BASIC An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the account beneficiary who is covered under a high-deductible health plan. An HDHP is a health plan that satisfies certain requirements with respect to deductibles and out-of-pocket expenses. For self-only coverage, an HDHP has an annual deductible of at least $1,100 and annual out-of-pocket expenses required to be paid (deductibles, co-insurance and other amounts, but not premiums) not exceeding $5,500. For family coverage, an HDHP has an annual deductible of at least $2,200 and annual out-of-pocket expenses required to be paid not exceeding $11,000.

ELIGIBILITY An "eligible individual" means, with respect to any month, any individual who: Is covered under a high-deductible health plan (HDHP) on the first day of such month; Is not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing certain limited types of coverage for accidents, disability, dental care, vision care, or long-term care); Is not entitled to benefits under Medicare; and May not be claimed as a dependent on another person’s tax return.

CONTRIBUTIONS Any eligible individual may contribute to an HSA. For an HSA established by an employee, the employee, the employee’s employer or both may contribute to the HSA for the employee in a given year. Employer contributions to the employee’s HSA are excludable from the employee’s gross income and are not subject to withholding from wages for income tax or subject to the FICA, FUTA, or Railroad Retirement Tax Act. Contributions to an employee’s HSA through a cafeteria plan are treated as employer contributions. Family members may also make contributions to an HSA on behalf of another family member as long as that other family member is an eligible individual. An HSA is generally exempt from tax, unless it has ceased to be an HSA. For calendar year 2007, the maximum monthly contribution for eligible individuals with self-only coverage under an HDHP is 1/12 of the lesser of 100% of the annual deductible under the HDHP (minimum of $1,100) but not more than $2,850. For eligible individuals with family coverage under an HDHP, the maximum contribution is 1/12 of the lesser of 100% of the annual deductible under the HDHP (minimum of $2,200) but not more than $5,650. In addition to the maximum monthly contribution amount, catch-up contributions, may be made by or on behalf of individuals age 55 or older and younger than 65 and will be $800 per person for 2007. After an individual has attained age 65 (the Medicare eligibility age), contributions, including catch-up contributions, cannot be made to an individual’s HSA.

ESTABLISHING AN HSA Beginning January 1, 2004, any eligible individual can establish an HSA with a qualified HSA trustee or custodian. No permission or authorization from the Internal Revenue Service is necessary to establish an HSA. An eligible individual who is an employee may establish an HSA with or without involvement of the employer. The HSA can be established through a qualified trustee or custodian who is different from the HDHP provider.

DISTRIBUTIONS An individual is permitted to receive distributions from an HSA at any time. Distributions from an HSA used exclusively to pay for qualified medical expenses of the account beneficiary, his or her spouse, or dependents are excludable from gross income. Any amount of the distribution not used exclusively to pay for qualified medical expenses is includable in gross income of the account beneficiary and is subject to an additional 10% tax on the amount includable, except in the case of distributions made after the account beneficiary’s death, disability, or attaining age 65. The term "qualified medical expenses" are expenses paid by the account beneficiary, his or her spouse or dependents for medical care as defined in section 213(d) (including nonprescription drugs as described in Rev. Rul. 2003-102, 2003-38 I.R.B. 559), but only to the extent the expenses are not covered by insurance or otherwise. The qualified medical expenses must be incurred only after the HSA has been established. HSA trustees or custodians and employers are not required to determine whether HSA distributions are used for qualified medical expenses. Individuals who establish HSAs make that determination and should maintain records of their medical expenses sufficient to show that the distributions have been made exclusively for qualified medical expenses, and are therefore excludable from gross income.

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