Health Savings Account Details

Health Savings Accounts (HSA)

A Health Savings Account (HSA) is a tax-deferred investment account, similar in many respects to an IRA, used in conjunction with a qualified high deductible health plan (HDHP). It is an arrangement that allows earnings and deductible contributions to grow tax-deferred. HSAs are primarily used to save for qualified medical expenses. Here's more information about HSAs:

Tax Advantages

Your HSA contributions that do not exceed the contribution limits are deductible from your gross income on your federal income tax return for the tax year for which the contributions are made. Earnings grow on a tax-deferred basis. Contribution and earnings dollars may be withdrawn at any time federally income tax-free for qualified medical expenses. At age 65, or upon disability, you may make withdrawals from your HSA for any reason without a tax penalty; however, the withdrawals will be taxed as ordinary income.

Eligibility Requirements

An "eligible individual" can establish an HSA. An "eligible individual" means, with respect to any month, any individual who meets all of the following conditions:

• Covered under an HDHP on the first day of such month;
• Not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing certain types of coverage);
• Not yet enrolled in Medicare Part A or Part B, and
• Not eligible to be claimed as a dependent on another person's tax return

For you to qualify for an HSA, your HDHP must meet one of the following criteria for 2009

• For Self-Only coverage- An annual deductible of at least $1,150 with maximum out-of-pocket expenses up to $5,800.
• For Family coverage- An annual deductible of at least $2,300 with maximum out-of-pocket expenses up to $11,600.

HDHP deductible, out of pocket expense, and HSA contribution limits

The maximum annual contribution for 2009 is $3,000 for those with self-only coverage, or $5,950 for those with family coverage.

Beginning in 2007, an individual who is an eligible individual during the last month of the tax year is treated as an eligible individual during every month of that tax year, and can therefore make the maximum annual HSA contribution for that year. However, a recapture provision applies if the individual ceases to be an eligible individual during the “testing period.” (“Recapture” means that federal income tax deductions are recaptured (i.e., included in gross income and subject, generally, to a 10% tax penalty) for the months the individual was not an eligible individual during the tax year.) The “testing period” is the period beginning with the last month of the tax year for which the individual was an eligible individual and ending on the last day of the 12th month following that month.

EXAMPLE: John Smith establishes self-only HDHP coverage on June 1, 2007 and makes the maximum annual HSA contribution of $2,850 for 2007. He must continue to be an eligible individual through December 31, 2008 to avoid recapture of the portion of his 2007 HSA deduction attributable to the months of January through May of 2007. If, during 2008, John discontinues his HDHP coverage (or has nonpermitted insurance coverage), he must, on his 2008 federal income tax return, include $1,187.50 (5 months x $237.50/month) in income and pay a 10% tax penalty ($118.75).

Eligible individuals age 55 or older may make additional "catch-up" contributions of up to $900 in 2008 and up to $1,000 annually in 2009. A married couple can make two catch-up contributions as long as both spouses are at least 55 years of age.

Contribution Timing

You can make contributions to your HSA from January 1st through the tax-filing deadline (excluding extensions) for the year, generally April 15.

Contribution Sources

You, a family member, your employer, or any other person may contribute to your HSA. All contributions made by or on behalf of an eligible individual to an HSA are aggregated for purposes of applying the contribution limit.

Distribution Guidelines

You may take distributions from an HSA at any time. Distributions made for qualified medical expenses are federally income tax-free. Distributions made for non-qualified medical expenses prior to age 65 are subject to federal income taxation and a 10% tax penalty. Distributions, not used for qualified medical expenses, made after the account holder turns age 65, becomes disabled or dies are not subject to the additional 10% tax penalty, but are taxed as ordinary income.

Visit your State Farm® agent to further discuss the benefits of a Health Savings Account or contact State Farm Bank at 1-877-SF4-BANK / 1-877-734-2265.

State Farm does not provide tax or legal advice. You should contact your tax or legal advisor for advice regarding your situation.

Health Savings Accounts are available in all states and the District of Columbia.