Table of Contents
A health savings account (HSA) is a tax-exempt trust or custodial account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for 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 qualified HSA trustee can be a bank, an 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 your health plan provider.
Your employer may already have some information on HSA trustees in your area.
If you have an Archer MSA, you can generally roll it over into an HSA tax free. See Rollovers, later.
-
You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on Form 1040.
-
Contributions to your HSA 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.
To be an eligible individual and qualify for an HSA, you must meet the following requirements.
-
You have a high deductible health plan (HDHP), described later, on the first day of the month.
-
You have no other health coverage except what is permitted under Other health coverage, later.
-
You are not enrolled in Medicare.
-
You cannot be claimed as a dependent on someone else's 2007 tax return.
Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers).
If you meet these requirements, you are an eligible individual even if your spouse has non-HDHP family coverage, provided your spouse's coverage does not cover you.
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 your exemption.
Each spouse who is an eligible individual who wants an HSA must open a separate HSA. You cannot have a joint HSA.
-
A higher annual deductible than typical health plans, and
-
A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. Out-of-pocket expenses include copayments and other amounts, but do not include premiums.
-
Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals.
-
Routine prenatal and well-child care.
-
Child and adult immunizations.
-
Tobacco cessation programs.
-
Obesity weight-loss programs.
-
Screening services. This includes screening services for the following:
-
Cancer.
-
Heart and vascular diseases.
-
Infectious diseases.
-
Mental health conditions.
-
Substance abuse.
-
Metabolic, nutritional, and endocrine conditions.
-
Musculoskeletal disorders.
-
Obstetric and gynecological conditions.
-
Pediatric conditions.
-
Vision and hearing disorders.
For more information on screening services, see Notice 2004-23, which is on page 725 of Internal Revenue Bulletin 2004-15 at
www.irs.gov/pub/irs-irbs/irb04-15.pdf. -
Type of Coverage | Minimum
Annual Deductible |
Maximum
Annual Deductible and Other Out-of-Pocket Expenses * |
Self-only | $1,100 | $5,500 |
Family | $2,200 | $11,000 |
* 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. |
Example.
You have family health insurance coverage in 2007. The annual deductible for the family plan is $3,500. This plan also has an individual deductible of $1,500 for each family member. The plan does not qualify as an HDHP because the deductible for an individual family member is below the minimum annual deductible ($2,200) for family coverage.
-
Liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property.
-
A specific disease or illness.
-
A fixed amount per day (or other period) of hospitalization.
-
Accidents.
-
Disability.
-
Dental care.
-
Vision care.
-
Long-term care.
-
Limited-purpose health FSA or HRA. These arrangements can pay or reimburse the items listed earlier under Other health coverage, except long-term care. Also, these arrangements can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible.
-
Suspended HRA. Before the beginning of an HRA coverage period, you can elect to suspend the HRA. The HRA does not pay or reimburse, at any time, the medical expenses incurred during the suspension period except preventive care and items listed under Other health coverage. When the suspension period ends, you are no longer eligible to make contributions to an HSA.
-
Post-deductible health FSA or HRA. These arrangements do not pay or reimburse any medical expenses incurred before the minimum annual deductible amount is met. The deductible for these arrangements does not have to be the same as the deductible for the HDHP, but benefits may not be provided before the minimum annual deductible amount is met.
-
Retirement HRA. This arrangement pays or reimburses only those medical expenses incurred after retirement. After retirement you are no longer eligible to make contributions to an HSA.
Any eligible individual can contribute to an HSA. For an employee's HSA, the employee, the employee's employer, or both may contribute to the employee's HSA in the same year. For an HSA established by a self-employed (or unemployed) individual, the individual can contribute. Family members or any other person may also make contributions on behalf of an eligible individual.
Contributions to an HSA must be made in cash. Contributions of stock or property are not allowed.
The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have, your age, the date you become an eligible individual, and the date you cease to be an eligible individual. For 2007, if you have self-only HDHP coverage, you can contribute up to $2,850. If you have family HDHP coverage, you can contribute up to $5,650.
For 2008, if you have self-only HDHP coverage, you can contribute up to $2,900. If you have family HDHP coverage you can contribute up to $5,800.
If you were, or were considered (under the last-month rule, discussed later), an eligible individual for the entire year and did not change your type of coverage, you can contribute the full amount based on your type of coverage. However, if you were not an eligible individual for the entire year or changed your coverage during the year, your contribution limit is the greater of:
-
The limitation shown on the last line of the Line 3 Limitation Chart and Worksheet in the Instructions for Form 8889, Health Savings Accounts (HSAs), or
-
The maximum annual HSA contribution based on your HDHP coverage (self-only or family) on the first day of the last month of your tax year.
If you had family HDHP coverage on the first day of the last month of your tax year, your contribution limit for 2007 is $5,650 even if you changed coverage during the year.
Example 1.
Chris, age 53, becomes an eligible individual on December 1, 2007. He has family HDHP coverage on that date. Under the last-month rule, he contributes $5,650 to his HSA.
Chris fails to be an eligible individual in June 2008. Because Chris did not remain an eligible individual during the testing period (December 1, 2007, through December 31, 2008), he must include in his 2008 income the contributions made in 2007 that would not have been made except for the last-month rule. Chris uses the worksheet for line 3 in the Form 8889 instructions to determine this amount.
January | -0- |
February | -0- |
March | -0- |
April | -0- |
May | -0- |
June | -0- |
July | -0- |
August | -0- |
September | -0- |
October | -0- |
November | -0- |
December | $5,650.00 |
Total for all months | $5,650.00 |
Limitation. Divide the total by 12 | $470.83 |
Chris would include $5,179.17 ($5,650.00 - $470.83) in his gross income on his 2008 tax return. Also, a 10% additional tax applies to this amount.
Example 2.
Erika, age 39, has self-only HDHP coverage on January 1, 2007. Erika changes to family HDHP coverage on November 1, 2007. Because Erika has family HDHP coverage on December 1, 2007, she contributes $5,650 for 2007.
Erika fails to be an eligible individual in March 2008. Because she did not remain an eligible individual during the testing period (December 1, 2007, through December 31, 2008), she must include in income the contribution made that would not have been made except for the last-month rule. Erika uses the worksheet for line 3 in the Form 8889 instructions to determine this amount.
January | $2,850.00 |
February | $2,850.00 |
March | $2,850.00 |
April | $2,850.00 |
May | $2,850.00 |
June | $2,850.00 |
July | $2,850.00 |
August | $2,850.00 |
September | $2,850.00 |
October | $2,850.00 |
November | $5,650.00 |
December | $5,650.00 |
Total for all months | $39,800.00 |
Limitation. Divide the total by 12 | $3,316.67 |
Erika would include $2,333.33 ($5,650 - $3,316.67) in her gross income on her 2008 tax return. Also, a 10% additional tax applies to this amount.
For 2008, the additional contribution amount is $900.
If you have more than one HSA in 2007, your total contributions to all the HSAs cannot be more than the limits discussed earlier.
The rules for married people apply only if both spouses are eligible individuals.
If both spouses are 55 or older and not enrolled in Medicare, each spouse's contribution limit is increased by the additional contribution. If both spouses meet the age requirement, the total contributions under family coverage cannot be more than $7,250.
Example.
For 2007, Mr. Auburn and his wife are both eligible individuals. They each have family coverage under separate HDHPs. Mr. Auburn is 58 years old and Mrs. Auburn is 53. Mr. and Mrs. Auburn can split the family contribution limit ($5,650) equally or they can agree on a different division. If they split it equally, Mr. Auburn can contribute $3,625 to an HSA (one-half the maximum contribution for family coverage ($2,825) + $800 additional contribution) and Mrs. Auburn can contribute $2,825 to an HSA.
Example.
You turned age 65 in July 2007 and enrolled in Medicare. You had an HDHP with self-only coverage and are eligible for an additional contribution of $800. Your contribution limit is $1,825 ($3,650 × 6 ÷ 12 ).
A rollover contribution is not included in your income, is not deductible, and does not reduce your contribution limit.
Note.
If you instruct the trustee of your HSA to transfer funds directly to the trustee of another HSA, the transfer is not considered a rollover. There is no limit on the number of these transfers. Do not include the amount transferred in income, deduct it as a contribution, or include it as a distribution on Form 8889, line 12a.
Contributions made by your employer are not included in your income. Contributions to an employee's account by an employer using the amount of an employee's salary reduction through a cafeteria plan are treated as employer contributions. You can claim contributions you made and contributions made by any other person, other than your employer, on your behalf, as an adjustment to income.
Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. The contributions are treated as a distribution of money and are not included in the partner's gross income. Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are deductible by the partnership and includible in the partner's gross income. In both situations, the partner can deduct the contribution made to the partner's HSA.
Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are deductible by the S corporation and includible in the shareholder-employee's gross income. The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA.
-
You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
-
You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.
If you fail to remain an eligible individual during any of the testing periods, discussed earlier, the amount you have to include in income is not an excess contribution. If you withdraw any of those amounts, the amount is treated the same as any other distribution from an HSA, discussed next.
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.
You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 10% tax. You do not have to make distributions from your HSA each year.
If you are no longer an eligible individual, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses.
A distribution is money you get from your health savings account. The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA.
-
You and your spouse.
-
All dependents you claim on your tax return.
-
Any person you could have claimed as a dependent on your return except that:
-
The person filed a joint return,
-
The person had gross income of $3,400 or more, or
-
You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2007 return.
-
You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your HSA.
-
You engaged in any transaction prohibited by section 4975 with respect to any of your HSAs, at any time in 2007. Your account ceases to be an HSA as of January 1, 2007, and you must include the fair market value of all assets in the account as of January 1, 2007, on Form 8889, line 14a.
-
You used any portion of any of your HSAs as security for a loan at any time in 2007. You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR, line 21.
Recordkeeping. You must keep records sufficient to show that:
-
The distributions were exclusively to pay or reimburse qualified medical expenses,
-
The qualified medical expenses had not been previously paid or reimbursed from another source, and
-
The medical expenses had not been taken as an itemized deduction in any year.
Do not send these records with your tax return. Keep them with your tax records.
How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined earlier).
-
If you use a distribution from your HSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8889. However, the distribution of an excess contribution taken out after the due date, including extensions, of your return is subject to tax even if used for qualified medical expenses. Follow the instructions for the form and file it with your Form 1040 or Form 1040NR.
-
If you do not use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution. Report the amount on Form 8889 and file it with your Form 1040 or Form 1040NR. If you have a taxable HSA distribution, include it in the total on Form 1040 or Form 1040NR, line 21, and enter “HSA” and the amount on the dotted line next to line 21. You may have to pay an additional 10% tax on your taxable distribution.
An HSA is generally exempt from tax. You are permitted to take a distribution from your HSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions, earlier). Earnings on amounts in an HSA are not included in your income while held in the HSA.
You should choose a beneficiary when you set up your HSA. What happens to that HSA when you die depends on whom you designate as the beneficiary.
-
The account stops being an HSA, and
-
The fair market value of the HSA becomes taxable to the beneficiary in the year in which you die.
The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death.
You must file Form 8889 with your Form 1040 or Form 1040NR if you (or your spouse, if married filing a joint return) had any activity in your HSA during the year. You must file the form even if only your employer or your spouse's employer made contributions to the HSA.
This section contains the rules that employers must follow if they decide to make HSAs available to their employees. Unlike the previous discussions, “you” refers to the employer and not to the employee.
-
The same amount, or
-
The same percentage of the annual deductible limit under the HDHP covering the employees.
-
Are covered by your HDHP and are eligible to establish an HSA,
-
Have the same category of coverage (either self-only or family coverage), and
-
Have the same category of employment (part-time, full-time, or former employees).
Note.
For purposes of making contributions to HSAs of non-highly compensated employees, highly compensated employees shall not be treated as comparable participating employees.
Archer MSAs were created to help self-employed individuals and employees of certain small employers meet the medical care costs of the account holder, the account holder's spouse, or the account holder's dependent(s).
A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified medical expenses of the account holder who is eligible for Medicare.
An Archer MSA 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) in which you can save money exclusively for future medical expenses.
-
You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040 or Form 1040NR.
-
The interest or other earnings on the assets in your Archer MSA are tax free.
-
Distributions may be tax free if you pay qualified medical expenses. See Qualified medical expenses, later.
-
The contributions remain in your Archer MSA from year to year until you use them.
-
An Archer MSA is “portable” so it stays with you if you change employers or leave the work force.
To qualify for an Archer MSA, you must be either of the following.
-
An employee (or the spouse of an employee) of a small employer (defined later) that maintains a self-only or family HDHP for you (or your spouse).
-
A self-employed person (or the spouse of a self-employed person) who maintains a self-only or family HDHP.
You can have no other health or Medicare coverage except what is permitted under Other health coverage, later. You must be an eligible individual on the first day of a given month to get an Archer MSA deduction for that month.
If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an Archer MSA contribution. This is true even if the other person does not actually claim your exemption.
-
Had 50 or fewer employees when the Archer MSAs began,
-
Made a contribution that was excludable or deductible as an Archer MSA for the last year he or she had 50 or fewer employees, and
-
Had an average of 200 or fewer employees each year after 1996.
-
A higher annual deductible than typical health plans, and
-
A maximum limit on the annual out-of-pocket medical expenses that you must pay for covered expenses.
Type of Coverage | Minimum
Annual Deductible |
Maximum
Annual Deductible |
Maximum
Annual Out-of-Pocket Expenses |
Self-only | $1,900 | $2,850 | $3,750 |
Family | $3,750 | $5,650 | $6,900 |
Example.
You have family health insurance coverage in 2007. The annual deductible for the family plan is $4,500. This plan also has an individual deductible of $2,000 for each family member. The plan does not qualify as an HDHP because the deductible for an individual family member is below the minimum annual deductible ($3,750) for family coverage.
-
Liabilities incurred under workers' compensation laws, torts, or ownership or use of property.
-
A specific disease or illness.
-
A fixed amount per day (or other period) of hospitalization.
-
Accidents.
-
Disability.
-
Dental care.
-
Vision care.
-
Long-term care.
Contributions to an Archer MSA must be made in cash. You cannot contribute stock or other property to an Archer MSA.
There are two limits on the amount you or your employer can contribute to your Archer MSA:
-
The annual deductible limit.
-
An income limit.
Example 1.
You have an HDHP for your family all year in 2007. The annual deductible is $4,000. You can contribute up to $3,000 ($4,000 × 75%) to your Archer MSA for the year.
Example 2.
You have an HDHP for your family for the entire months of July through December, 2007 (6 months). The annual deductible is $4,000. You can contribute up to $1,500 ($4,000 × 75% ÷ 12 × 6) to your Archer MSA for the year.
If you and your spouse each have a family plan, 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.
Example 1.
Bob Smith earned $25,000 from ABC Company in 2007. Through ABC, he had an HDHP for his family for the entire year. The annual deductible was $4,000. He can contribute up to $3,000 to his Archer MSA (75% × $4,000). He can contribute the full amount because he earned more than $3,000 at ABC.
Example 2.
Joe Craft is self-employed. He had an HDHP for his family for the entire year in 2007. The annual deductible was $4,000. Based on the annual deductible, the maximum contribution to his Archer MSA would have been $3,000 (75% × $4,000). However, after deducting his business expenses, Joe's net self-employment income is $1,950 for the year. Therefore, he is limited to a contribution of $1,950.
Report all contributions to your Archer MSA on Form 8853 and file it with your Form 1040 or Form 1040NR. You should include all contributions you, or your employer, made for 2007, including those made by April 15, 2008, that are designated for 2007.
You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount you (or your employer) contributed during the year. Your employer's contributions should be shown in box 12 of Form W-2, Wage and Tax Statement, with code R. Follow the instructions for Form 8853 and complete the worksheet for line 5. Report your Archer MSA deduction on Form 1040, line 36, or Form 1040NR, line 34.
-
You withdraw the excess contributions by the due date, including extensions, of your tax return.
-
You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.
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 Archer MSA to send you a distribution from your Archer MSA.
You can receive tax-free distributions from your Archer MSA to pay for qualified medical expenses (discussed later). If you receive distributions for other reasons, the amount will be subject to income tax and may be subject to an excise tax as well. You do not have to make withdrawals from your Archer MSA each year.
If you no longer qualify to make contributions, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses.
A distribution is money you get from your Archer MSA. The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA.
-
You and your spouse.
-
All dependents you claim on your tax return.
-
Any person you could have claimed as a dependent on your return except that:
-
The person filed a joint return,
-
The person had gross income of $3,400 or more, or
-
You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2007 return
-
-
You engaged in any transaction prohibited by section 4975 with respect to any of your Archer MSAs at any time in 2007. Your account ceases to be an Archer MSA as of January 1, 2007, and you must include the fair market value of all assets in the account as of January 1, 2007, on line 8a of Form 8853.
-
You used any portion of any of your Archer MSAs as security for a loan at any time in 2007. You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR, line 21.
Recordkeeping. You must keep records sufficient to show that:
-
The distributions were exclusively to pay or reimburse qualified medical expenses,
-
The qualified medical expenses had not been previously paid or reimbursed from another source, and
-
The medical expenses had not been taken as an itemized deduction in any year.
Do not send these records with your tax return. Keep them with your tax records.
How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined earlier).
-
If you use a distribution from your Archer MSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8853. Follow the instructions for the form and file it with your Form 1040 or Form 1040NR.
-
If you do not use a distribution from your Archer MSA for qualified medical expenses, you must pay tax on the distribution. Report the amount on Form 8853 and file it with your Form 1040 or Form 1040NR. If you have a taxable Archer MSA distribution, include it in the total on Form 1040 or Form 1040NR, line 21, and enter “MSA” and the amount on the dotted line next to line 21. You may have to pay an additional tax on your taxable distribution.
If an amount (other than a rollover) is contributed to your Archer MSA this year (by you or your employer), you also must report and pay tax on a distribution you receive from your Archer MSA this year that is used to pay medical expenses of someone who is not covered by an HDHP, or is also covered by another health plan that is not an HDHP, at the time the expenses are incurred.
An Archer MSA is generally exempt from tax. You are permitted to take a distribution from your Archer MSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions, earlier). Earnings on amounts in an Archer MSA are not included in your income while held in the Archer MSA.
You should choose a beneficiary when you set up your Archer MSA. What happens to that Archer MSA when you die depends on whom you designate as the beneficiary.
-
The account stops being an Archer MSA, and
-
The fair market value of the Archer MSA becomes taxable to the beneficiary in the year in which you die.
The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death.
You must file Form 8853 with your Form 1040 or Form 1040NR if you (or your spouse, if married filing a joint return) had any activity in your Archer MSA during the year. You must file the form even if only your employer or your spouse's employer made contributions to the Archer MSA.
This section contains the rules that employers must follow if they decide to make Archer MSAs available to their employees. Unlike the previous discussions, “you” refers to the employer and not to the employee.
-
The same amount, or
-
The same percentage of the annual deductible limit under the HDHP covering the employees.
-
Are covered by your HDHP and are eligible to establish an Archer MSA,
-
Have the same category of coverage (either self-only or family coverage), and
-
Have the same category of employment (either part-time or full-time).
A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare and have a high deductible health plan (HDHP) that meets the Medicare guidelines.
A Medicare Advantage MSA is a tax-exempt trust or custodial savings account that you set up with a financial institution (such as a bank or an insurance company) in which the Medicare program can deposit money for qualified medical expenses. The money in your account is not taxed if it is used for qualified medical expenses, and it may earn interest or dividends.
An HDHP is a special health insurance policy that has a high deductible. You choose the policy you want to use as part of your Medicare Advantage MSA plan. However, the policy must be approved by the Medicare program.
Medicare Advantage MSAs are administered through the federal Medicare program. You can get information by calling 1-800-Medicare (1-800-633-4227) or through the Internet at www.medicare.gov.
Note.
You must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your tax return if you have a Medicare Advantage MSA.
A health flexible spending arrangement (FSA) allows employees to be reimbursed for medical expenses. FSAs are usually funded through voluntary salary reduction agreements with your employer. No employment or federal income taxes are deducted from your contribution. The employer may also contribute.
For information on the interaction between a health FSA and an HSA, see Other employee health plans under Qualifying for an HSA, earlier.
-
Contributions made by your employer can be excluded from your gross income.
-
No employment or federal income taxes are deducted from the contributions.
-
Withdrawals may be tax free if you pay qualified medical expenses. See Qualified medical expenses, later.
-
You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account.
Health FSAs are employer-established benefit plans. These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. Employers have complete flexibility to offer various combinations of benefits in designing their plan. You do not have to be covered under any other health care plan to participate.
Self-employed persons are not eligible for an FSA.
Certain limitations may apply if you are a highly compensated participant or a key employee.
You contribute to your FSA by electing an amount to be voluntarily withheld from your pay by your employer. This is sometimes called a salary reduction agreement. The employer may also contribute to your FSA if specified in the plan.
You do not pay federal income tax or employment taxes on the salary you contribute or the amounts your employer contributes to the FSA. However, contributions made by your employer to provide coverage for long-term care insurance must be included in income.
At the beginning of the plan year, you must designate how much you want to contribute. Then, your employer will deduct amounts periodically (generally, every payday) in accordance with your annual election. You can change or revoke your election only if there is a change in your employment or family status that is specified by the plan.
There is no limit on the amount of money you or your employer can contribute to the accounts; however, the plan must prescribe either a maximum dollar amount or maximum percentage of compensation that can be contributed to your health FSA.
Generally, contributed amounts that are not spent by the end the plan year are forfeited. See Balance in an FSA, later. For this reason, it is important to base your contribution on an estimate of the qualifying expenses you will have during the year.
Generally, distributions from a health FSA must be paid only to reimburse you for qualified medical expenses you incurred during the period of coverage. You must be able to receive the maximum amount of reimbursement (the amount you have elected to contribute for the year) at any time during the coverage period, regardless of the amount you have actually contributed. The maximum amount you can receive tax free is the total amount you elected to contribute to the health FSA for the year.
You must provide the health FSA with a written statement from an independent third party stating that the medical expense has been incurred and the amount of the expense. You must also provide a written statement that the expense has not been paid or reimbursed under any other health plan coverage. The FSA cannot make advance reimbursements of future or projected expenses.
Debit cards, credit cards, and stored value cards given to you by your employer can be used to reimburse participants in a
health FSA. If the use
of these cards meets certain substantiation methods, you may not have to provide additional information to the health FSA.
For information on these
methods, see Revenue Ruling 2003-43 on page 935 of Internal Revenue Bulletin (IRB) 2003-21 at
www.irs.gov/pub/irs-irbs/irb03-21.pdf, Notice 2006-69 on page 107 of IRB
2006-31 at
www.irs.gov/pub/irs-irbs/irb06-31.pdf, and Notice 2007-2 on page 254 of IRB
2007-2 at
www.irs.gov/pub/irs-irbs/irb07-02.pdf.
-
Amounts paid for health insurance premiums.
-
Amounts paid for long-term care coverage or expenses.
-
Amounts that are covered under another health plan.
www.irs.gov/pub/irs-irbs/irb02-28.pdf. You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the distribution you receive from the FSA.
-
September 21, 2006, or
-
The date of the distribution.
-
The plan must have been amended to allow these distributions.
-
You must elect to make the rollover.
-
The year-end balance in the health FSA must be frozen.
-
The funds must be transferred within 2½ months after the end of the health FSA's plan year and result in a zero balance in the health FSA.
-
The distribution must be contributed directly to the HSA trustee by the employer.
Flexible spending accounts are “use-it-or-lose-it” plans. This means that amounts in the account at the end of the plan year cannot be carried over to the next year. However, the plan can provide for a grace period of up to 2½ months after the end of the plan year. If there is a grace period, any qualified medical expenses incurred in that period can be paid from any amounts left in the account at the end of the previous year. Your employer is not permitted to refund any part of the balance to you. See Qualified HSA distribution, earlier.
For the health FSA to maintain tax-qualified status, employers must comply with certain requirements that apply to cafeteria plans. For example, there are restrictions for plans that cover highly compensated employees and key employees. The plans must also comply with rules applicable to other accident and health plans. Chapters 1 and 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits, explain these requirements.
A health reimbursement arrangement (HRA) must be funded solely by an employer. The contribution cannot be paid through a voluntary salary reduction agreement on the part of an employee. Employees are reimbursed tax free for qualified medical expenses up to a maximum dollar amount for a coverage period. An HRA may be offered with other health plans, including FSAs.
For information on the interaction between an HRA and an HSA, see Other employee health plans under Qualifying for an HSA, earlier.
-
Contributions made by your employer can be excluded from your gross income.
-
Reimbursements may be tax free if you pay qualified medical expenses. See Qualified medical expenses, later.
-
Any unused amounts in the HRA can be carried forward for reimbursements in later years.
HRAs are employer-established benefit plans. These may be offered in conjunction with other employer-provided health benefits. Employers have complete flexibility to offer various combinations of benefits in designing their plan. You do not have to be covered under any other health care plan to participate.
Self-employed persons are not eligible for an HRA.
Certain limitations may apply if you are a highly compensated participant.
HRAs are funded solely through employer contributions and may not be funded through employee salary deferrals under a cafeteria plan. These contributions are not included in the employee's income. You do not pay federal income taxes or employment taxes on amounts your employer contributes to the HRA.
Generally, distributions from an HRA must be paid to reimburse you for qualified medical expenses you have incurred. The expense must have been incurred on or after the date you are enrolled in the HRA.
Debit cards, credit cards, and stored value cards given to you by your employer can be used to reimburse participants in an
HRA. If the use of
these cards meets certain substantiation methods, you may not have to provide additional information to the HRA. For information
on these methods, see
Revenue Ruling 2003-43 on page 935 of Internal Revenue Bulletin (IRB) 2003-21 at
www.irs.gov/pub/irs-irbs/irb03-21.pdf, Notice 2006-69 on page 107 of IRB
2006-31 at
www.irs.gov/pub/irs-irbs/irb06-31.pdf, and Notice 2007-2 on page 254 of IRB
2007-2 at
www.irs.gov/pub/irs-irbs/irb07-02.pdf.
If any distribution is, or can be, made for other than the reimbursement of qualified medical expenses, any distribution (including reimbursement of qualified medical expenses) made in the current tax year is included in gross income. For example, if an unused reimbursement is payable to you in cash at the end of the year, or upon termination of your employment, any distribution from the HRA is included in your income. This also applies if any unused amount upon your death is payable in cash to your beneficiary or estate, or if the HRA provides an option for you to transfer any unused reimbursement at the end of the year to a retirement plan. However, see Qualified HSA distribution, later.
If the plan permits amounts to be paid as medical benefits to a designated beneficiary (other than the employee's spouse or dependents), any distribution from the HRA is included in income. However, if, before August 15, 2006, the plan contains such a provision, this rule will not apply until plan years beginning after December 31, 2008.
Reimbursements under an HRA can be made to the following persons.
-
Current and former employees.
-
Spouses and dependents of those employees.
-
Any person you could have claimed as a dependent on your return except that:
-
The person filed a joint return,
-
The person had gross income of $3,400 or more, or
-
You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2007 return.
-
-
Spouses and dependents of deceased employees.
-
Amounts paid for health insurance premiums.
-
Amounts paid for long-term care coverage.
-
Amounts that are not covered under another health plan.
www.irs.gov/pub/irs-irbs/irb02-28.pdf. You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the distribution from the HRA.
-
September 21, 2006, or
-
The date of the distribution.
-
The plan must have been amended to allow these distributions.
-
You must elect to make the rollover.
-
The year-end balance in the HRA must be frozen.
-
The funds must be transferred within 2½ months after the end of the HRA's plan year and result in a zero balance in the HRA.
-
The distribution must be contributed directly to the HSA trustee by the employer.
Amounts that remain at the end of the year can generally be carried over to the next year. Your employer is not permitted to refund any part of the balance to you. These amounts may never be used for anything but reimbursements for qualified medical expenses. See Qualified HSA distribution, earlier.
For an HRA to maintain tax-qualified status, employers must comply with certain requirements that apply to other accident and health plans. Chapters 1 and 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits, explain these requirements.
You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.
www.improveirs.org.
Internet. You can access the IRS website at www.irs.gov 24 hours a day, 7 days a week to:
-
E-file your return. Find out about commercial tax preparation and e-file services available free to eligible taxpayers.
-
Check the status of your 2007 refund. Click on Where's My Refund. Wait at least 6 weeks from the date you filed your return (3 weeks if you filed electronically). Have your 2007 tax return available because you will need to know your social security number, your filing status, and the exact whole dollar amount of your refund.
-
Download forms, instructions, and publications.
-
Order IRS products online.
-
Research your tax questions online.
-
Search publications online by topic or keyword.
-
View Internal Revenue Bulletins (IRBs) published in the last few years.
-
Figure your withholding allowances using the withholding calculator online at www.irs.gov/individuals.
-
Determine if Form 6251 must be filed using our Alternative Minimum Tax (AMT) Assistant.
-
Sign up to receive local and national tax news by email.
-
Get information on starting and operating a small business.
Phone. Many services are available by phone.
-
Ordering forms, instructions, and publications. Call 1-800-829-3676 to order current-year forms, instructions, and publications, and prior-year forms and instructions. You should receive your order within 10 days.
-
Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
-
Solving problems. You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your local Taxpayer Assistance Center for an appointment. To find the number, go to www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.
-
TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications.
-
TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.
-
Refund information. To check the status of your 2007 refund, call 1-800-829-4477 and press 1 for automated refund information or call 1-800-829-1954. Be sure to wait at least 6 weeks from the date you filed your return (3 weeks if you filed electronically). Have your 2007 tax return available because you will need to know your social security number, your filing status, and the exact whole dollar amount of your refund.
Evaluating the quality of our telephone services. To ensure IRS representatives give accurate, courteous, and professional answers, we
use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to listen
in on or record random
telephone calls. Another is to ask some callers to complete a short survey at the end of the call.
Walk-in. Many products and services are available on a walk-in basis.
-
Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.
-
Services. You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you're more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. No appointment is necessary, but if you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. A representative will call you back within 2 business days to schedule an in-person appointment at your convenience. To find the number, go to www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.
Mail. You can send your order for forms, instructions, and publications to the address below. You should receive a response within 10 days after your request is received.
National Distribution Center
P.O. Box 8903
Bloomington, IL 61702-8903
CD/DVD for tax products. You can order Publication 1796, IRS Tax Products CD/DVD, and obtain:
-
Current-year forms, instructions, and publications.
-
Prior-year forms, instructions, and publications.
-
Bonus: Historical Tax Products DVD - Ships with the final release.
-
Tax Map: an electronic research tool and finding aid.
-
Tax law frequently asked questions.
-
Tax Topics from the IRS telephone response system.
-
Fill-in, print, and save features for most tax forms.
-
Internal Revenue Bulletins.
-
Toll-free and email technical support.
-
The CD which is released twice during the year.
- The first release will ship the beginning of January 2008.
- The final release will ship the beginning of March 2008.
Purchase the CD/DVD from National Technical Information Service (NTIS) at www.irs.gov/cdorders for $35 (no handling fee) or call 1-877-CDFORMS (1-877-233-6767) toll free to buy the CD/DVD for $35 (plus a $5 handling fee). Price is subject to change.
CD for small businesses. Publication 3207, The Small Business Resource Guide CD for 2007, is a must for every small business owner or any taxpayer about to start a business. This year's CD includes:
-
Helpful information, such as how to prepare a business plan, find financing for your business, and much more.
-
All the business tax forms, instructions, and publications needed to successfully manage a business.
-
Tax law changes for 2007.
-
Tax Map: an electronic research tool and finding aid.
-
Web links to various government agencies, business associations, and IRS organizations.
-
“Rate the Product” survey—your opportunity to suggest changes for future editions.
-
A site map of the CD to help you navigate the pages of the CD with ease.
-
An interactive “Teens in Biz” module that gives practical tips for teens about starting their own business, creating a business plan, and filing taxes.
An updated version of this CD is available each year in early April. You can get a free copy by calling 1-800-829-3676 or by visiting www.irs.gov/smallbiz.
More Online Publications |