Consumer Driven Health
Health Savings Accounts - FAQ
What is an HSA?
Health Savings Account. HSA’s are a new option for health insurance and they have two parts. The first part is a health insurance policy that covers large hospital bills. The second part of the Health Savings Account is an investment account or retirement account from which you can withdraw money tax-free to pay for current and future qualified healthcare expenses. Otherwise, the money accumulates with tax-free interest until retirement, when you can withdraw for any purpose and pay normal income taxes (probably in a lower tax bracket). HSA’s were made possible by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.
Who can establish an HSA?
Most people with a qualified High Deductible Health Insurance Plan (HDHP) may establish an HSA. To be eligible, an individual must also: 1) not be covered under a health plan that does not have a high deductible*; 2) not be entitled to benefits under Medicare, and; 3) not be claimed as a dependent on another person’s tax return. An HSA is established with an HSA trustee or custodian—usually an insurance company or a bank (much the same way that IRAs are established).
* Exceptions to this rule are “permitted insurance exceptions”. The permitted exceptions are: Worker’s Compensation, Tort Liabilities, Property and Casualty, Insurance for Specific Disease or Illness or Insurance that pays a fixed amount per day of hospitalization.
What is a High Deductible Health Plan (HDHP)?
Generally, a high deductible health plan satisfies certain requirements with respect to deductibles and out-of-pocket expenses. For single coverage, a high deductible health plan has an annual deductible of at least $1,050 (2006) and annual out-of-pocket expenses (deductibles, coinsurance, and copays, not including out-of-network costs) not exceeding $5,250. For family coverage, a high deductible health plan has an annual deductible of at least $2,100 (deductibles, coinsurance, and copays, not including out-of- network costs) not exceeding $10,500.
Where does the money deposited in the account come from?
Individuals, employers, and employees may all contribute to your HSA, up to the maximum allowable contribution.
How much can be contributed to my HSA?
The maximum contribution for a single person is either $2,650 of an amount equal to the insurance plan deductible—whichever is LESS. The maximum contribution for a family is either $5,250 or an amount equal to the insurance plan deductible—whichever is LESS. The maximum contribution will be adjusted every year on January 1st as it is indexed for inflation. The maximum contributions listed above are based on an HSA being established on January 1st for a plan which has a calendar year deductible. If a high deductible health plan starts after January 1st, the maximum contribution is prorated based on the number of full months the plan will be in force during the calendar year. For people between the ages of 55 and 65, the HSA contribution limit is increased by $700 for 2006 and goes up by $100 each year until reaching $1,000. Both the account holder and the spouse can make “catch-up” contributions.
How is the money contributed to my HSA?
Contributions may be made in regular installments by either the employer, the employee, or both. Contributions made by the employee can be made through a payroll deduction. This contribution is made using pre-tax dollars that are withheld from your paycheck. Contributions can also be made in lump sums by either the employer, the employee, or both.
What happens if more money is contributed than allowed?
To avoid a tax penalty, a refund of excess contributions plus interest must be withdrawn from the account by the date taxes are due or by April 15th of the following year, whichever comes first. It is the responsibility of the account holder not to exceed the maximum allowed.
How long do I have to make contributions to my HSA?
Contributions can be posted to the HSA any time before April 15th or when taxes are posted the following year.
What happens to the HSA balance at the end of the year?
Unspent HSA funds roll over each year and belong to the employee. There is no “use-it-or-lose-it” provision with HSAs. These funds can continue to be used for qualified medical expenses, along with any new contributions.
What is the tax treatment of HSA contributions?
Employer contributions made to an HSA are tax deductible. Employee contributions made to an HSA are tax deductible. The contributions are deductible whether or not the eligible individual itemizes deductions. HSA contributions may not, however, also be deducted as medical expenses. If an employee is contributing through a cafeteria plan, contributions are made before taxes and the employer saves on FICA taxes as well.
Can the amount of employer funding vary based on classes of employees?
No, there are comparability rules that must be followed when funding the HSA. In general, the employer must make available comparable contributions on behalf of all employees with comparable coverage during the same period. Contributions are considered comparable if they are either the same amount or the same percentage of the deductible under the plan.
Are HSA accumulations tax-free or tax-deferred?
HSA accumulations are tax-free if used to pay for qualified medical expenses. Accumulations are tax-deferred if they are held in the account until the age of 65 and then used for purposes other than qualified medical expenses.
If the employee has an HDHP with family coverage, but his or her spouse is not covered under that plan or other family coverage, can the employee still contribute to the family maximum under the employee’s plan?
Yes, if the spouses file joint tax returns or agree to aggregate their contribution maximums that way. Otherwise, the employee’s contribution maximum will be one-half of the family maximum under the employee’s plan.
If the employee’s family is not covered under the employees’ qualified HDHP, can the employee still use his or her HSA funds to pay their qualified expenses?
Yes, the employee may use HSA funds to pay the qualified expenses of the dependents listed (claimed) on income taxes. This has been verified by the Treasury Department.
What happens to contributions made by my employer if I terminate my employment?
Contributions, other than those that are advanced to cover charges exceeding the account balance, belong to you and cannot be taken back by your employer at the time you leave employment.
What can HSA funds be used for?
Funds can be withdrawn for any purpose. However, if not withdrawn for qualified medical expenses by someone under the age of 65, the amount withdrawn is taxable and subject to a 10% penalty by the IRS. After age 65, there is no penalty for non-qualified withdrawals but amounts are taxable at ordinary income rates. Funds used to pay for the following are tax-free and penalty free:
- Qualified medical expenses as defined under Section 213 of the IRS Code
- COBRA insurance
- Health Insurance premiums for individuals receiving unemployment compensation
- Qualified long term care insurance and expenses
Medicare and retiree health insurance premiums, but not Medicare supplement premiums
How do employees sign up for the HSA?
Once the employer has decided to purchase a qualified HDHP, each employee must choose an HSA Vendor and complete all of the required HSA enrollment materials.