Beginning on January 1, 2004, individuals under the age of 65 are eligible to contribute to an HSA if they have a qualified health plan.
For individual coverage, a qualified health plan must have a minimum deductible of $1,000 with a $5,000 cap on out-of-pocket expenses (indexed annually).
For family coverage, a qualified health plan must have a minimum deductible of $2,000 with a $10,000 cap on out-of-pocket expenses (indexed annually).
Preventive care services are not subject to the deductible.
Individuals may contribute up to 100% of the health plan deductible. The maximum annual contribution for 2006 is $2,700 for individual coverage and $5,450 for family coverage (indexed annually).
Individuals age 55 - 65 may make additional “catch-up” contributions of up to $500 in 2004, $600 in 2005, $700 in 2006, etc. to $1,000 in 2009 and thereafter. A married couple can make two catch-up contributions as long as both spouses are at least 55.
Contributions may be made by individuals, family members and employers and are tax deductible, even if the account beneficiary does not itemize. Employer contributions are made on a pre-tax basis and are not taxable to the employee. Employers will be allowed to offer HSAs through a cafeteria plan.
Investment earnings accrue tax-free.
HSA distributions are tax-free if they are used to pay for qualified medical expenses. Qualified expenses include prescription drugs, qualified long-term care services and long-term care insurance, COBRA coverage, Medicare expenses (but not Medigap), and retiree health expenses for individuals age 65 and older.
Distributions made for any other purpose are subject to income tax and a 10% penalty. The 10% penalty is waived in the case of death or disability. The 10% penalty is also waived for distributions made by individuals age 65 and older.
Upon death, HSA ownership may transfer to the spouse on a tax-free basis.
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