Health Savings Accounts  and Other Tax-Favored Health Plans

taxmap/pubs/p969-000.htm#TXMP2f584229 What's New(p1)

The following new rules apply for 2007.

• Your contributions to your HSA are no longer limited to your annual health plan deductible.
• If you are an eligible individual on the first day of the last month of your tax year, you are treated as being an eligible individual for the entire tax year for purposes of figuring the amount you can contribute to your HSA.
• If you are not a highly compensated employee, your employer does not have to take into account a highly compensated employee in determining who is a comparable participating employee for making contributions to HSAs.
• You may be able to exclude from your gross income a one-time qualified HSA funding distribution from your individual retirement account.
• You may be able to request your employer make a one-time transfer of the balance in your health FSA or HRA to your HSA.
• Medicare Advantage MSAs have been approved by the Medicare Program.
• Form 8889, Part III. In Part III of Form 8889, Health Savings Accounts (HSAs), you figure the 10% additional tax that is due to your failure to remain an eligible individual during the testing periods discussed under Health Savings Accounts (HSAs). Form 8889 instructs you to report this tax on Form 1040, line 44, or on Form 1040NR, line 41, using checkbox "c." However, due to late tax law changes, the tax must instead be included on Form 1040, line 63, or on Form 1040NR, line 58, as an additional write-in tax. On the dotted line next to Form 1040, line 63, or Form 1040NR, line 58, enter "HDHP" and the amount of this tax.

taxmap/pubs/p969-000.htm#TXMP18e74088 Reminder(p2)

taxmap/pubs/p969-000.htm#TXMP28e5e9aa
Photographs of missing children.(p2)

The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

taxmap/pubs/p969-000.htm#TXMP3c9b2a4c
Introduction

Various programs are designed to give individuals tax advantages to offset health care costs. This publication explains the following programs.

• Health savings accounts (HSAs).
• Medical savings accounts (Archer MSAs and Medicare Advantage MSAs).
• Health flexible spending arrangements (FSAs).
• Health reimbursement arrangements (HRAs).

An HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual. Contributions, other than employer contributions, are deductible on the eligible individual's return whether or not the individual itemizes deductions. Employer contributions are not included in income. Distributions from an HSA that are used to pay qualified medical expenses are not taxed.

An Archer MSA may receive contributions from an eligible individual and his or her employer, but not both in the same year. Contributions by the individual are deductible whether or not the individual itemizes deductions. Employer contributions are not included in income. Distributions from an Archer MSA that are used to pay qualified medical expenses are not taxed.

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 enrolled in Medicare. Contributions can only be made by Medicare. The contributions are not included in your income. Distributions from a Medicare Advantage MSA that are used to pay qualified medical expenses are not taxed.

A health FSA may receive contributions from an eligible individual. Employers may also contribute. Contributions are not includible in income. Reimbursements from an FSA that are used to pay qualified medical expenses are not taxed.

An HRA must receive contributions from the employer only. Employees may not contribute. Contributions are not includible in income. Reimbursements from an HRA that are used to pay qualified medical expenses are not taxed.

taxmap/pubs/p969-000.htm#TXMP51236875 Comments and suggestions.(p2)

We welcome your comments about this publication and your suggestions for future editions.

You can write to us at the following address:

 
Internal Revenue Service 
Individual Forms and Publications Branch 
SE:W:CAR:MP:T:I 
1111 Constitution Ave. NW, IR-6526 
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

You can email us at *taxforms@irs.gov. (The asterisk must be included in the address.) Please put "Publications Comment" on the subject line. Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products.

taxmap/pubs/p969-000.htm#TXMP0c15e625 Ordering forms and publications.(p2)

Visit 
www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received.

 
National Distribution Center 
P.O. Box 8903 
Bloomington, IL 61702–8903

taxmap/pubs/p969-000.htm#TXMP75ba833d Tax questions.(p2)

If you have a tax question, check the information available on www.irs.gov or call 1-800-829-1040. We cannot answer tax questions sent to either of the above addresses.

taxmap/pubs/p969-000.htm#TXMP36761121 Health Savings Accounts (HSAs)(p2)

Health Savings Account

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.

taxmap/pubs/p969-000.htm#TXMP69311cc3 What are the benefits of an HSA?(p2)

You may enjoy several benefits from having an HSA.

• 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.

taxmap/pubs/p969-000.htm#TXMP143910fd Qualifying for an HSA(p3)

Qualifying for an HSA

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.

taxmap/pubs/p969-000.htm#TXMP1388a0a7 High deductible health plan (HDHP).(p3)

An HDHP has:

• 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.

An HDHP may provide preventive care benefits without a deductible or with a deductible below the minimum annual deductible. Preventive care includes, but is not limited to, the following.

1. Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals.
2. Routine prenatal and well-child care.
3. Child and adult immunizations.
4. Tobacco cessation programs.
5. Obesity weight-loss programs.
6. Screening services. This includes screening services for the following:
   1. Cancer.
   2. Heart and vascular diseases.
   3. Infectious diseases.
   4. Mental health conditions.
   5. Substance abuse.
   6. Metabolic, nutritional, and endocrine conditions.
   7. Musculoskeletal disorders.
   8. Obstetric and gynecological conditions.
   9. Pediatric conditions.
   10. 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.
   

The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2007.

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.

Self-only HDHP coverage is an HDHP covering only an eligible individual. Family HDHP coverage is an HDHP covering an eligible individual and at least one other individual (whether or not that individual is an eligible individual).

taxmap/pubs/p969-000.htm#TXMP4c3ec76f
Example.(p3)

An eligible individual and his dependent child are covered under an "employee plus one" HDHP offered by the individual's employer. This is family HDHP coverage.

taxmap/pubs/p969-000.htm#TXMP24bd2f61 Family plans that do not meet the high deductible rules.(p4)

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 family coverage, the plan does not qualify as an HDHP.

taxmap/pubs/p969-000.htm#TXMP63c2b515
Example.(p4)

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.

taxmap/pubs/p969-000.htm#TXMP0f428490 Other health coverage.(p4)

You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan.

You can have additional insurance that provides benefits only for the following items.

• 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.

You can also have coverage (whether provided through insurance or otherwise) for the following items.

• Accidents.
• Disability.
• Dental care.
• Vision care.
• Long-term care.

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.

taxmap/pubs/p969-000.htm#TXMP1a353707 Prescription drug plans.(p4)

You can have a prescription drug plan, either as part of your HDHP or a separate plan (or rider), and qualify as an eligible individual if the plan does not provide benefits until the minimum annual deductible of the HDHP has been met. If you can receive benefits before that deductible is met, you are not an eligible individual.

taxmap/pubs/p969-000.htm#TXMP2e15cf19 Other employee health plans.(p4)

An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally cannot make contributions to an HSA. Health FSAs and HRAs are discussed later.

However, an employee can make contributions to an HSA while covered under an HDHP and one or more of the following arrangements.

• 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.

taxmap/pubs/p969-000.htm#TXMP218280ad Health FSA – grace period.(p4)

Coverage during a grace period by a general purpose health FSA is allowed if the balance in the health FSA at the end of its prior year plan is zero, or a qualified HSA distribution (discussed later) of any balance remaining is made to an HSA. See Flexible Spending Arrangements (FSAs), later.

taxmap/pubs/p969-000.htm#TXMP6206d1a3 Contributions to an HSA(p4)

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.

taxmap/pubs/p969-000.htm#TXMP4171d127 Limit on Contributions(p4)

Limit on Contributions

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:

1. 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
2. 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.

taxmap/pubs/p969-000.htm#TXMP44166087 Last-month rule.(p5)

Under the last-month rule, if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered an eligible individual for the entire year. You are treated as having the same HDHP coverage for the entire year as you had on the first day of that last month.

taxmap/pubs/p969-000.htm#TXMP63ec5f36 Testing period.(p5)

If contributions were made to your HSA based on you being an eligible individual for the entire year under the last-month rule, you must remain an eligible individual during the testing period. For the last-month rule, the testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month. For example, December 1, 2007, through December 31, 2008.

If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the total contributions made to your HSA that would not have been made except for the last-month rule. You include this amount in your income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. The income and additional tax are shown on Form 8889, Part III.

taxmap/pubs/p969-000.htm#TXMP610152f7
Example 1.(p5)

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.

taxmap/pubs/p969-000.htm#TXMP01e47e97
Example 2.(p5)

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.

taxmap/pubs/p969-000.htm#TXMP417e2eab Additional contribution.(p5)

For 2007, if you are an eligible individual who is age 55 or older, your contribution limit is increased by $800. For example, if you have self-only coverage, you can contribute up to $3,650 (the contribution limit for self-only coverage ($2,850) plus the additional contribution of $800). However, see Enrolled in Medicare, later.

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.

taxmap/pubs/p969-000.htm#TXMP4a49a8dd Reduction of contribution limit.(p6)

You must reduce the amount that can be contributed (including any additional contribution) to your HSA by the amount of any contribution made to your Archer MSA (including employer contributions) for the year. A special rule applies to married people, discussed next, if each spouse has family coverage under an HDHP.

taxmap/pubs/p969-000.htm#TXMP2165286b Rules for married people.(p6)

If either spouse has family HDHP coverage, both spouses are treated as having family HDHP coverage. If each spouse has family coverage under a separate plan, both are treated as having family coverage under the plan with the lower annual deductible to determine if the plan is an HDHP. You must reduce the limit on contributions, before taking into account any additional contributions, by the amount contributed to both spouse's Archer MSAs. After that reduction, the contribution limit is split equally between the spouses unless you agree on a different division.

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.

taxmap/pubs/p969-000.htm#TXMP614868ac
Example.(p6)

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.

taxmap/pubs/p969-000.htm#TXMP30617132 Employer contributions.(p6)

You must reduce the amount you, or any other person, can contribute to your HSA by the amount of any contributions made by your employer that are excludable from your income. This includes amounts contributed to your account by your employer through a cafeteria plan.

taxmap/pubs/p969-000.htm#TXMP15f68592 Enrolled in Medicare.(p6)

Beginning with the first month you are enrolled in Medicare, your contribution limit is zero.

taxmap/pubs/p969-000.htm#TXMP323d59ce
Example.(p6)

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 ).

taxmap/pubs/p969-000.htm#TXMP01b5e7e3 Qualified HSA funding distribution.(p6)

A qualified HSA funding distribution may be made from your IRA, other than a SEP IRA or SIMPLE IRA, to your HSA. The maximum amount depends on the HDHP coverage (self-only or family) you have on the first day of the month in which the contribution is made. The distribution must be made directly by the trustee of the IRA to the trustee of the HSA. The distribution is not included in your income, is not deductible, and reduces the amount that can be contributed to your HSA. The qualified HSA funding distribution is shown on Form 8889, Part I, line 10.

You can make only one qualified HSA funding distribution during your lifetime. However, if you make a distribution during a month when you have self-only HDHP coverage, you can make another qualified HSA funding distribution in a later month in that tax year if you change to family HDHP coverage. The total qualified HSA funding distribution cannot be more than the contribution limit for family HDHP coverage.

taxmap/pubs/p969-000.htm#TXMP564444f6 Funding distribution – testing period.(p6)

You must remain an eligible individual during the testing period. For a qualified HSA funding distribution, the testing period begins with the month in which the qualified HSA funding distribution is contributed and ends on the last day of the 12th month following that month. For example, if a qualified HSA funding distribution is contributed to your HSA on August 15, 2007, your testing period runs from August 1, 2007, through August 31, 2008.

If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the qualified HSA funding distribution. You include this amount in income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. The income and the additional tax are shown on Form 8889, Part III.

taxmap/pubs/p969-000.htm#TXMP587f1332 Rollovers(p6)

Rollover

A rollover contribution is not included in your income, is not deductible, and does not reduce your contribution limit.

taxmap/pubs/p969-000.htm#TXMP41ab01c9 Archer MSAs and other HSAs.(p6)

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.

You must roll over the amount within 60 days after the date of receipt. You can make only one rollover contribution to an HSA during a 1-year period.

taxmap/pubs/p969-000.htm#TXMP4c75885b
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.

taxmap/pubs/p969-000.htm#TXMP59d1934e Qualified HSA distribution.(p6)

This is a distribution from a health FSA or an HRA that is transferred to your HSA. To be a qualified HSA distribution certain conditions must be met. See Qualified HSA distribution under Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangements (HRAs), later.

taxmap/pubs/p969-000.htm#TXMP6d35b152 Testing period.(p7)

You must remain an eligible individual during the testing period. For a qualified HSA distribution, the testing period begins with the month in which the qualified HSA distribution is contributed and ends on the last day of the 12th month following that month. For example, if a qualified HSA distribution is contributed to your HSA on December 31, 2007, your testing period runs from December 1, 2007, through December 31, 2008.

If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the qualified HSA distribution. You include this amount in income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. The income and the additional tax are shown on Form 8889, Part III.

taxmap/pubs/p969-000.htm#TXMP29ec4cd3 When To Contribute(p7)

You can make contributions to your HSA for 2007 until April 15, 2008.

taxmap/pubs/p969-000.htm#TXMP29b6a4d5 Reporting Contributions on Your Return(p7)

Contributions on Your Return

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.

taxmap/pubs/p969-000.htm#TXMP7069e399 Form 8889.(p7)

Report all contributions to your HSA on Form 8889 and file it with your Form 1040 or Form 1040NR. You should include all contributions made for 2007, including those made by April 15, 2008, that are designated for 2007. Contributions made by your employer and qualified HSA funding distributions are also shown on the form.

You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount contributed to your HSA during the year. Your employer's contributions also will be shown in box 12 of Form W-2, Wage and Tax Statement, with code W. Follow the instructions for Form 8889. Report your HSA deduction on Form 1040 or Form 1040NR, line 25.

taxmap/pubs/p969-000.htm#TXMP53e1c801 Excess contributions.(p7)

You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier. Excess contributions are not deductible. Excess contributions made by your employer are included in your gross income. If the excess contribution is not included in box 1 of Form W-2, you must report the excess as "Other income" on your tax return.

Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. The excise tax applies to each tax year the excess contribution remains in the account.

You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions.

• 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.

taxmap/pubs/p969-000.htm#TXMP051919c4 Distributions From an HSA(p7)

Distributions From an HSA

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.

taxmap/pubs/p969-000.htm#TXMP45d37e44 Qualified medical expenses.(p7)

Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. These are explained in Publication 502, Medical and Dental Expenses. However, even though non-prescription medicines (other than insulin) do not qualify for the medical and dental expenses deduction, they do qualify as expenses for HSA purposes. Qualified medical expenses are those incurred by the following persons.

1. You and your spouse.
2. All dependents you claim on your tax return.
3. Any person you could have claimed as a dependent on your return except that:
   1. The person filed a joint return,
   2. The person had gross income of $3,400 or more, or
   3. 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.

taxmap/pubs/p969-000.htm#TXMP6fe9e831 Special rules for insurance premiums.(p8)

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.

The premiums for long-term care coverage that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually. See Limit on long-term care premiums you can deduct in the instructions for Schedule A (Form 1040).

taxmap/pubs/p969-000.htm#TXMP547618ad Health coverage tax credit.(p8)

You cannot claim this credit for premiums that you pay with a tax-free distribution from your HSA. See Publication 502 for more information on this credit.

taxmap/pubs/p969-000.htm#TXMP4196f489 Deemed distributions from HSAs.(p8)

The following situations result in deemed taxable distributions 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.

taxmap/pubs/p969-000.htm#TXMP14504137 Reporting Distributions on Your Return(p8)

Reporting Distributions on Your Return

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.

taxmap/pubs/p969-000.htm#TXMP1a23ac4d Additional tax.(p8)

There is an additional 10% tax on the part of your distributions not used for qualified medical expenses. Figure the tax on Form 8889 and file it with your Form 1040 or Form 1040NR. Report the additional tax on Form 1040, line 63, or Form 1040NR, line 58, and enter "HSA" and the amount on the dotted line next to that line.

taxmap/pubs/p969-000.htm#TXMP29dd1e2e Exceptions.(p8)

There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.

taxmap/pubs/p969-000.htm#TXMP159f99b5 Balance in an HSA(p8)

Balance in an HSA

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.

taxmap/pubs/p969-000.htm#TXMP78311eef Death of HSA Holder(p9)

Death of HSA Holder

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.

taxmap/pubs/p969-000.htm#TXMP1ff94495 Spouse is the designated beneficiary.(p9)

If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse's HSA after your death.

taxmap/pubs/p969-000.htm#TXMP0b22c4ff Spouse is not the designated beneficiary.(p9)

If your spouse is not the designated beneficiary of your HSA:

• 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.

If your estate is the beneficiary, the value is included on your final income tax return.

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.

taxmap/pubs/p969-000.htm#TXMP2d732d4a Filing Form 8889(p9)

Filing Form 8889

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.

taxmap/pubs/p969-000.htm#TXMP4cbf0fb8 Employer Participation(p9)

Employer Participation

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.

taxmap/pubs/p969-000.htm#TXMP1d6c358a Health plan.(p9)

If you want your employees to be able to have an HSA, they must have an HDHP. You can provide no additional coverage other than those exceptions listed previously under Other health coverage.

taxmap/pubs/p969-000.htm#TXMP04d39d1f Contributions.(p9)

You can make contributions to your employees' HSAs. You deduct the contributions on the "Employee benefit programs" line of your business income tax return for the year in which you make the contributions. If you are filing Form 1040, Schedule C, this is Part II, line 14.

taxmap/pubs/p969-000.htm#TXMP7e125d47 Comparable contributions.(p9)

If you decide to make contributions, you must make comparable contributions to all comparable participating employees' HSAs. Your contributions are comparable if they are either:

• The same amount, or
• The same percentage of the annual deductible limit under the HDHP covering the employees.

taxmap/pubs/p969-000.htm#TXMP1190feb3 Comparable participating employees.(p9)

Comparable participating 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).

The comparability rules do not apply to contributions made through a cafeteria plan.

taxmap/pubs/p969-000.htm#TXMP0e25fa36
Note.For purposes of making contributions to HSAs of non-highly compensated employees, highly compensated employees shall not be treated as comparable participating employees.

taxmap/pubs/p969-000.htm#TXMP0f16c6a2 Excise tax.(p9)

If you made contributions to your employees' HSAs that were not comparable, you must pay an excise tax of 35% of the amount you contributed.

taxmap/pubs/p969-000.htm#TXMP20a3a97c Employment taxes.(p9)

Amounts you contribute to your employees' HSAs are generally not subject to employment taxes. You must report the contributions in box 12 of the Form W-2 you file for each employee. This includes the amounts the employee elected to contribute through a cafeteria plan. Enter code "W" in box 12.

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