Insider secrets-how an HSA plan can save
you taxes & premiums

This presentation is adopted from a presentation made in an advanced tax
planning class as part of the curriculum for my Master’s in Tax & Financial
Planning at San Diego State University. Although it highlights many of the
HSA basic concepts, it is actually designed to focus on a little known
“secret” behind the HSA plan—the ability to by-pass the 7.5% AGI
limitation required before most people can ever deduct any of their medical
expenses. I hope you enjoy!
C. Dean Richard, JD, MSBA
Needless to say, all contents ©2008, all rights reserved.
1
Health Savings Account Plans
By now, almost everyone knows that an
HSA plan allows you to use TAX-FREE
money to pay most medical expenses
But did you also know . . .
2
An HSA also allows you to:
By-pass the 7.5% AGI Limitation and deduct
(almost) all of your medical expenses ….
BEFORE they are incurred!
3
What is an HSA?
A tax-sheltered savings account designed
specifically for medical expenses
Predecessor: Medical Savings Accounts
(MSA), born in the Kennedy-Kassalbaum
Bill of 1996 (also known as “HIPAA”)
Revitalized in 2004 as part of the
Medicare Reform Act of 2003
4
Tax-Advantages—the Basics
100% of your annual contribution to
your savings account is deductible
“above the line”
Earnings accumulate tax-deferred
(can invest in almost anything)
Withdrawals are TAX-FREE (if
used for qualified medical expenses
5
Similar to an IRA
Sounds like an IRA?
YES!!
(“it’s a medical IRA”)
6
Who is eligible?
Almost everyone, including:
Self-Employed (sole proprietors,
partners, sub-S stockholders)
Employees with a company sponsored
HSA qualified insurance plan in place
Anyone with enough earned income to
at least equal the HSA contribution
7
What is the Catch?
You must first purchase a special
health insurance policy: “HDHP”
(High Deductible Health Plan)
Note: Our nationwide insurance agency
specializes in high deductible health
plans. Visit any of our websites to get
quotes, or click here to get a quote.
8
HSA Insurance Policy (“HDHP”)
Specified Deductible and Out-of-Pocket ranges
Type of
Coverage
Minimum
Deductible
Maximum
Deductible
Maximum
Annual Outof-Pocket
SINGLE
1,100
5,600
5,600
FAMILY
2,250
11,200
11,200
*For 2008 Tax year
9
What is the Catch? (con’t...)
Only after you become insured with an HSA-qualified
health plan can you then open and fund the actual HSA
savings account.
 POINT: The savings account is totally separate from
the high deductible insurance policy required to establish
eligibility for the savings account.
So, yes, you must pay premiums an an insurance policy
in addition to making any contributions to the savings
account.
10
Why would anyone want an HSA?
Basic concept: Pay a much smaller premium on your
insurance policy—because of the higher deductible—and take
the difference and set it aside in a special savings account,
basically to cover the “small” medical bills yourself—and let
the insurance policy pay just the “big” bills.
POINT: In theory, this is usually a more efficient way to fund
your own health care, especially if you have to fund it
yourself. This argument loses ground if someone else
provides your coverage at little or no cost, or if you have preexisting health conditions that require costly upkeep.
11
Government “encouragement”
Tax deduction for merely saving money
100% tax deductible contributions!
Tax-free withdrawals! (for qualified expenses)
12
AGI “By-Pass”
Compare an HSA to the “other way” you can get a deduction
for medical expenses—you have to spend money.
Schedule A—Itemized Deduction for medical expenses.
Limited to 7.5% of AGI.
Key term: Expenses. Ordinarily, you have to spend money,
i.e., incur expenses in order to get a tax deduction.
Which would you rather have: A deduction for expenses
incurred or for money contributed to a savings account?
13
Example:
Bill & Susan, both age 44, with 2 kids
Bill is self-employed contractor
AGI: $77,000
Medical “expenses” for the year: $1,600 (by law, does not include
insurance premiums paid!)
Amount of deduction: ZERO
Why?: 7.5% threshold is not reached until $5,775 in
expenses are incurred
14
Example (cont.):
Compare the HSA.
Contribution to HSA: $5,800
Amount of Deduction: $5,800
Estimated Tax Savings: $1,624 (28%)
Bill & Susan can actually use “tax dollars” to pay all of
their medical expenses and still have $4,200 saved and
hard at work earning tax-deferred interest (or investments).
Duh! (5,800 contribution – 1,600 medical expenses = 4,200 balance)
**Actual insurance premiums are also 100% deductible for
the self-employed under either option.
15
Limitations on Annual Deduction
Lesser of:
 Earned income, or
Maximum allowable annual contribution
 $5,800families
 $2,900 single person plans
Additional contribution up to $900 allowed as
“catch-up” provision for individuals 55+.
16
Other Important Factors-Penalties
15% tax penalty for withdrawing money not used for
eligible medical expenses prior to age 65 (after 65, basically used
as IRA—no penalty for “early” withdrawal, but is includable in gross income,
unless used to pay qualifying medical expenses)
Ordinary income if withdrawn for ineligible expenses (at
any age)
6% excise tax for contributing more than allowable
amount each year
17
Eligible Expenses:
Withdrawals are tax-free and penalty-free at any age if
made to pay any of the eligible expenses:
• ambulance
• gum treatment • prescription medicines
• anesthetist
• gynecologist
• psychiatrist
• eyeglasses
• pediatrician
• physician
• blood tests
• hospital bills
• psychoanalyst
• arch supports
• healing services • psychologist
• lab tests
• hearing aids
• neurologist
NOTE: This is the same list used by the IRS to determine if medical expenses
you claim qualify for the 7.5% AGI deduction!
18
Deadlines?
If a qualifying health insurance policy is in place by Dec. 1,
a taxpayer is eligible for the full contribution for the entire tax
year.
Contributions may be made up until April 15.
19
Why wait?
Note: Our nationwide insurance agency
specializes in high deductible health
plans. Visit any of our websites to get
quotes, or click here to get a quote.
20