A Health Savings Account is an account, when coupled with a high deductible health insurance plan that allows for the accumulation of tax favored savings gor the funding of qualified medical expenses.

Effective January 1, 2004, contributions made by an eligible individual to an HSA account are deductible in determining adjusting gross income. Just like an IRA.

An eligible individual is anyone who has a qualified high deductible health insurance plan. Whether employed or self-employed.

The maximum aggergate annual contribution for 2004 that can be made is the lesser of 100% of the deductible on a high deductible plan or maximum of $2,600 individual or $5,150 family per year.

Individuals 55 and over are allowed to contribute an additional $500 to the aggregate annual contribution for 2004.

High Deductible Health Plans: Insurance Companies that Provide HSA Qualified Plans

To qualify as a high deductible plan, the minimum deductible must be at least $1,000 for an individual and $2,000 for family.

Out-of-Pocket maximums are set $5,000 individual and $10,000 famiy for 2004. These maximums are subject to annual cost of living increases.

Out-of-Network Out-of-Pocket limits are not included in the Out-of-Pocket maximum.

A high deductible plan can pay for preventive care as defined by federal law, under the deductible and still qualify.

Contributions:

Annual contribution limits for 2004 are at either the high deductible plan deductible or $2,600 for individual or $5,150 for family - whichever amount is less.

Contributions may be made by anyone on behalf of the account beneficiary. Employer, employee, self, friend, etc.

Unused funds from an MSA plan may be rolled over into an HSA account with no penalty.

Distributions:

The money in the HSA accumulates on a tax - deffered basis and can be used to pay for any qualified medical expense.

Withdrawals for reasons other than qualified medical expenses prior to age 65 are taxable and subject to a 10% penalty.

Upon death, disability, or attaining age 65, funds can be withdrawn for non-medical reasons with no penalty but such distributions will be includible in gross income.

You can use tax free withdrawals to pay premiums for qualified long term care insurance; COBRA continuation; health insurance in effect while receiving unemployment compensation under any federal or state law; and if you are age 65 or older, any health insurance other than Medicare Supplemental policy.