If I open a personal health savings account (because
my employer has a high-deductible medical plan this year), and I
fund it to the full maximum for family coverage, will this amount
($5,150) be fully or partially deductible above the line on Form
1040? Thanks. -- Kim
Health savings accounts became part of the law in January, ushered
in by the Medicare Reform Act of 2003. HSAs are the successor to
Archer Medical Savings Accounts that were introduced in 1996 but
never caught on. Oddly, though, if you're on Medicare, you are not
eligible to contribute to an HSA.
Basically, a health
savings account is used in combination with a higher-deductible
medical insurance policy. By increasing your deductible, you reduce
your current premiums and use that savings and possibly other funds
to contribute to a private investment account that is tax-deductible.
It's kind of like an IRA for health care expenses.
Most people have the option of increasing their auto
insurance deductibles in exchange for saving on their premiums.
This is basically the same choice. If you never have an accident,
you come out ahead. If you never get sick, you'll also come out
Even though receiving benefits, your payments on the
policy can continue to be deducted as medical expenses within the
If you have a high-deductible health plan at work
(e.g., your plan references Internal Revenue Code sec. 223), you
are eligible to contribute to an HSA. However, the IRS has ruled
(in Revenue Ruling 2004-45) that if you have a flexible
spending account or health reimbursement account under a cafeteria
plan with your employer, you would not be an eligible individual
for making contributions to an HSA. Since 2004 is the first year
for HSAs, many employers did not have time to adjust their benefits
for employees to contribute the maximum under an HSA.
All that said, your 2004 contribution limit is $5,150
for a family or, if less, the amount of your family deductible.
The limitation is prorated for 2004 based on the number of full
months you were in the high-deductible health plan. For example,
if you started in the plan on July 1, your maximum contribution
is cut in half.
The contributions are an above-the-line deduction
on Form 1040, whether or not you itemize.