A health savings account (HSA) is a tax-exempt trust or custodial account that you set up with a U.S. financial institution (such as a bank or an insurance company) which allows you to pay or be reimbursed for certain medical expenses. This account must be used in conjunction with a high deductible health plan (HDHP), discussed later.
The HSA can be established using a qualified trustee or custodian that is different from the HDHP provider. Contributions to an HSA must be made in cash or through a cafeteria plan. Contributions of stock or property are not allowed.

If you have an Archer MSA, you can generally roll it over into an HSA tax free.
What are the benefits of an HSA? You may enjoy several benefits from having an HSA.
• You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040.
• Contributions made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
• The contributions remain in your account from year to year until you use them.
• The interest or other earnings on the assets in the account are tax free.
• Distributions may be tax free if you pay qualified medical expenses. See Qualified Medical Expenses, later.
• An HSA is “portable” so it stays with you if you change employers or leave the work force.
Qualifying for an HSA
To qualify for an HSA, you must meet the following requirements.
• You have an HDHP.
• You have no other health insurance coverage except what is permitted under Other health insurance, later.
• You are not entitled to Medicare benefits.
• You cannot be claimed as a dependent on someone else's 2004 tax return.

If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an HSA contribution. This is true even if the other person does not actually claim the deduction.
High deductible health plan (HDHP). An HDHP has:
1. A higher annual deductible than typical health plans, and
2. A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses.
Limits. The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2004.

Type of Coverage

Minimum  Annual Deductible
Maximum Annual Deductible and Other Out-of-Pocket Expenses *
Self-only $1,000 $5,000
Family $2,000 $10,000
* This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies.
Family plans that do not meet the high deductible rules. There are some family plans that have deductibles for both the family as a whole and for individual family members. Under these plans, if you meet the individual deductible for one family member, you do not have to meet the higher annual deductible amount for the family. If either the deductible for the family as a whole or the deductible for an individual family member is below the minimum annual deductible for that year, the plan does not qualify as an HDHP.
Example.
Mr. Orville has family health insurance coverage with company A in 2004. The annual deductible for the family plan is $3,500. This plan also has an individual deductible of $1,500 for each family member. Mr. Orville's wife had $2,200 of covered medical expenses. They had no other medical expenses for 2004. The plan paid $700 to Mr. Orville because Mrs. Orville met the individual deductible of $1,500, even though the Orvilles did not meet the $3,500 annual deductible for the family plan. The plan does not qualify as an HDHP because the deductible for Mrs. Orville is below the minimum deductible amount.

Other health insurance.

You (or your spouse if you file jointly) generally cannot have any other health plan that is not an HDHP. However, this rule does not apply if the other health plan(s) only covers the following items.
• Accidents.
• Disability.
• Dental care.
• Vision care.
• Long-term care.
• Benefits related to workers' compensation laws, tort liabilities, or ownership or use of property.
• A specific disease or illness.
• A fixed amount per day (or other period) of hospitalization.


Plans in which substantially all of the coverage is through the above listed items are not HDHPs. For example, if your plan provides coverage substantially all of which is for a specific disease or illness, the plan is not an HDHP for purposes of establishing an HSA.

Amount of Contribution

The amount you, your family members, or your employer can contribute to your HSA depends on the type of HDHP coverage you have and your age.
For 2004, if you have self-only coverage, you can contribute up to the amount of your annual health plan deductible, but not more than $2,600 ($3,100 if you are age 55 or older). If you have family coverage, you can contribute up to the amount of your annual health plan deductible, but not more than $5,150 ($5,650 if you are age 55 or older). See Rules for married people (discussed later). You must have an HSA all year to contribute the full amount.
For each full month you did not have an HDHP, you must reduce the amount you can contribute by one-twelfth. You must also reduce the amount you can contribute to an HSA by any (a) amounts contributed to your Archer MSA (including employer contributions) and (b) employer contributions to your HSA that were excluded from income.

Example.
In 2004, you have an HDHP for your family for the entire months of July through December (6 months). The annual deductible of your HDHP is $4,000. You can contribute up to $2,000 ($4,000 ÷ 12 months × 6 months) to your HSA for the year. If your annual deductible is $6,000 and you are under the age of 55 at the end of 2004, you can contribute up to $2,575 ($5,150 ÷ 12 months × 6 months) to your HSA for the year.
Note. If you have more than one HSA in 2004, your total contributions to all the HSAs cannot be more than the limits above.

Contributions in excess of the limits above may be includible in your gross income and may be subject to a 6% excise tax.

Rules for married people.

 If either spouse has family coverage, both spouses are treated as having family coverage. If both spouses have family coverage, you are treated as having family coverage with the lower annual deductible of the two health plans. The contribution limit is split equally between you unless you agree on a different division.


If both spouses are age 55 or older by the end of 2004, each spouse can contribute an additional amount to his or her HSA. Therefore, if both spouses were age 55 or older by the end of the year, the total contributions to the HSAs when both spouses have family coverage cannot be more than $6,150.
Example.
Mr. Auburn and his wife both have family coverage under separate HDHPs. Mr. Auburn is 58 years old and Mrs. Auburn is 53. Mr. Auburn has a $3,000 deductible under his HDHP and Mrs. Auburn has a $2,000 deductible under her HDHP. Mr. and Mrs. Auburn are both treated as being covered under the HDHP with the $2,000 deductible. Mr. Auburn can contribute $1,500 to an HSA (½ the deductible of $2,000 + $500 additional contribution for people age 55 or older) and Mrs. Auburn can contribute $1,000 to an HSA (unless Mr. and Mrs. Auburn agree to a different division).
Medicare eligible individuals. Beginning with the first month you are entitled to benefits under Medicare (month you turn age 65), you cannot contribute to an HSA.
Example.
You turned age 65 in July 2004 and became eligible for Medicare benefits. You had self-only coverage under an HDHP with an annual deductible of $1,000. You cannot contribute to an HSA after June 2004. Your monthly contribution limit is $125 ($1,000/12 + $500/12 for the additional contribution for people age 55 or older). You can make contributions for January through June totaling $750 ($125 × 6), but cannot make any contributions for July through December.

When To Contribute

You can make contributions to your HSA for 2004 until April 15, 2005.

Setting Up an HSA

No permission or authorization from the IRS is necessary to establish an HSA. When you set up an HSA, you will need to work with a trustee. A trustee can be a bank, a life insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from the HDHP provider.
Your employer may already have some information on HSA trustees in your area.
Rollovers. You can roll over amounts from Archer MSAs and other HSAs into an HSA. Rollover contributions do not need to be in cash. Rollovers are not subject to the annual contribution limits. Rollovers from an IRA, a health reimbursement arrangement, or a flexible spending arrangement are not allowed.

Distributions

You can make tax-free withdrawals from your HSA to pay or be reimbursed for qualified medical expenses you incur after the HSA has been established (discussed later). If you make withdrawals for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 10% tax as well. You do not have to make withdrawals from your HSA each year.
You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your HSA to send you a distribution from your HSA.
Qualified medical expenses. Qualified medical expenses are those that qualify for the medical and dental expenses deduction. These are explained in Publication 502, Medical and Dental Expenses. Examples include amounts paid for doctors' fees, prescription and non-prescription medicines, and necessary hospital services not paid for by insurance. Qualified medical expenses must be incurred after the HSA has been established.

You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free amount of the distribution from your HSA.

Special rules for insurance premiums.

 Generally, you cannot treat insurance premiums as qualified medical expenses for HSAs. You can, however, treat premiums for long-term care coverage, health care coverage while you receive unemployment benefits, or health care continuation coverage required under any federal law as qualified medical expenses for HSAs. If you are age 65 or older, you can treat insurance premiums (other than premiums for a Medicare supplemental policy, such as Medigap) as qualified medical expenses for HSAs.

Recordkeeping.