit
coverages
- Health insurance
plans that qualify after age 65
NOTE:
Violations - nonqualified uses of Health Savings Account savings are
subject to taxation and a 10%
penalty. The 10% penalty does not apply if the Health Savings Account
holder is age 65 or older, is disabled
or dies.
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What
are the tax benefits of a Health Savings Account?
Qualified individuals enjoy significant tax benefits related to paying
qualified medical expenses. These benefits
have mechanics similar to IRA accounts in that:
- Savings are never
taxed if used for qualified medical expenses
- Health Savings
Account earnings are tax-free
- Employer or employee
contributions to a Health Savings Account are excluded from income
- When a Health
Savings Account holder dies, the savings become the property of the
named death
beneficiary, or of the Health Savings Account holder's estate. The
spouse of the account holder may treat
the assets as their own Health Savings Account. Other death beneficiaries
must treat such savings as
ordinary taxable income
- Savings from
an unused Health Savings Account may be used for retirement, but these
funds will be subject
to a 10% penalty if the Health Savings Account holder has not reached
65. Any funds that are not used for medical expenses will be subject
to income taxes.
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Who is eligible?
Health Savings Accounts are available to people covered by a High Deductible
Health Plan (HDHP).
Eligible
individuals
To be eligible to have contributions made to your HSA, you must be covered
under a high deductible health plan (HDHP) and have no other health coverage
except permitted coverage. You cannot be enrolled in Medicare or be claimed
as a dependent on another person's tax return. You must be an eligible
individual on the first day of the
month to take an HSA deduction for that month.
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How
do I know what is a High Deductible Health Plan?
The government has outlined certain dollar limits in an insurance plan
to determine if it is a High Deductible
Health Plan.
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High
Deductible Health Plan Limits - Year 2010
(Note:
These limits are revised each year to reflect cost-of-living increases.)
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Individual
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Family
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Annual
Deductible
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$1,200
or more
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$2,400
or more
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Annual
Deductible added to
out-of-pocket expenses may not exceed
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$5,950
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$11,900
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Are
self-employed individuals eligible for a Health Savings Account?
Businesses structured as sole proprietorships and the self-employed are
excellent candidates for Health
Savings Accounts.
- A plan that includes
a Health Savings Account can save money with the lower premiums you
have in a High Deductible Health Plan.
- This strategy
also protects the employer against the possibility of catastrophic
healthcare expenses.
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How
do I show my participation in a Health Savings Plan on my tax return?
- If you have a
Health Savings Account, you must report all contributions and distributions
on your individual
tax return.
- Your W-2 form
will show employer contributions (if any) to your Health Savings Account
which is also shown
on the employer's business tax return.
- The IRS receives
a report of all contributions and distributions you make from your
custodian or trustee
where the Health Savings Account is held.
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How
much can I contribute to a Health Savings Account a year?
If you have individual or family coverage under a High Deductible Health
Plan, the government chart below
indicates contribution limits.
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Health
Savings Account Contribution Limits - Year 2010
(Note:
These limits are revised each year to reflect cost-of-living increases.)
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Individual
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Family
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whichever
is less:
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whichever
is less:
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Annual
Contribution Limit
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The
Annual Plan Deductible
or $3,050
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The
Annual Plan Deductible
or $6,150
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If
I am 55 or older, do catch-up contributions apply as they do with IRAs?
Yes, you can take advantage of additional contributions as follows:
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Age
55 and over
Catch-up Contribution Limits
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Tax
Year
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Catch-up
Contributions
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2005
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$600
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2006
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$700
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2007
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$800
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2008
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$900
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2009
and later
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$1,000
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IMPORTANT
NOTE
The information contained in this brochure is not intended to provide
specific advice or recommendations for any individual. We suggest that
you consult your financial advisor.
*Content
copyright © Tower Financial Marketing, 800-368-9053.
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