Health Savings Account Tax Issues

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HSA Contributions & Distributions

Here you will find general commentary about tax issues pertaining to Health Savings Accounts (HSAs). If you want greater detail, go to the visit the IRS website.

Tax Deduction for Contributions

Health Savings Account (HSA) contributions made by an eligible individual (or by a family member of the eligible individual) are an "above-the-line" tax deduction in determining the gross income of the eligible individual.

HSA contributions are deductible whether or not the individual is itemizing deductions. You cannot deduct HSA contributions as medical expense deductions.

For purposes of recognizing your HSA deposits and distributions on your personal tax return, the IRS requires you to complete Form 8889.

Employer HSA Contributions

Employer contributions (within prescribed limits) to an eligible employee's HSA are excludable from the employee's gross income and not subject to withholding. The IRS considers employer HSA contributions to be employer-provided coverage for medical expenses under an accident or health plan.

Employer contributions to an employee's HSA must be reported on the employee's W-2.

HSA Contribution Deadlines

An individual's HSA contributions for a specific year must be made on or before the due date (without extensions) for filing tax returns for that year. Correspondingly, for 2012, HSA contributions must be made on or before the April 2013 filing deadline.

Insurance Premium Deductibility

The IRS gives no special deductibility treatment to premiums paid for HSA-compatible high deductible health insurance plans.

For employers, HSA-compatible high deductible plan premiums are deductible expenses the same as premiums paid for traditional health insurance plans. For the self-employed, medical insurance premiums are fully deductible, whether the health insurance is HSA-compatible or of the traditional variety.

Qualified Expense Distributions

When distributions from an HSA are used to pay for qualified medical expenses of the account owner, his or her spouse, or dependents, the distributions are excluded from gross income -- even if the individual is not currently eligible to make HSA contributions.

Non-Qualified Expense Distributions

Distributions not used for qualified medical expenses are includable in gross income and, for applicants under age 65, subject to an additional 10% tax. Do not use your HSA funds for non-qualified expenses.

State Income Tax Treatment

States follow the HSA tax treatment established by the federal government, providing state income taxes deductions for HSA contributions.

IRS Reporting

As an HSA owner, you are required to submit IRS Form 8889with your federal income tax return. This form reports your total HSA deposits and withdrawals for the tax year. Your HSA administrator will provide information you need to complete this form.

If your employer has contributed to your HSA, those contributions will be reported on your W-2.

If you are subjected to an IRS audit, you may need to provide proof that HSA distributions were used for qualified expenses. That is reason number one why you should maintain accurate records of your qualified health care expenses.

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