Please follow this link to the Department of Treasury's website for the full guidance:  http://www.ustreas.gov/press/releases/reports/111904revproc200471.pdf

                                                               
Manage Your Health Care Dollar - Gaining more control of your health care dollar is certainly an important advantage. When you place money in an HSA, you retain ownership and management of that account. That money can be spent on Qualified Medical Expenses— copays on a doctor's visit for example, or your prescription deductible. You decide when and how to spend these dollars.

                          
Reduce Your Health Care Costs - Saving money on your health care costs is another advantage. The beauty of the HSA is that it allows you to choose a higher-deductible plan without exposing yourself to higher risk. A higher-deductible plan reduces your premium, and you can apply the savings to help fund your HSA.

Here's an example of how it would work. Suppose that you have a family medical plan, in which you now pay $780 a month in premiums and have a $0 deductible. With your HSA, you raise your deductible to $1,500, which lowers your premiums to $380 a month for your family plan. You put $250 a month (one-twelfth of your $3,000 deductible) into your HSA, for a total monthly outlay of $630 (your $380 premium plus your $250 HSA contribution). 

In this example, the outright savings are $1,800 in year one. The more important figure is the $3,000 in your HSA—money that would have gone to the insurance company, but instead, you have retained control over it. You may use some or all of it to cover your deductible or other qualified medical expenses. Or, if you are fortunate enough to have few medical expenses, some or all of that money might be sitting in your account at the end of the year. 

Annual contribution limits for 2007 are at either the high deductible plan deductible or $2850 for individual or $5650 for family – which ever amount is less. Contributions may be made by anyone on behalf of the account beneficiary. Unused funds from an MSA plan may be rolled over into a HSA account with no penalty. Individuals 55 and over are allowed to contribute an additional $800 to the aggregate annual contribution for 2007.

The money in the HSA accumulates on a tax – deferred basis and can be used to pay for any qualified medical expense. Withdrawals for reasons other than qualified medical expenses prior to age 65 are taxable and subject to a 10% penalty.

Upon death, disability, or attaining age 65, funds can be withdrawn for non-medical reasons with no penalty, but such distributions will be included in gross income. You can use tax-free withdrawals to pay premiums for qualified long term care insurance, COBRA or State Continuation health insurance, while receiving unemployment compensation under any federal or state law, and if you are age 65 or older, any health insurance other than a Medicare supplemental policy.

Funding

HSA can be funded by Employer or Employee or Both. HSA may be funded through Section 125 Cafeteria Plan. 

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FAQ

What Are the “Qualified Medical Expenses” That Are Eligible for Tax-free Distributions?

The term “qualified medical expenses” are expenses paid by the account beneficiary, his or her spouse or dependents for medical care as defined in section 213(d) (including nonprescription drugs as described in Rev. Rul. 2003-102, 2003-38 I.R.B. 559), but only to the extent the expenses are not covered by insurance or otherwise. See IRS Pub. 502

Are Health Insurance Premiums Qualified Medical Expenses?

Generally, health insurance premiums are not qualified medical expenses except for the following:  qualified long-term care insurance, COBRA health care continuation coverage, and health care coverage while an individual is receiving unemployment compensation. In addition, for individuals over age 65, premiums for Medicare Part A or B, Medicare HMO, and the employee share of premiums for employer-sponsored health insurance, including premiums for employer-sponsored retiree health insurance can be paid from HSA.   Premiums for Medigap policies are not qualified medical expenses.  

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