Given the ever-escalating cost of providing employee health care benefits, health savings accounts (HSAs) offer a tax-favorable way to set aside funds to meet future medical needs. Key tax-related elements of HSAs are:
• contributions you make to an HSA are tax deductible, with limits;
• contributions your employer makes aren’t taxed to you;
• earnings on the funds within the HSA are not taxed; and
• distributions from the HSA to cover qualified medical expenses are not taxed.
Who is eligible? To be eligible for an HSA, you must be covered by a high deductible health plan. For 2011, a high deductible health plan is defined as a plan with an annual deductible of at least $1,200 for self-only coverage or at least $2,400 for family coverage. Additionally, annual out-of-pocket expenses cannot exceed $5,950 for self-only coverage or $11,900 for family coverage. Out-of-pocket expenses include deductibles, co-payments and other amounts (other than premiums) that must be paid for plan benefits.
Deduction limits. For self-only coverage, the 2011 limit on deductible contributions is $3,050. For family coverage, the 2011 limit on deductible contributions is $6,150. An individual who has reached age 55 before the close of the tax year may make additional “catch-up” contributions for 2011 of up to $1,000.
Contributions may be made to an HSA by or on behalf of an eligible individual even if the individual has no compensation or if the contributions exceed the individual’s compensation.
Employer contributions. If you are an eligible individual, and your employer contributes to your HSA, the employer’s contribution is treated as employer-provided coverage for medical expenses and is excludable from your gross income up to the deduction limitation, as described above.
Earnings. If the HSA is set up properly, it is generally exempt from taxation including an exemption from tax on earnings. However; taxes may apply if contribution limitations are exceeded, required reports are not provided, or prohibited transactions occur.
Distributions. Distributions from the HSA to cover an eligible individual’s qualified medical expenses, or those of his spouse or dependents, are not taxed. Qualified medical expenses for these purposes generally mean those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is subject to income tax and an additional 20% tax will apply to the withdrawal unless it is made after reaching age 65 or in the event of death or disability.
Please contact us if you are interested in finding out more details on whether an HSA is right for you and/or your business.
About Blackman & Sloop CPAs, P.A.:
Blackman & Sloop is a full-service CPA firm headquartered in Chapel Hill, North Carolina and is actively involved in auditing, taxation, management consulting, financial planning, and related services. The firm directs a large part of its services toward providing management with advice on budgeting, forecasts, projections, financing decisions, financial analysis, and tax developments. The firm also performs review and compilation services and prepares not-for-profit, corporate, individual, estate, retirement plan, and trust tax returns as well as technology consulting services regarding installation and training on QuickBooks. Blackman & Sloop provides services in Raleigh, Durham, Chapel Hill, RTP, Hillsborough, Pittsboro, Charlotte, and the rest of North Carolina. To find out more please visit http://www.blackmansloop.com
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