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Health Savings Accounts
On December 8, 2003, President George W. Bush signed the Medicare Act, which included a tax planning opportunity you should consider implementing as part of your tax planning. This Act included a new vehicle for funding medical expenses – the Health Savings Account (HSA). These accounts are meant to allow taxpayers to have more control over their health care spending and encourage saving for medical expenses on a tax-free, tax-deductible basis to almost everyone. |
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What are HSAs?
- An HSA is a tax-exempt savings account similar to an IRA. Basically, tax-deductible money is contributed, grows tax-free and can be withdrawn tax-free to pay for qualified medical expenses.
- Beginning January 1, 2004, HSAs can be established by eligible individuals to pay for the qualified medical expenses of the individual, spouse, or their dependents.
- Unlike the "use-it-or-lose-it" employer reimbursement-type plans or so-called cafeteria plans, the money put into an HSA belongs to the account holder and will carry over year-to-year until it is withdrawn.
Who is Eligible?
- HSAs are available to everyone regardless of income. There are no phase out rules for more prosperous individuals and their families. Any person or family, no matter how much they earn, can potentially qualify for an HSA.
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An eligible individual is a person who is covered by a high-deductible health plan (HDHP).
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An eligible individual cannot be claimed as a dependent on someone else’s tax return
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An eligible individual generally cannot be covered by any other health plan or be entitled to Medicare benefits.
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An eligible individual can carry certain "permitted insurance" such as insurance for a specified disease or illness or insurance that pays a fixed amount per day of hospitalization.
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Individuals are also able to have additional coverage for accidents, disability, dental care, vision care and long-term care and still be eligible. |
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What is a High Deductible Health Plan?
- An HDHP is generally a health plan with an annual deductible of $1,000 and not greater than $5,000 out-of-pocket expenses for single coverage and an annual deductible of $2,000 with not greater than $10,000 out-of-pocket expenses for family coverage.
- Note: Do not assume that your health plan qualifies as an HDHP just because it has a "high deductible."
How Much Can Be Contributed?
- Eligible individuals can generally contribute up to 100% of their deductible annually. But the contribution is limited to $2,600 for single coverage (for 2004) and $5,150 for family coverage (for 2004).
- Catch-up contributions can be made to an HSA if you are between ages 55 to 65. The amount of the additional or "catch-up" contribution in 2004 is $500.
- The amounts noted above will be periodically indexed for inflation.
- Employers can also contribute money into their employee’s HSA but the total amount contributed by both employee and employer is limited to the above amounts. An employer can also offer HSAs as a part of their menu of choices in their cafeteria plan.
- Amounts contributed by an employer are deductible by the employer and are not included in the income of the employee. Contributions are also not subject to employment taxes.
Contributions are Deductible
- Contributions made to an HSA are deductible from gross income. In other words, they are an "above-the-line" deduction. They are deductible whether or not you itemize your deductions.
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Money can be contributed to an HSA for 2004 up until April 15, 2005 for calendar year taxpayers.
Are Distributions Taxed?
- Distributions used to pay qualified medical expenses are tax-free.
- After age 65, account holders can continue to take distributions for medical expenses tax-free even though they will no longer be eligible to contribute to their HSA.
- Certain over-the-counter drugs such as pain reliever, antacid, and allergy medicine are qualified medical expenses.
- Certain health insurance premiums such as qualified long-term care premiums, COBRA health care continuation coverage and, for those over age 65, Medicare Part A & B premiums are qualified medical expenses.
- Money withdrawn for expenses other than qualified medical expenses will be taxed and a 10% penalty will be imposed with certain exceptions.
How Do You Establish an HSA?
- HSAs can be, but do not have to be, established through an employer. An eligible individual can establish an HSA after December 31, 2003 with a qualified HSA trustee or custodian.
- Generally, any insurance company or bank can be a trustee. Any person already approved to be a trustee of an IRA or an Archer MSA is automatically approved to be an HSA trustee.
- Congress expects over 40 million HSA plans to be established by the year 2010.
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| HSAs appear to be a new tax planning vehicle that all of our clients should consider using as part of their tax planning. The key to the effectiveness of this new tax planning tool will be how the health insurance industry embraces it by developing new health insurance products.
Since HSAs are new, we do not know how many financial institutions and brokerage firms will choose to offer them, what fees will be charged, or what investment alternatives will be available. Note: You have until April 15, 2005 to make a deductible HSA contribution for 2004, assuming you are currently covered by a high deductible plan, so do not be concerned or hurry your decision. Since we expect HSAs to be very popular, information should be coming very soon.
Top 14 Tips for Avoiding Fraud
Employee theft has become incredibly common in Fort Collins and in most cases goes unreported to authorities and the public. Our firm has become aware of at least five significant employee theft/fraud cases in the past two years. Because of this fact, we thought this issue was timely and we wanted to enhance your awareness of this disease and give you some tips for avoiding it.
The most common method of fraud detection (almost half of all cases) is a tip or complaint from an employee, vendor, customer or anonymous informant. Internal and external audits identify another 36 percent of all discovered fraud cases. The following list is designed to enhance your awareness of this problem. |
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Internal Controls
- The most important prevention process is separating the duties of receiving funds, disbursing funds, writing checks, signing checks, and reconciling bank accounts. Having one employee responsible for all cash-related functions makes small businesses significantly vulnerable to fraud.
- Have the monthly bank statement delivered unopened to the owner, who should review it for unusual transactions such as declining deposits and unfamiliar payees.
- Owners should review returned checks for signatures or endorsements that look forged, missing checks, check numbers that are out of order, and checks where the payee listed does not match the name in the check register.
Employment Conditions
- Management should institute background checks on new employees, and notify job applicants that their backgrounds will be checked.
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- Employees should receive regular and recurring training about the detrimental aspects of fraud. Employees receiving such training are more likely to aid in controlling it.
- Employees’ attitudes should be reviewed since employees who feel well-treated and adequately compensated are less likely to commit occupational fraud. Additionally, employees who hold grudges against their employers - whether or not justified - are more likely to turn to occupational fraud and abuse.
Workplace Conditions
- Owners should insist that employees take a vacation for at least one week every year. Such procedure will help identify kiting and other issues.
- Adopt a tip hotline or complaint-reporting mechanism that will enable employees, vendors, customers or outside sources to report suspected fraud anonymously or without fear of reprisal.
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Automation
- Have an accounting software program expert, preferably a CPA, do the initial set-up of the program to make sure that helpful features are turned on and unhelpful features are turned off.
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- Access to personnel and vendor master file records should be password protected and restricted by job function.
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Computer systems should create an audit trail of all changes make to the vendor master file records, including an identification of those who made the changes.
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Changes to vendor master file records should require supporting documentation, supervisory approval, and independent review. |
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