The New Rules For Health Savings Accounts
Thursday Aug 23, 2007The New Rules For Health Savings Accounts in Politics and Legislation
The New Rules For Health Savings Accounts
Health Savings Accounts (HSAs) were opened in 2006 to be a flexible, tax-free healthcare savings tool. Now, there are new rules making the HSA even better.
The HSA allows people to deposit money straight from their paycheck before taxes. And when money is withdrawn from an HSA, it stays tax-free unlike its predecessor, the Medical Savings Account, where funds withdrawn are considered taxable income. The savings in an HSA also rolls over each year and builds interest, in contrast from the Flexible Savings Account, in which funds are forfeited at the end of the year.
To be eligible to open an HSA, you need to enroll in a high-deductible health insurance plan deductibles have to be at least $1,100 for individuals and $2,200 for families.
Up until now, HSA savers could only deposit as much as their deductible in one year. But the new rules will let most people deposit more money annually. The new limits are $2,850 for individuals and $5,650 for families. And you can put in an extra $800 if you'll be 55 or older as of December 31, 2007.
The amount you could contribute into an HSA also depended on when you became eligible. Previously, if you opened your HSA in the middle of the year, you would only be able to deposit a pro-rated amount. But starting in December 2007, you'll be able to contribute up to the new yearly maximum regardless of when you sign up.
The new rules also allow you to transfer funds from another health account, such as a Flexible Savings Account, or from an Individual Retirement Account (IRA).
These new benefits are attractive incentives to open an HSA. But to take advantage of the new rules, you also need to be aware of the recapture rule.
Each one of these new benefits is accompanied by a one-year "testing period." So if you become ineligible to have an HSA during the testing period, if you switch health plans with a lower deductible than the HSA minimum for example, the recapture rule will apply. It dictates any funds saved or transferred within the testing period will be taxed like regular taxable income. On top of that, you'll be assessed a 10% tax penalty.
So if you decide to use the new HSA rules to your advantage, make sure you're sure you'll keep your plan for longer than the testing period.
More and more Americans enroll in a Health Savings Account and a high-deductible plan every year. They're now a popular consumer-driven health insurance option providing more affordable coverage and tax-free savings. And with these new rules, having a Health Savings Account is even better.
Source: Bischoff, Bill. The New Health Savings Account Rules. SmartMoney. July 31, 2007.
http://www.smartmoney.com/taxmatters/index.cfm?story=20070731
