Saturday, December 9, 2006

Health Insurance and Health Savings Accounts


Health Insurance
Employer-provided health insurance is NOT taxable to the employee
Employer reimbursements to employees for medical expenses are excluded from taxable wages. These reimbursements can include non-prescription drugs.
A Health reimbursement plan can also reimburse the employee for health insurance paid directly by the employee.

If the employer does not reimburse such expenses, most will qualify as an itemized deduction, but the deduction is reduced by 7½ % of Adjusted Gross Income.

If you are self employed, you can deduct your health insurance (not to exceed your self-employment income) even if you don’t itemize your deductions. There is no 7½ % of AGI reduction of this deduction).

Health Savings Accounts (HSAs):
These accounts permit you to deduct your cost or exclude your employer’s cost from income.
Instead of buying a policy that pays a large part of your medical expenses, you may choose to buy a policy with a high deductible ($1000+) which covers only the costs above the deductible. Premiums on high-deductible policies obviously cost less—but leave you exposed to high out-of-pocket expenses.
With a H S A you put away the money as a savings plan that you can tap to pay the part your insurance won’t pay.
The money you save in the H S A is yours to keep whether you use it or not, and the interest it earns is not taxable. You are eligible to set up an H S A even if you have no earned income.
Keep in mind that you are ineligible if your health insurance policy is like mine—I only pay a $ 20 co-payment when I go to a doctor and the insurance pays the rest.

You can’t contribute unlimited amounts to the H S A. The amount you can contribute depends on your filing status: The largest amount is allowed if you have family coverage and are over 55 years old.
The smallest amount is if your policy covers yourself only and you are under age 55.

High deductible means the deductible can’t be LESS than $1000 for self-only coverage and can’t be less than $2000 for Family coverage. (these are 2005 figures and will be increased for 2006)

On the other hand the deductible can’t be MORE than $ 5100 for self-only coverage or $10,200 for Family coverage. (these are 2005 figures which will be increased for 2006). Apparently this is to keep you from buying a policy that only costs $1.00 per year with $1 billion deductible and having, in effect, no coverage. The medical savings account is designed to provide an incentive for everyone to carry some sort of coverage rather than having the government pay what you can’t afford.

The plan must have a trustee to administer it. Information is available at

This information is not intended to be advice to the recipient.In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this correspondence was not intended or written to be used and cannot be used for the purposes of avoiding penalties.