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Free File State Tax

Free file state tax 10. Free file state tax   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. Free file state tax Cash method. Free file state tax Debt acquired from a decedent. Free file state tax Liquidation. Free file state tax Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. Free file state tax Introduction You have a bad debt if you cannot collect money owed to you. Free file state tax A bad debt is either a business bad debt or a nonbusiness bad debt. Free file state tax This chapter discusses only business bad debts. Free file state tax Generally, a business bad debt is one that comes from operating your trade or business. Free file state tax You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. Free file state tax All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. Free file state tax For more information on nonbusiness bad debts, see Publication 550. Free file state tax Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. Free file state tax S. Free file state tax Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. Free file state tax Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. Free file state tax A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. Free file state tax Bad debts of a corporation (other than an S corporation) are always business bad debts. Free file state tax Credit sales. Free file state tax   Business bad debts are mainly the result of credit sales to customers. Free file state tax Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. Free file state tax After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. Free file state tax   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. Free file state tax If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. Free file state tax    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. Free file state tax This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. Free file state tax Accrual method. Free file state tax   If you use the accrual method of accounting, you generally report income as you earn it. Free file state tax You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. Free file state tax   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. Free file state tax Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. Free file state tax Cash method. Free file state tax   If you use the cash method of accounting, you generally report income when you receive payment. Free file state tax You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. Free file state tax For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. Free file state tax Debts from a former business. Free file state tax   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. Free file state tax If any of these receivables subsequently become worthless, the loss is still a business bad debt. Free file state tax Debt acquired from a decedent. Free file state tax   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. Free file state tax The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. Free file state tax Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. Free file state tax Liquidation. Free file state tax   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. Free file state tax Types of Business Bad Debts Business bad debts may result from the following. Free file state tax Loans to clients and suppliers. Free file state tax   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. Free file state tax Debts owed by political parties. Free file state tax   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. Free file state tax You use the accrual method of accounting. Free file state tax The debt arose from the sale of goods or services in the ordinary course of your trade or business. Free file state tax More than 30% of your receivables accrued in the year of the sale were from sales to political parties. Free file state tax You made substantial and continuing efforts to collect on the debt. Free file state tax Loan or capital contribution. Free file state tax   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. Free file state tax Debts of an insolvent partner. Free file state tax   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. Free file state tax If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. Free file state tax Business loan guarantee. Free file state tax   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. Free file state tax You made the guarantee in the course of your trade or business. Free file state tax You have a legal duty to pay the debt. Free file state tax You made the guarantee before the debt became worthless. Free file state tax You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. Free file state tax You received reasonable consideration for making the guarantee. Free file state tax You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. Free file state tax Example. Free file state tax Jane Zayne owns the Zayne Dress Company. Free file state tax She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. Free file state tax Elegant Fashions is one of Zayne's largest clients. Free file state tax Elegant Fashions later defaulted on the loan. Free file state tax As a result, Ms. Free file state tax Zayne paid the remaining balance of the loan in full to the bank. Free file state tax She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. Free file state tax She was motivated by the desire to retain one of her better clients and keep a sales outlet. Free file state tax Deductible in the year paid. Free file state tax   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. Free file state tax Rights against a borrower. Free file state tax   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. Free file state tax The debt is then owed to you. Free file state tax If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. Free file state tax Joint debtor. Free file state tax   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. Free file state tax Sale of mortgaged property. Free file state tax   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. Free file state tax When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. Free file state tax This may occur when the debt is due or prior to that date. Free file state tax To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. Free file state tax It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Free file state tax Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Free file state tax Property received for debt. Free file state tax   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. Free file state tax You can deduct the remaining debt as a bad debt if and when it becomes worthless. Free file state tax   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. Free file state tax It is not a recovery of a bad debt. Free file state tax For information on the sale of an asset, see Publication 544. Free file state tax How To Claim a Business Bad Debt There are two methods to claim a business bad debt. Free file state tax The specific charge-off method. Free file state tax The nonaccrual-experience method. Free file state tax Generally, you must use the specific charge-off method. Free file state tax However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . Free file state tax Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. Free file state tax However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. Free file state tax Partly worthless debts. Free file state tax   You can deduct specific bad debts that become partly uncollectible during the tax year. Free file state tax Your tax deduction is limited to the amount you charge off on your books during the year. Free file state tax You do not have to charge off and deduct your partly worthless debts annually. Free file state tax You can delay the charge off until a later year. Free file state tax However, you cannot deduct any part of a debt after the year it becomes totally worthless. Free file state tax Significantly modified debt. Free file state tax   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. Free file state tax For more information, see Regulations section 1. Free file state tax 166-3(a)(3). Free file state tax Deduction disallowed. Free file state tax   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. Free file state tax If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. Free file state tax The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. Free file state tax Totally worthless debts. Free file state tax   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. Free file state tax   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. Free file state tax However, you may want to do so. Free file state tax If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. Free file state tax See Partly worthless debts, earlier. Free file state tax Filing a claim for refund. Free file state tax   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. Free file state tax If the bad debt was totally worthless, you must file the claim by the later of the following dates. Free file state tax 7 years from the date your original return was due (not including extensions). Free file state tax 2 years from the date you paid the tax. Free file state tax   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. Free file state tax 3 years from the date you filed your original return. Free file state tax 2 years from the date you paid the tax. Free file state tax You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. Free file state tax Such an impairment requires proof of existence. Free file state tax   For details and more information about filing a claim, see Publication 556. Free file state tax Use one of the following forms to file a claim. Free file state tax For more information, see the instructions for the applicable form. Free file state tax Table 10-1. Free file state tax Forms Used To File a Claim IF you filed as a. Free file state tax . Free file state tax . Free file state tax THEN file. Free file state tax . Free file state tax . Free file state tax Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. Free file state tax Under this method, you do not accrue service related income you expect to be uncollectible. Free file state tax Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. Free file state tax Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. Free file state tax Service related income. Free file state tax   You can use the nonaccrual-experience method only for amounts earned by performing services. Free file state tax You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. Free file state tax Gross receipts test. Free file state tax   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. Free file state tax If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. Free file state tax   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. Free file state tax For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. Free file state tax Interest or penalty charged. Free file state tax   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. Free file state tax However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. Free file state tax You otherwise accrue the full amount due as gross income at the time you provide the services. Free file state tax You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. Free file state tax Change in accounting method. Free file state tax   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. Free file state tax See Form 3115 and the Instructions for Form 3115 for more information. Free file state tax Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. Free file state tax The amount you include is limited to the amount you actually deducted. Free file state tax However, you can exclude the amount deducted that did not reduce your tax. Free file state tax Report the recovery as “Other income” on the appropriate business form or schedule. Free file state tax See Recoveries in Publication 525 for more information. Free file state tax Net operating loss (NOL) carryover. Free file state tax   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. Free file state tax A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. Free file state tax For more information about NOLs, see Publication 536. Free file state tax Also, see the Instructions for Form 1045, and the Instructions for Form 1139. Free file state tax Prev  Up  Next   Home   More Online Publications
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Individual Retirement Arrangements (IRAs)

Getting Started
Learn about saving for retirement using Traditional and Roth IRAs.

Contribution Limits
How much can you contribute to your IRA?

Deduction Limits
How much of your IRA contributions can you deduct on your taxes?

Rollovers (See our Rollover Chart)
The why, what, how, when and where about moving your retirement savings.

Distributions
Taking withdrawals from your IRA - when and how much.

Beneficiaries
Information for spousal and non-spousal IRA beneficiaries

Saver's Credit
Individuals may be able to take a tax credit of up to $1,000 if they make eligible contributions to an IRA.

SEP and SIMPLE IRA Plans

Additional IRA Resources

Page Last Reviewed or Updated: 26-Mar-2014

The Free File State Tax

Free file state tax Publication 969 - Main Content Table of Contents Health Savings Accounts (HSAs)Qualifying for an HSA Contributions to an HSA Distributions From an HSA Balance in an HSA Death of HSA Holder Filing Form 8889 Employer Participation Medical Savings Accounts (MSAs)Archer MSAs Contributions to an MSA Distributions From an MSA Balance in an Archer MSA Death of the Archer MSA Holder Filing Form 8853 Employer Participation Medicare Advantage MSAs Flexible Spending Arrangements (FSAs)Qualifying for an FSA Contributions to an FSA Distributions From an FSA Balance in an FSA Employer Participation Health Reimbursement Arrangements (HRAs)Qualifying for an HRA Contributions to an HRA Distributions From an HRA Balance in an HRA Employer Participation How To Get Tax HelpLow Income Taxpayer Clinics Health Savings Accounts (HSAs) A health savings account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. Free file state tax You must be an eligible individual to qualify for an HSA. Free file state tax No permission or authorization from the IRS is necessary to establish an HSA. Free file state tax You set up an HSA with a trustee. Free file state tax 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. Free file state tax The HSA can be established through a trustee that is different from your health plan provider. Free file state tax Your employer may already have some information on HSA trustees in your area. Free file state tax If you have an Archer MSA, you can generally roll it over into an HSA tax free. Free file state tax See Rollovers, later. Free file state tax What are the benefits of an HSA?   You may enjoy several benefits from having an HSA. Free file state tax 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. Free file state tax Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income. Free file state tax The contributions remain in your account until you use them. Free file state tax The interest or other earnings on the assets in the account are tax free. Free file state tax Distributions may be tax free if you pay qualified medical expenses. Free file state tax See Qualified medical expenses , later. Free file state tax An HSA is “portable. Free file state tax ” It stays with you if you change employers or leave the work force. Free file state tax Qualifying for an HSA To be an eligible individual and qualify for an HSA, you must meet the following requirements. Free file state tax You must be covered under a high deductible health plan (HDHP), described later, on the first day of the month. Free file state tax You have no other health coverage except what is permitted under Other health coverage , later. Free file state tax You are not enrolled in Medicare. Free file state tax You cannot be claimed as a dependent on someone else's 2013 tax return. Free file state tax 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). Free file state tax 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. Free file state tax If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an HSA contribution. Free file state tax This is true even if the other person does not actually claim your exemption. Free file state tax Each spouse who is an eligible individual who wants an HSA must open a separate HSA. Free file state tax You cannot have a joint HSA. Free file state tax High deductible health plan (HDHP). Free file state tax   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. Free file state tax Out-of-pocket expenses include copayments and other amounts, but do not include premiums. Free file state tax   An HDHP may provide preventive care benefits without a deductible or with a deductible less than the minimum annual deductible. Free file state tax Preventive care includes, but is not limited to, the following. Free file state tax Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals. Free file state tax Routine prenatal and well-child care. Free file state tax Child and adult immunizations. Free file state tax Tobacco cessation programs. Free file state tax Obesity weight-loss programs. Free file state tax Screening services. Free file state tax This includes screening services for the following: Cancer. Free file state tax Heart and vascular diseases. Free file state tax Infectious diseases. Free file state tax Mental health conditions. Free file state tax Substance abuse. Free file state tax Metabolic, nutritional, and endocrine conditions. Free file state tax Musculoskeletal disorders. Free file state tax Obstetric and gynecological conditions. Free file state tax Pediatric conditions. Free file state tax Vision and hearing disorders. Free file state tax For more information on screening services, see Notice 2004-23, 2004-15 I. Free file state tax R. Free file state tax B. Free file state tax 725 available at www. Free file state tax irs. Free file state tax gov/irb/2004-15_IRB/ar10. Free file state tax html. Free file state tax     The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2013. Free file state tax      Self-only coverage Family coverage Minimum annual deductible $1,250 $2,500 Maximum annual deductible and other out-of-pocket expenses* $6,250 $12,500 * This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Free file state tax Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies. Free file state tax    The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2014. Free file state tax      Self-only coverage Family coverage Minimum annual deductible $1,250 $2,500 Maximum annual deductible and other out-of-pocket expenses* $6,350 $12,700 * This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Free file state tax Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies. Free file state tax   Self-only HDHP coverage is an HDHP covering only an eligible individual. Free file state tax 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). Free file state tax Example. Free file state tax An eligible individual and his dependent child are covered under an “employee plus one” HDHP offered by the individual's employer. Free file state tax This is family HDHP coverage. Free file state tax Family plans that do not meet the high deductible rules. Free file state tax   There are some family plans that have deductibles for both the family as a whole and for individual family members. Free file state tax 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. Free file state tax If either the deductible for the family as a whole or the deductible for an individual family member is less than the minimum annual deductible for family coverage, the plan does not qualify as an HDHP. Free file state tax Example. Free file state tax You have family health insurance coverage in 2013. Free file state tax The annual deductible for the family plan is $3,500. Free file state tax This plan also has an individual deductible of $1,500 for each family member. Free file state tax The plan does not qualify as an HDHP because the deductible for an individual family member is less than the minimum annual deductible ($2,500) for family coverage. Free file state tax Other health coverage. Free file state tax   You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. Free file state tax However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan. Free file state tax    You can have additional insurance that provides benefits only for the following items. Free file state tax Liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property. Free file state tax A specific disease or illness. Free file state tax A fixed amount per day (or other period) of hospitalization. Free file state tax   You can also have coverage (whether provided through insurance or otherwise) for the following items. Free file state tax Accidents. Free file state tax Disability. Free file state tax Dental care. Free file state tax Vision care. Free file state tax Long-term care. Free file state tax    Plans in which substantially all of the coverage is through the items listed earlier are not HDHPs. Free file state tax 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. Free file state tax Prescription drug plans. Free file state tax   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. Free file state tax If you can receive benefits before that deductible is met, you are not an eligible individual. Free file state tax Other employee health plans. Free file state tax   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. Free file state tax Health FSAs and HRAs are discussed later. Free file state tax   However, an employee can make contributions to an HSA while covered under an HDHP and one or more of the following arrangements. Free file state tax Limited-purpose health FSA or HRA. Free file state tax These arrangements can pay or reimburse the items listed earlier under Other health coverage except long-term care. Free file state tax Also, these arrangements can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible. Free file state tax Suspended HRA. Free file state tax Before the beginning of an HRA coverage period, you can elect to suspend the HRA. Free file state tax 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. Free file state tax When the suspension period ends, you are no longer eligible to make contributions to an HSA. Free file state tax Post-deductible health FSA or HRA. Free file state tax These arrangements do not pay or reimburse any medical expenses incurred before the minimum annual deductible amount is met. Free file state tax 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. Free file state tax Retirement HRA. Free file state tax This arrangement pays or reimburses only those medical expenses incurred after retirement. Free file state tax After retirement you are no longer eligible to make contributions to an HSA. Free file state tax Health FSA – grace period. Free file state tax   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. Free file state tax See Flexible Spending Arrangements (FSAs) , later. Free file state tax Contributions to an HSA Any eligible individual can contribute to an HSA. Free file state tax For an employee's HSA, the employee, the employee's employer, or both may contribute to the employee's HSA in the same year. Free file state tax For an HSA established by a self-employed (or unemployed) individual, the individual can contribute. Free file state tax Family members or any other person may also make contributions on behalf of an eligible individual. Free file state tax Contributions to an HSA must be made in cash. Free file state tax Contributions of stock or property are not allowed. Free file state tax 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. Free file state tax For 2013, if you have self-only HDHP coverage, you can contribute up to $3,250. Free file state tax If you have family HDHP coverage, you can contribute up to $6,450. Free file state tax For 2014, if you have self-only HDHP coverage, you can contribute up to $3,300. Free file state tax If you have family HDHP coverage you can contribute up to $6,550. Free file state tax 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. Free file state tax 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 Line 3 Limitation Chart and Worksheetin 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. Free file state tax If you had family HDHP coverage on the first day of the last month of your tax year, your contribution limit for 2013 is $6,450 even if you changed coverage during the year. Free file state tax Last-month rule. Free file state tax   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. Free file state tax You are treated as having the same HDHP coverage for the entire year as you had on the first day of the last month. Free file state tax Testing period. Free file state tax   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. Free file state tax 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. Free file state tax For example, December 1, 2013, through December 31, 2014. Free file state tax   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. Free file state tax You include this amount in your income in the year in which you fail to be an eligible individual. Free file state tax This amount is also subject to a 10% additional tax. Free file state tax The income and additional tax are shown on Form 8889, Part III. Free file state tax Example 1. Free file state tax Chris, age 53, becomes an eligible individual on December 1, 2013. Free file state tax He has family HDHP coverage on that date. Free file state tax Under the last-month rule, he contributes $6,450 to his HSA. Free file state tax Chris fails to be an eligible individual in June 2014. Free file state tax Because Chris did not remain an eligible individual during the testing period (December 1, 2013, through December 31, 2014), he must include in his 2014 income the contributions made in 2013 that would not have been made except for the last-month rule. Free file state tax Chris uses the worksheet in the Form 8889 instructions to determine this amount. Free file state tax January -0- February -0- March -0- April -0- May -0- June -0- July -0- August -0- September -0- October -0- November -0- December $6,450. Free file state tax 00 Total for all months $6,450. Free file state tax 00 Limitation. Free file state tax Divide the total by 12 $537. Free file state tax 50 Chris would include $5,912. Free file state tax 50 ($6,450. Free file state tax 00 – $537. Free file state tax 50) in his gross income on his 2014 tax return. Free file state tax Also, a 10% additional tax applies to this amount. Free file state tax Example 2. Free file state tax Erika, age 39, has self-only HDHP coverage on January 1, 2013. Free file state tax Erika changes to family HDHP coverage on November 1, 2013. Free file state tax Because Erika has family HDHP coverage on December 1, 2013, she contributes $6,450 for 2013. Free file state tax Erika fails to be an eligible individual in March 2014. Free file state tax Because she did not remain an eligible individual during the testing period (December 1, 2013, through December 31, 2014), she must include in income the contribution made that would not have been made except for the last-month rule. Free file state tax Erika uses the worksheet in the Form 8889 instructions to determine this amount. Free file state tax January $3,250. Free file state tax 00 February $3,250. Free file state tax 00 March $3,250. Free file state tax 00 April $3,250. Free file state tax 00 May $3,250. Free file state tax 00 June $3,250. Free file state tax 00 July $3,250. Free file state tax 00 August $3,250. Free file state tax 00 September $3,250. Free file state tax 00 October $3,250. Free file state tax 00 November $6,450. Free file state tax 00 December $6,450. Free file state tax 00 Total for all months $45,400. Free file state tax 00 Limitation. Free file state tax Divide the total by 12 $3,783. Free file state tax 34 Erika would include $2,666. Free file state tax 67 ($6,450 – $3,783. Free file state tax 34) in her gross income on her 2014 tax return. Free file state tax Also, a 10% additional tax applies to this amount. Free file state tax Additional contribution. Free file state tax   If you are an eligible individual who is age 55 or older at the end of your tax year, your contribution limit is increased by $1,000. Free file state tax For example, if you have self-only coverage, you can contribute up to $4,250 (the contribution limit for self-only coverage ($3,250) plus the additional contribution of $1,000). Free file state tax However, see Enrolled in Medicare , later. Free file state tax If you have more than one HSA in 2013, your total contributions to all the HSAs cannot be more than the limits discussed earlier. Free file state tax Reduction of contribution limit. Free file state tax   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. Free file state tax A special rule applies to married people, discussed next, if each spouse has family coverage under an HDHP. Free file state tax Rules for married people. Free file state tax   If either spouse has family HDHP coverage, both spouses are treated as having family HDHP coverage. Free file state tax If each spouse has family coverage under a separate plan, the contribution limit for 2013 is $6,450. Free file state tax You must reduce the limit on contributions, before taking into account any additional contributions, by the amount contributed to both spouses' Archer MSAs. Free file state tax After that reduction, the contribution limit is split equally between the spouses unless you agree on a different division. Free file state tax The rules for married people apply only if both spouses are eligible individuals. Free file state tax If both spouses are 55 or older and not enrolled in Medicare, each spouse's contribution limit is increased by the additional contribution. Free file state tax If both spouses meet the age requirement, the total contributions under family coverage cannot be more than $8,450. Free file state tax Each spouse must make the additional contribution to his or her own HSA. Free file state tax Example. Free file state tax For 2013, Mr. Free file state tax Auburn and his wife are both eligible individuals. Free file state tax They each have family coverage under separate HDHPs. Free file state tax Mr. Free file state tax Auburn is 58 years old and Mrs. Free file state tax Auburn is 53. Free file state tax Mr. Free file state tax and Mrs. Free file state tax Auburn can split the family contribution limit ($6,450) equally or they can agree on a different division. Free file state tax If they split it equally, Mr. Free file state tax Auburn can contribute $4,225 to an HSA (one-half the maximum contribution for family coverage ($3,225) + $1,000 additional contribution) and Mrs. Free file state tax Auburn can contribute $3,225 to an HSA. Free file state tax Employer contributions. Free file state tax   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. Free file state tax This includes amounts contributed to your account by your employer through a cafeteria plan. Free file state tax Enrolled in Medicare. Free file state tax   Beginning with the first month you are enrolled in Medicare, your contribution limit is zero. Free file state tax Example. Free file state tax You turned age 65 in July 2013 and enrolled in Medicare. Free file state tax You had an HDHP with self-only coverage and are eligible for an additional contribution of $1,000. Free file state tax Your contribution limit is $2,125 ($4,250 × 6 ÷ 12). Free file state tax Qualified HSA funding distribution. Free file state tax   A qualified HSA funding distribution may be made from your traditional IRA or Roth IRA to your HSA. Free file state tax This distribution cannot be made from an ongoing SEP IRA or SIMPLE IRA. Free file state tax For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within your tax year in which the distribution would be made. Free file state tax   The maximum qualified HSA funding distribution depends on the HDHP coverage (self-only or family) you have on the first day of the month in which the contribution is made and your age as of the end of the tax year. Free file state tax The distribution must be made directly by the trustee of the IRA to the trustee of the HSA. Free file state tax The distribution is not included in your income, is not deductible, and reduces the amount that can be contributed to your HSA. Free file state tax The qualified HSA funding distribution is shown on Form 8889 for the year in which the distribution is made. Free file state tax   You can make only one qualified HSA funding distribution during your lifetime. Free file state tax 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. Free file state tax The total qualified HSA funding distribution cannot be more than the contribution limit for family HDHP coverage plus any additional contribution to which you are entitled. Free file state tax Example. Free file state tax In 2013, you are an eligible individual, age 57, with self-only HDHP coverage. Free file state tax You can make a qualified HSA funding distribution of $4,250 ($3,250 plus $1,000 additional contribution). Free file state tax Funding distribution – testing period. Free file state tax   You must remain an eligible individual during the testing period. Free file state tax 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. Free file state tax For example, if a qualified HSA funding distribution is contributed to your HSA on August 10, 2013, your testing period begins in August 2013, and ends on August 31, 2014. Free file state tax   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. Free file state tax You include this amount in income in the year in which you fail to be an eligible individual. Free file state tax This amount is also subject to a 10% additional tax. Free file state tax The income and the additional tax are shown on Form 8889, Part III. Free file state tax   Each qualified HSA funding distribution allowed has its own testing period. Free file state tax For example, you are an eligible individual, age 45, with self-only HDHP coverage. Free file state tax On June 18, 2013, you make a qualified HSA funding distribution of $3,250. Free file state tax On July 27, 2013, you enroll in family HDHP coverage and on August 17, 2013, you make a qualified HSA funding distribution of $3,200. Free file state tax Your testing period for the first distribution begins in June 2013 and ends on June 30, 2014. Free file state tax Your testing period for the second distribution begins in August 2013 and ends on August 31, 2014. Free file state tax   The testing period rule that applies under the last-month rule (discussed earlier) does not apply to amounts contributed to an HSA through a qualified HSA funding distribution. Free file state tax If you remain an eligible individual during the entire funding distribution testing period, then no amount of that distribution is included in income and will not be subject to the additional tax for failing to meet the last-month rule testing period. Free file state tax Rollovers A rollover contribution is not included in your income, is not deductible, and does not reduce your contribution limit. Free file state tax Archer MSAs and other HSAs. Free file state tax   You can roll over amounts from Archer MSAs and other HSAs into an HSA. Free file state tax You do not have to be an eligible individual to make a rollover contribution from your existing HSA to a new HSA. Free file state tax Rollover contributions do not need to be in cash. Free file state tax Rollovers are not subject to the annual contribution limits. Free file state tax   You must roll over the amount within 60 days after the date of receipt. Free file state tax You can make only one rollover contribution to an HSA during a 1-year period. Free file state tax Note. Free file state tax If you instruct the trustee of your HSA to transfer funds directly to the trustee of another of your HSAs, the transfer is not considered a rollover. Free file state tax There is no limit on the number of these transfers. Free file state tax Do not include the amount transferred in income, deduct it as a contribution, or include it as a distribution on Form 8889. Free file state tax When To Contribute You can make contributions to your HSA for 2013 until April 15, 2014. Free file state tax If you fail to be an eligible individual during 2013, you can still make contributions, up until April 15, 2014, for the months you were an eligible individual. Free file state tax Your employer can make contributions to your HSA between January 1, 2014, and April 15, 2014, that are allocated to 2013. Free file state tax Your employer must notify you and the trustee of your HSA that the contribution is for 2013. Free file state tax The contribution will be reported on your 2014 Form W-2. Free file state tax Reporting Contributions on Your Return Contributions made by your employer are not included in your income. Free file state tax 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. Free file state tax Generally, 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. Free file state tax Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. Free file state tax The contributions are treated as a distribution of money and are not included in the partner's gross income. Free file state tax 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. Free file state tax In both situations, the partner can deduct the contribution made to the partner's HSA. Free file state tax 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. Free file state tax The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. Free file state tax Form 8889. Free file state tax   Report all contributions to your HSA on Form 8889 and file it with your Form 1040 or Form 1040NR. Free file state tax You should include all contributions made for 2013, including those made by April 15, 2014, that are designated for 2013. Free file state tax Contributions made by your employer and qualified HSA funding distributions are also shown on the form. Free file state tax   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. Free file state tax Your employer's contributions also will be shown in box 12 of Form W-2, Wage and Tax Statement, with code W. Free file state tax Follow the instructions for Form 8889. Free file state tax Report your HSA deduction on Form 1040 or Form 1040NR. Free file state tax Excess contributions. Free file state tax   You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier. Free file state tax Excess contributions are not deductible. Free file state tax Excess contributions made by your employer are included in your gross income. Free file state tax 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. Free file state tax   Generally, you must pay a 6% excise tax on excess contributions. Free file state tax See Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. Free file state tax The excise tax applies to each tax year the excess contribution remains in the account. Free file state tax   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. Free file state tax You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made. Free file state tax 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. Free file state tax 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. Free file state tax If you withdraw any of those amounts, the amount is treated the same as any other distribution from an HSA, discussed later. Free file state tax Deducting an excess contribution in a later year. Free file state tax   You may be able to deduct excess contributions for previous years that are still in your HSA. Free file state tax The excess contribution you can deduct for the current year is the lesser of the following two amounts. Free file state tax Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year. Free file state tax The total excess contributions in your HSA at the beginning of the year. Free file state tax   Amounts contributed for the year include contributions by you, your employer, and any other person. Free file state tax They also include any qualified HSA funding distribution made to your HSA. Free file state tax Any excess contribution remaining at the end of a tax year is subject to the excise tax. Free file state tax See Form 5329. Free file state tax 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. Free file state tax 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. Free file state tax 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. Free file state tax If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax. Free file state tax You do not have to make distributions from your HSA each year. Free file state tax If you are no longer an eligible individual, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses. Free file state tax Generally, a distribution is money you get from your health savings account. Free file state tax Your total distributions include amounts paid with a debit card that restricts payments to health care and amounts withdrawn from the HSA by other individuals that you have designated. Free file state tax 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. Free file state tax Qualified medical expenses. Free file state tax   Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. Free file state tax These are explained in Publication 502, Medical and Dental Expenses. Free file state tax   Also, non-prescription medicines (other than insulin) are not considered qualified medical expenses for HSA purposes. Free file state tax A medicine or drug will be a qualified medical expense for HSA purposes only if the medicine or drug: Requires a prescription, Is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or Is insulin. Free file state tax   For HSA purposes, expenses incurred before you establish your HSA are not qualified medical expenses. Free file state tax State law determines when an HSA is established. Free file state tax An HSA that is funded by amounts rolled over from an Archer MSA or another HSA is established on the date the prior account was established. Free file state tax   If, under the last-month rule, you are considered to be an eligible individual for the entire year for determining the contribution amount, only those expenses incurred after you actually establish your HSA are qualified medical expenses. Free file state tax   Qualified medical expenses are those incurred by the following persons. Free file state tax You and your spouse. Free file state tax All dependents you claim on your tax return. Free file state tax 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 $3,900 or more, or You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return. Free file state tax    For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child's exemption. Free file state tax 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. Free file state tax Insurance premiums. Free file state tax   You cannot treat insurance premiums as qualified medical expenses unless the premiums are for: Long-term care insurance. Free file state tax Health care continuation coverage (such as coverage under COBRA). Free file state tax Health care coverage while receiving unemployment compensation under federal or state law. Free file state tax Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap). Free file state tax   The premiums for long-term care insurance (item (1)) that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually. Free file state tax See Limit on long-term care premiums you can deduct in the instructions for Schedule A (Form 1040). Free file state tax   Items (2) and (3) can be for your spouse or a dependent meeting the requirement for that type of coverage. Free file state tax For item (4), if you, the account beneficiary, are not 65 or older, Medicare premiums for coverage of your spouse or a dependent (who is 65 or older) generally are not qualified medical expenses. Free file state tax Health coverage tax credit. Free file state tax   You cannot claim this credit for premiums that you pay with a tax-free distribution from your HSA. Free file state tax See Publication 502 for more information on this credit. Free file state tax Deemed distributions from HSAs. Free file state tax   The following situations result in deemed taxable distributions from your HSA. Free file state tax You engaged in any transaction prohibited by section 4975 with respect to any of your HSAs, at any time in 2013. Free file state tax Your account ceases to be an HSA as of January 1, 2013, and you must include the fair market value of all assets in the account as of January 1, 2013, on Form 8889. Free file state tax You used any portion of any of your HSAs as security for a loan at any time in 2013. Free file state tax You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR. Free file state tax   Examples of prohibited transactions include the direct or indirect: Sale, exchange, or leasing of property between you and the HSA, Lending of money between you and the HSA, Furnishing goods, services, or facilities between you and the HSA, and Transfer to or use by you, or for your benefit, of any assets of the HSA. Free file state tax   Any deemed distribution will not be treated as used to pay qualified medical expenses. Free file state tax These distributions are included in your income and are subject to the additional 20% tax, discussed later. Free file state tax Recordkeeping. Free file state tax 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. Free file state tax Do not send these records with your tax return. Free file state tax Keep them with your tax records. Free file state tax 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). Free file state tax 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. Free file state tax 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. Free file state tax Follow the instructions for the form and file it with your Form 1040 or Form 1040NR. Free file state tax If you do not use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution. Free file state tax Report the amount on Form 8889 and file it with your Form 1040 or Form 1040NR. Free file state tax You may have to pay an additional 20% tax on your taxable distribution. Free file state tax HSA administration and maintenance fees withdrawn by the trustee are not reported as distributions from the HSA. Free file state tax Additional tax. Free file state tax   There is an additional 20% tax on the part of your distributions not used for qualified medical expenses. Free file state tax Figure the tax on Form 8889 and file it with your Form 1040 or Form 1040NR. Free file state tax Exceptions. Free file state tax   There is no additional tax on distributions made after the date you are disabled, reach age 65, or die. Free file state tax Balance in an HSA An HSA is generally exempt from tax. Free file state 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. Free file state tax Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions , earlier). Free file state tax Earnings on amounts in an HSA are not included in your income while held in the HSA. Free file state tax Death of HSA Holder You should choose a beneficiary when you set up your HSA. Free file state tax What happens to that HSA when you die depends on whom you designate as the beneficiary. Free file state tax Spouse is the designated beneficiary. Free file state tax   If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse's HSA after your death. Free file state tax Spouse is not the designated beneficiary. Free file state tax   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. Free file state tax If your estate is the beneficiary, the value is included on your final income tax return. Free file state tax 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. Free file state tax 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. Free file state tax You must file the form even if only your employer or your spouse's employer made contributions to the HSA. Free file state tax If, during the tax year, you are the beneficiary of two or more HSAs or you are a beneficiary of an HSA and you have your own HSA, you must complete a separate Form 8889 for each HSA. Free file state tax Enter “statement” at the top of each Form 8889 and complete the form as instructed. Free file state tax Next, complete a controlling Form 8889 combining the amounts shown on each of the statement Forms 8889. Free file state tax Attach the statements to your tax return after the controlling Form 8889. Free file state tax Employer Participation This section contains the rules that employers must follow if they decide to make HSAs available to their employees. Free file state tax Unlike the previous discussions, “you” refers to the employer and not to the employee. Free file state tax Health plan. Free file state tax   If you want your employees to be able to have an HSA, they must have an HDHP. Free file state tax You can provide no additional coverage other than those exceptions listed previously under Other health coverage . Free file state tax Contributions. Free file state tax   You can make contributions to your employees' HSAs. Free file state tax You deduct the contributions on your business income tax return for the year in which you make the contributions. Free file state tax If the contribution is allocated to the prior year, you still deduct it in the year in which you made the contribution. Free file state tax   For more information on employer contributions, see Notice 2008-59, 2008-29 I. Free file state tax R. Free file state tax B. Free file state tax 123, questions 23 through 27, available at www. Free file state tax irs. Free file state tax gov/irb/2008-29_IRB/ar11. Free file state tax html. Free file state tax Comparable contributions. Free file state tax   If you decide to make contributions, you must make comparable contributions to all comparable participating employees' HSAs. Free file state tax 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. Free file state tax The comparability rules do not apply to contributions made through a cafeteria plan. Free file state tax Comparable participating employees. Free file state tax   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). Free file state tax   To meet the comparability requirements for eligible employees who have not established an HSA by December 31 or have not notified you that they have an HSA, you must meet a notice requirement and a contribution requirement. Free file state tax   You will meet the notice requirement if by January 15 of the following calendar year you provide a written notice to all such employees. Free file state tax The notice must state that each eligible employee who, by the last day of February, establishes an HSA and notifies you that they have established an HSA will receive a comparable contribution to the HSA for the prior year. Free file state tax For a sample of the notice, see Regulation 54. Free file state tax 4980G-4 A-14(c). Free file state tax You will meet the contribution requirement for these employees if by April 15, 2014, you contribute comparable amounts plus reasonable interest to the employee's HSA for the prior year. Free file state tax Note. Free file state tax For purposes of making contributions to HSAs of non-highly compensated employees, highly compensated employees shall not be treated as comparable participating employees. Free file state tax Excise tax. Free file state tax   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. Free file state tax Employment taxes. Free file state tax   Amounts you contribute to your employees' HSAs are generally not subject to employment taxes. Free file state tax You must report the contributions in box 12 of the Form W-2 you file for each employee. Free file state tax This includes the amounts the employee elected to contribute through a cafeteria plan. Free file state tax Enter code “W” in box 12. Free file state tax Medical Savings Accounts (MSAs) 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). Free file state tax After December 31, 2007, you cannot be treated as an eligible individual for Archer MSA purposes unless: You were an active participant for any tax year ending before January 1, 2008, or You became an active participant for a tax year ending after December 31, 2007, by reason of coverage under a high deductible health plan (HDHP) of an Archer MSA participating employer. Free file state tax 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. Free file state tax Archer MSAs An Archer MSA is a tax-exempt trust or custodial account that you set up with a U. Free file state tax S. Free file state tax financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses. Free file state tax What are the benefits of an Archer MSA?   You may enjoy several benefits from having an Archer MSA. Free file state tax You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040 or Form 1040NR. Free file state tax The interest or other earnings on the assets in your Archer MSA are tax free. Free file state tax Distributions may be tax free if you pay qualified medical expenses. Free file state tax See Qualified medical expenses , later. Free file state tax The contributions remain in your Archer MSA from year to year until you use them. Free file state tax An Archer MSA is “portable” so it stays with you if you change employers or leave the work force. Free file state tax Qualifying for an Archer MSA To qualify for an Archer MSA, you must be either of the following. Free file state tax 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). Free file state tax A self-employed person (or the spouse of a self-employed person) who maintains a self-only or family HDHP. Free file state tax You can have no other health or Medicare coverage except what is permitted under Other health coverage , later. Free file state tax You must be an eligible individual on the first day of a given month to get an Archer MSA deduction for that month. Free file state tax If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an Archer MSA contribution. Free file state tax This is true even if the other person does not actually claim your exemption. Free file state tax Small employer. Free file state tax   A small employer is generally an employer who had an average of 50 or fewer employees during either of the last 2 calendar years. Free file state tax The definition of small employer is modified for new employers and growing employers. Free file state tax Growing employer. Free file state tax   A small employer may begin HDHPs and Archer MSAs for his or her employees and then grow beyond 50 employees. Free file state tax The employer will continue to meet the requirement for small employers if he or she: 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. Free file state tax Changing employers. Free file state tax   If you change employers, your Archer MSA moves with you. Free file state tax However, you may not make additional contributions unless you are otherwise eligible. Free file state tax High deductible health plan (HDHP). Free file state tax   To be eligible for an Archer MSA, you must be covered under an HDHP. Free file state tax An HDHP has: 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. Free file state tax Limits. Free file state tax   The following table shows the limits for annual deductibles and the maximum out-of-pocket expenses for HDHPs for 2013. Free file state tax   Self-only coverage Family coverage Minimum annual deductible $2,150 $4,300 Maximum annual deductible $3,200 $6,450 Maximum annual out-of-pocket expenses $4,300 $7,850 Family plans that do not meet the high deductible rules. Free file state tax   There are some family plans that have deductibles for both the family as a whole and for individual family members. Free file state tax 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. Free file state tax If either the deductible for the family as a whole or the deductible for an individual family member is less than the minimum annual deductible for family coverage, the plan does not qualify as an HDHP. Free file state tax Example. Free file state tax You have family health insurance coverage in 2013. Free file state tax The annual deductible for the family plan is $5,500. Free file state tax This plan also has an individual deductible of $2,000 for each family member. Free file state tax The plan does not qualify as an HDHP because the deductible for an individual family member is less than the minimum annual deductible ($4,300) for family coverage. Free file state tax Other health coverage. Free file state tax   You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. Free file state tax However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan. Free file state tax However, you can have additional insurance that provides benefits only for the following items. Free file state tax Liabilities incurred under workers' compensation laws, torts, or ownership or use of property. Free file state tax A specific disease or illness. Free file state tax A fixed amount per day (or other period) of hospitalization. Free file state tax You can also have coverage (whether provided through insurance or otherwise) for the following items. Free file state tax Accidents. Free file state tax Disability. Free file state tax Dental care. Free file state tax Vision care. Free file state tax Long-term care. Free file state tax Contributions to an MSA Contributions to an Archer MSA must be made in cash. Free file state tax You cannot contribute stock or other property to an Archer MSA. Free file state tax Who can contribute to my Archer MSA?   If you are an employee, your employer may make contributions to your Archer MSA. Free file state tax (You do not pay tax on these contributions. Free file state tax ) If your employer does not make contributions to your Archer MSA, or you are self-employed, you can make your own contributions to your Archer MSA. Free file state tax Both you and your employer cannot make contributions to your Archer MSA in the same year. Free file state tax You do not have to make contributions to your Archer MSA every year. Free file state tax    If your spouse is covered by your HDHP and an excludable amount is contributed by your spouse's employer to an Archer MSA belonging to your spouse, you cannot make contributions to your own Archer MSA that year. Free file state tax Limits There are two limits on the amount you or your employer can contribute to your Archer MSA: The annual deductible limit. Free file state tax An income limit. Free file state tax Annual deductible limit. Free file state tax   You (or your employer) can contribute up to 75% of the annual deductible of your HDHP (65% if you have a self-only plan) to your Archer MSA. Free file state tax You must have the HDHP all year to contribute the full amount. Free file state tax If you do not qualify to contribute the full amount for the year, determine your annual deductible limit by using the worksheet in the Instructions for Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. Free file state tax Example 1. Free file state tax You have an HDHP for your family all year in 2013. Free file state tax The annual deductible is $5,000. Free file state tax You can contribute up to $3,750 ($5,000 × 75%) to your Archer MSA for the year. Free file state tax Example 2. Free file state tax You have an HDHP for your family for the entire months of July through December 2013 (6 months). Free file state tax The annual deductible is $5,000. Free file state tax You can contribute up to $1,875 ($5,000 × 75% ÷ 12 × 6) to your Archer MSA for the year. Free file state tax 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. Free file state tax The contribution limit is split equally between you unless you agree on a different division. Free file state tax Income limit. Free file state tax   You cannot contribute more than you earned for the year from the employer through whom you have your HDHP. Free file state tax   If you are self-employed, you cannot contribute more than your net self-employment income. Free file state tax This is your income from self-employment minus expenses (including the deductible part of self-employment tax). Free file state tax Example 1. Free file state tax Noah Paul earned $25,000 from ABC Company in 2013. Free file state tax Through ABC, he had an HDHP for his family for the entire year. Free file state tax The annual deductible was $5,000. Free file state tax He can contribute up to $3,750 to his Archer MSA (75% × $5,000). Free file state tax He can contribute the full amount because he earned more than $3,750 at ABC. Free file state tax Example 2. Free file state tax Westley Lawrence is self-employed. Free file state tax He had an HDHP for his family for the entire year in 2013. Free file state tax The annual deductible was $5,000. Free file state tax Based on the annual deductible, the maximum contribution to his Archer MSA would have been $3,750 (75% × $5,000). Free file state tax However, after deducting his business expenses, Joe's net self-employment income is $2,500 for the year. Free file state tax Therefore, he is limited to a contribution of $2,500. Free file state tax Individuals enrolled in Medicare. Free file state tax   Beginning with the first month you are enrolled in Medicare, you cannot contribute to an Archer MSA. Free file state tax However, you may be eligible for a Medicare Advantage MSA, discussed later. Free file state tax When To Contribute You can make contributions to your Archer MSA for 2013 until April 15, 2014. Free file state tax Reporting Contributions on Your Return Report all contributions to your Archer MSA on Form 8853 and file it with your Form 1040 or Form 1040NR. Free file state tax You should include all contributions you, or your employer, made for 2013, including those made by April 15, 2014, that are designated for 2013. Free file state tax 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. Free file state tax Your employer's contributions should be shown in box 12 of Form W-2, Wage and Tax Statement, with code R. Free file state tax Follow the instructions for Form 8853 and complete the worksheet in the instructions. Free file state tax Report your Archer MSA deduction on Form 1040 or Form 1040NR. Free file state tax Excess contributions. Free file state tax   You will have excess contributions if the contributions to your Archer MSA for the year are greater than the limits discussed earlier. Free file state tax Excess contributions are not deductible. Free file state tax Excess contributions made by your employer are included in your gross income. Free file state tax 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. Free file state tax   Generally, you must pay a 6% excise tax on excess contributions. Free file state tax See Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to figure the excise tax. Free file state tax The excise tax applies to each tax year the excess contribution remains in the account. Free file state tax   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. Free file state tax You withdraw the excess contributions by the due date, including extensions, of your tax return. Free file state tax 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. Free file state tax Deducting an excess contribution in a later year. Free file state tax   You may be able to deduct excess contributions for previous years that are still in your Archer MSA. Free file state tax The excess contribution you can deduct in the current year is the lesser of the following two amounts. Free file state tax Your maximum Archer MSA contribution limit for the year minus any amounts contributed to your Archer MSA for the year. Free file state tax The total excess contributions in your Archer MSA at the beginning of the year. Free file state tax   Any excess contributions remaining at the end of a tax year are subject to the excise tax. Free file state tax See Form 5329. Free file state tax Distributions From an MSA You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. Free file state tax 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. Free file state tax You can receive tax-free distributions from your Archer MSA to pay for qualified medical expenses (discussed later). Free file state tax If you receive distributions for other reasons, the amount will be subject to income tax and may be subject to an additional 20% tax as well. Free file state tax You do not have to make withdrawals from your Archer MSA each year. Free file state tax If you no longer qualify to make contributions, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses. Free file state tax A distribution is money you get from your Archer MSA. Free file state tax 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. Free file state tax Qualified medical expenses. Free file state tax   Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. Free file state tax These are explained in Publication 502. Free file state tax   Also, non-prescription medicines (other than insulin) are not considered qualified medical expenses for MSA purposes. Free file state tax A medicine or drug will be a qualified medical expense for MSA purposes only if the medicine or drug: Requires a prescription, Is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or Is insulin. Free file state tax   Qualified medical expenses are those incurred by the following persons. Free file state tax You and your spouse. Free file state tax All dependents you claim on your tax return. Free file state tax 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 $3,900 or more, or You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return. Free file state tax    For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child's exemption. Free file state tax    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 Archer MSA. Free file state tax Special rules for insurance premiums. Free file state tax   Generally, you cannot treat insurance premiums as qualified medical expenses for Archer MSAs. Free file state tax 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 Archer MSAs. Free file state tax Health coverage tax credit. Free file state tax   You cannot claim this credit for premiums that you pay with a tax-free distribution from your Archer MSA. Free file state tax See Publication 502 for information on this credit. Free file state tax Deemed distributions from Archer MSAs. Free file state tax   The following situations result in deemed taxable distributions from your Archer MSA. Free file state tax You engaged in any transaction prohibited by section 4975 with respect to any of your Archer MSAs at any time in 2013. Free file state tax Your account ceases to be an Archer MSA as of January 1, 2013, and you must include the fair market value of all assets in the account as of January 1, 2013, on Form 8853. Free file state tax You used any portion of any of your Archer MSAs as security for a loan at any time in 2013. Free file state tax You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR. Free file state tax   Examples of prohibited transactions include the direct or indirect: Sale, exchange, or leasing of property between you and the Archer MSA, Lending of money between you and the Archer MSA, Furnishing goods, services, or facilities between you and the Archer MSA, and Transfer to or use by you, or for your benefit, of any assets of the Archer MSA. Free file state tax   Any deemed distribution will not be treated as used to pay qualified medical expenses. Free file state tax These distributions are included in your income and are subject to the additional 20% tax, discussed later. Free file state tax Recordkeeping. Free file state tax 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. Free file state tax Do not send these records with your tax return. Free file state tax Keep them with your tax records. Free file state tax 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). Free file state tax 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. Free file state tax Follow the instructions for the form and file it with your Form 1040 or Form 1040NR. Free file state tax If you do not use a distribution from your Archer MSA for qualified medical expenses, you must pay tax on the distribution. Free file state tax Report the amount on Form 8853 and file it with your Form 1040 or Form 1040NR. Free file state tax You may have to pay an additional 20% tax, discussed later, on your taxable distribution. Free file state tax 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. Free file state tax Rollovers. Free file state tax   Generally, any distribution from an Archer MSA that you roll over into another Archer MSA or an HSA is not taxable if you complete the rollover within 60 days. Free file state tax An Archer MSA and an HSA can only receive one rollover contribution during a 1-year period. Free file state tax See the Form 8853 instructions for more information. Free file state tax Additional tax. Free file state tax   There is a 20% additional tax on the part of your distributions not used for qualified medical expenses. Free file state tax Figure the tax on Form 8853 and file it with your Form 1040 or Form 1040NR. Free file state tax Report the additional tax in the total on Form 1040 or Form 1040NR. Free file state tax Exceptions. Free file state tax   There is no additional tax on distributions made after the date you are disabled, reach age 65, or die. Free file state tax Balance in an Archer MSA An Archer MSA is generally exempt from tax. Free file state 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. Free file state tax Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions , earlier). Free file state tax Earnings on amounts in an Archer MSA are not included in your income while held in the Archer MSA. Free file state tax Death of the Archer MSA Holder You should choose a beneficiary when you set up your Archer MSA. Free file state tax What happens to that Archer MSA when you die depends on whom you designate as the beneficiary. Free file state tax Spouse is the designated beneficiary. Free file state tax   If your spouse is the designated beneficiary of your Archer MSA, it will be treated as your spouse's Archer MSA after your death. Free file state tax Spouse is not the designated beneficiary. Free file state tax   If your spouse is not the designated beneficiary of your Archer MSA: 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. Free file state tax   If your estate is the beneficiary, the fair market value of the Archer MSA will be included on your final income tax return. Free file state tax 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. Free file state tax Filing Form 8853 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. Free file state tax You must file the form even if only your employer or your spouse's employer made contributions to the Archer MSA. Free file state tax If, during the tax year, you are the beneficiary of two or more Archer MSAs or you are a beneficiary of an Archer MSA and you have your own Archer MSA, you must complete a separate Form 8853 for each MSA. Free file state tax Enter “statement” at the top of each Form 8853 and complete the form as instructed. Free file state tax Next, complete a controlling Form 8853 combining the amounts shown on each of the statement Forms 8853. Free file state tax Attach the statements to your tax return after the controlling Form 8853. Free file state tax Employer Participation This section contains the rules that employers must follow if they decide to make Archer MSAs available to their employees. Free file state tax Unlike the previous discussions, “you” refers to the employer and not to the employee. Free file state tax Health plan. Free file state tax   If you want your employees to be able to have an Archer MSA, you must make an HDHP available to them. Free file state tax You can provide no additional coverage other than those exceptions listed previously under Other health coverage . Free file state tax Contributions. Free file state tax   You can make contributions to your employees' Archer MSAs. Free file state tax 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. Free file state tax If you are filing Form 1040, Schedule C, this is Part II, line 14. Free file state tax Comparable contributions. Free file state tax   If you decide to make contributions, you must make comparable contributions to all comparable participating employees' Archer MSAs. Free file state tax 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. Free file state tax Comparable participating employees. Free file state tax   Comparable participating 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). Free file state tax Excise tax. Free file state tax   If you made contributions to your employees' Archer MSAs that were not comparable, you must pay an excise tax of 35% of the amount you contributed. Free file state tax Employment taxes. Free file state tax   Amounts you contribute to your employees' Archer MSAs are generally not subject to employment taxes. Free file state tax You must report the contributions in box 12 of the Form W-2 you file for each employee. Free file state tax Enter code “R” in box 12. Free file state tax Medicare Advantage MSAs 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. Free file state tax 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. Free file state tax 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. Free file state tax The money in your account is not taxed if it is used for qualified medical expenses, and it may earn interest or dividends. Free file state tax An HDHP is a special health insurance policy that has a high deductible. Free file state tax You choose the policy you want to use as part of your Medicare Advantage MSA plan. Free file state tax However, the policy must be approved by the Medicare program. Free file state tax Medicare Advantage MSAs are administered through the federal Medicare program. Free file state tax You can get information by calling 1-800-Medicare (1-800-633-4227) or through the Internet at www. Free file state tax medicare. Free file state tax gov. Free file state tax Note. Free file state tax You must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your tax return if you have a Medicare Advantage MSA. Free file state tax Flexible Spending Arrangements (FSAs) A health flexible spending arrangement (FSA) allows employees to be reimbursed for medical expenses. Free file state tax FSAs are usually funded through voluntary salary reduction agreements with your employer. Free file state tax No employment or federal income taxes are deducted from your contribution. Free file state tax The employer may also contribute. Free file state tax Note. Free file state tax Unlike HSAs or Archer MSAs which must be reported on Form 1040 or Form 1040NR, there are no reporting requirements for FSAs on your income tax return. Free file state tax For information on the interaction between a health FSA and an HSA, see Other employee health plans under Qualifying for an HSA, earlier. Free file state tax What are the benefits of an FSA?   You may enjoy several benefits from having an FSA. Free file state tax Contributions made by your employer can be excluded from your gross income. Free file state tax No employment or federal income taxes are deducted from the contributions. Free file state tax Withdrawals may be tax free if you pay qualified medical expenses. Free file state tax See Qualified medical expenses , later. Free file state tax You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account. Free file state tax Qualifying for an FSA Health FSAs are employer-established benefit plans. Free file state tax These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. Free file state tax Employers have complete flexibility to offer various combinations of benefits in designing their plan. Free file state tax You do not have to be covered under any other health care plan to participate. Free file state tax Self-employed persons are not eligible for an FSA. Free file state tax Certain limitations may apply if you are a highly compensated participant or a key employee. Free file state tax Contributions to an FSA You contribute to your FSA by electing an amount to be voluntarily withheld from your pay by your employer. Free file state tax This is sometimes called a salary reduction agreement. Free file state tax The employer may also contribute to your FSA if specified in the plan. Free file state tax You do not pay federal income tax or employment taxes on the salary you contribute or the amounts your employer contributes to the FSA. Free file state tax However, contributions made by your employer to provide coverage for long-term care insurance must be included in income. Free file state tax When To Contribute At the