HSA FAQ

What is a Health Savings Account?
An HSA is a tax-deferred savings account opened in conjunction with an HSA-compatible high-deductible health insurance plan. Deposits to the account are tax-deductible; withdrawals from the account for qualified medical expenses are tax-free. HSAs have been created to help people under the age of 65 to help save money to meet medical and retiree health expenses on a tax-free basis.

When did HSAs become effective?
HSAs became effective on January 1, 2004. The enacting legislation is the Medicare Prescription Drug, Improvement & Modernization Act of 2003. This has been enacted as a permanent plan, with no sunset provisions or limit on the number of participants.

What is the relationship of Health Savings Accounts (HSAs) to Medical Savings Accounts (MSAs)?
The Medical Savings Account is a tax-exempt trust or custodial account with a financial institution in which account holders can save money exclusively for future qualified medical expenses. MSAs were created as a four-year pilot program, which had an unattained limit of 750,000 participants. It was “sunsetted” on December 31, 2003.
Existing Medical Savings Accounts can be converted to Health Savings Accounts with no change in the tax-exempt status.

What is a High-Deductible Health Plan (HDHP)?
A high deductible health plan is a health insurance plan that satisfies certain requirements in terms of deductibles and out of pocket expenses. The out of pocket maximum is based upon deductibles, co-payments, and other amounts; but does not include premiums paid.

For family coverage, a plan is an HDHP only if, under the terms of the plan and without regard to which family member incurs expenses, no amounts are payable from the HDHP until the family has incurred annual covered medical expenses in excess of the annual deductible.

A high-deductible plan may still qualify as HSA-compatible, even if it has a small deductible for preventive care (i.e., first dollar coverage). However, except for preventive care, a plan may not provide benefits for any year until the deductible for that year is met. This also includes no benefit paid for prescription drug coverage.

How do HSAs and HDHPs interact?
Before opening a health savings account, a person must have in place a high deductible health insurance plan that is HSA-compatible.

How does a Health Savings Account get established?
An HSA must be established with a qualified HSA trustee or custodian, similar to the opening of an Individual Retirement Account (IRA).

Who can serve as an Account Trustee?
Any insurance company or bank can be an HSA trustee or custodian. In addition, any other person already approved to be a trustee or custodian of IRAs or MSAs is automatically approved to be an HSA trustee or custodian.

Must the HSA and HDHP be held at the same institution?
No. The HSA can be established through a qualified trustee or custodian different from the HDHP provider. The different trustee or custodian may require proof or certification that the account beneficiary is an eligible individual, including that the individual is covered by a true high-deductible health plan.

Who has ownership of a Health Savings Account?
An HSA is owned solely by the individual in whose name the account is listed.

Who is eligible to own an HSA?
HSAs can be owned by an individual or family covered by a qualified HDHP.

Can a small group employer own an HSA?
A small group employer can set up health savings accounts for individual employees who have qualified HDHP coverage. However, it is the individual employee who owns their HSA.

Are HSAs portable?
An individual owns the HSA. If an employee leaves an employer and wants to roll the HSA money over into another financial institution, the rollover must be completed within 60 days. (e.g., if the money is withdrawn from the HSA account, there are 60 days to get it back into a qualified (HSA) account to avoid paying taxes and penalties on the withdrawal.)

However, since the employee owns the HSA account, it does not have to be rolled to anywhere; it can stay where it is.

What is the maximum allowable contribution to an HSA?
Previously, the maximum HSA contribution was the lesser of the deductible of the individual’s HSA-eligible plan or a statutory maximum. As of January 1, 2007, the maximum allowable contribution is the statutory maximum contribution, regardless of the individual’s deductible.

Therefore, for 2010, the maximum contribution for an eligible individual with self-only coverage is $3,050 and the maximum contribution for an eligible individual with family coverage is $6,150.

Who can make contributions to an HSA?
Contributions may be made by or on behalf of eligible individuals even if the individual has no compensation or if the contributions exceed their compensation.

While individuals & family members can contribute, HSA contributions may not be made by anyone who can be claimed as a tax dependent.

Once age 65 (Medicare eligibility age) is attained, no contributions (including catch-up) can be made.

How are contributions made to an HSA?
HSA contributions must be made in cash or its equivalent, including check or credit card. Rollovers or transfers of assets from an MSA or an FSA (through 2011) will also be accepted.

Also, effective January 1, 2007, new rules allow for a one-time contribution to an HSA of amounts distributed from an Individual Retirement Account (IRA). The contribution must be made in a direct trustee-to-trustee transfer. This IRA transfer will not be included in income or subject to the early withdrawal additional tax. The transfer is limited to the maximum HSA contribution for the year, and the amount contributed is not allowed as a deduction.

Generally, only one transfer may be made during the lifetime of an individual. If an individual electing the one time transfer does not remain an eligible individual for the 12 months following the month of the contribution, the transferred amount is included in income and subject to a 10% additional tax.

Previously, the HSA contribution was pro rated based on the number of months during the year that an individual was eligible for the HSA.

Effective January 1, 2007, new provisions provide an exception that will allow individuals who become covered under an HSA-eligible plan in a month other than January to make the maximum HSA contribution for the year based on their coverage in the last month of the year. This eliminates a common barrier to switching HSA-eligible coverage. If an individual does not stay in the HSA-eligible plan 12 months following the last month of the year of the first year of eligibility, the amount that could not have been contributed except for this provision will be included in income and subject to a 10% additional tax.

For individuals or couples over age 55 or over, catch-up contributions may also be made.

What is the deadline for annual HSA contributions?
Contributions for the taxable year can be made in one or more payments, at any time prior to the time for filing the eligible individual’s federal income tax return for that year (without extensions). This is generally April 15.

Although the annual contribution is determined monthly, the maximum contribution may be made on the first day of the year.

Additional (Catch-Up Contributions)
Age 55 or older may make additional contributions of:
2008: $900
2009: $1,000
2010: $1,000

Catch-up Contribution increase by $100/year up to $1000/per year in 2009 and thereafter.

A married couple can make two catch-up contributions, as long as both spouses are at least age 55. No contributions can be made once the HSA owner reaches age 65.

The same annual limit applies whether the contributions are made by employees, employers, self-employed persons, or family members.

All HSA contributions made by or on behalf of an eligible individual to an HSA are aggregated for purposes of applying the limit.

If an individual has more than one HSA, the aggregate annual contributions to all the HSAs are subject to the limit.

Supplementing an HSA/HDHP with other health plans requires coordination of coverage. Specifically, each month that another plan provides coverage that overlaps the coverage of the HDHP, the tax-favored contributions that can be made to the employee's HSA are reduced.

The contribution limit is the lowest deductible amount, divided equally between the spouses unless they agree on a different division.

Both spouses may make the catch-up contributions for individuals age 55 or over without exceeding the family coverage limit.

Can HDHP plan holders have any other insurance coverage?
Specified disease, hospital indemnity, auto insurance, vision, dental, accident & disability, and workers compensation are allowed in conjunction with an HSA. Though not considered qualifying HDHPs, they may serve as secondary insurance. These are known as “permissible insurance”.

Do HSAs have “use it or lose it” provisions?
HSA funds may be carried over indefinitely. No "use it or lose it" provisions apply.

What happens to the HSA if its owner becomes insured by a non-HDHP plan?
Once the HSA owner becomes insured by a health insurance policy that is not a high deductible plan, they can no longer make contributions to the HSA. However, money in the HSA can be used for qualified medical expenses, including co-payments.

How are HSA funds accessed?
Checks may be written on an HSA account.
Distributions may be made using a debit or stored value card.

Debit cards do not create new reporting requirements for employers.

What are qualified medical expenses?
Eligible qualified medical expenses are expenses paid by the account beneficiary, their spouse or dependents as defined in defined in Section 213(d) of the IRS Code.
For a complete listing of Qualified Medical Expenses, please click here.

-Prescription drugs (after the deductible is met)
-Some over the counter drugs
-Monies paid for the diagnosis, cure, mitigation, treatment or prevention of disease

For these premium payments:
-Qualified LTC insurance premiums & services
-COBRA premiums
-Health insurance premiums for those collecting unemployment payments
-Medicare Part A and B premiums
-Medicare HMO or Advantage premiums (NOT Medigap policies)
-Employer-sponsored retiree health expenses for individuals age 65 and over.
(Retiree health plans would not have to meet the minimum deductible requirements of $1,000/$2,000.

Note: It is not required that one exceed 7.5% of their Adjusted Gross Income (AGI) to qualify.

How does adjudication of claims take place?
HSAs are not regulated by IRS Section 105, which requires substantiation of a claim before reimbursement.
-Account holders must keep adequate records concerning the use of HSA funds.
-Account holders are responsible for ensuring that expenses paid from the account are qualified expenses.

Even if the HSA is funded through an FSA, no substantiation of claims should be required. An employer is not required to verify eligible expenses.

Will the HSA account pay for preventive care?
Preventive care is not subject to the deductible, though a plan may offer first dollar coverage for preventive care and still qualify for an HSA.

Will the HSA pay for office visits?
Co-payments for office visits are not permitted unless they occur after the deductible. Office visit co-pays are applied toward the out of pocket maximum.

Will the HSA pay for prescription drugs?
Co-payments are not permitted unless they occur after the deductible.
Co-insurance amounts paid are applied toward the out of pocket maximum.

How is the PPO provider network determined?
Open network for doctors & facilities
Deductible and out of pocket amounts only apply to in-network services.
Penalties for going out of the PPO network do not count toward the total costs to the insured.

What happens when the HSA owner turns 65?
Once age 65 is attained, additional contributions cannot be made to the HSA account.

For age 65 and over who are disabled or deceased: Non-qualified distributions are included as taxable income, and are not subject to the 10% penalty.

Over age 65: May take non-qualified distributions, which are included as taxable income and not subject to the 10% penalty.

How does an HSA interface with Medicare?
HSA funds can be used for all eligible medical expenses.

HSA funds can be used to pay for:
Medicare Part A and B premiums
Medicare HMO or Advantage premiums

To whom may an HSA be transferred?
An HSA plan can transfer to a spouse or former spouse tax-free in connection with divorce, separation or death of the account beneficiary (plan owner).

What happens to an HSA upon account owner death?
Upon death, any balance remaining in the HSA becomes the property of the person named as the beneficiary of the account.

If the beneficiary is the spouse, the HSA becomes the property of the spouse. The spouse is subject to income tax only if distributions are not used for qualified medical expenses.

If, at death, the HSA transfers to anyone other than a spouse, the HSA ceases to be an HSA as of the date of the accountholder’s death, and the fair market value of the HSA is included in the beneficiary’s gross income.

For anyone other than the estate, the includable amount is reduced by any payments made for the decedent’s qualified medical expenses if paid within one year of death.

Taxable distributions made after the account beneficiary’s death, disability or attainment of age 65 are not subject to the additional excise tax.

What constitutes ERISA compliance?
If the employer selects a specific HSA trustee and assists employees in establishing HSA accounts, the HSA should be an ERISA plan.

If the employer provides the HDHP but requires employees to establish their own HSA accounts, the HSA does not need to be ERISA compliant.

Note: An HSA is a trust exempt from taxation under Section 223. It is not a fund under Section 419(e) and therefore is not a “welfare benefit” under Section 419.

Previously, if an employer made contributions to an HSA, comparable contributions (either the same amount or same percentage) had to be made for all comparable participating employees during the same period. If an employer did not meet the compatibility rule, they were subject to a 35% excise tax on aggregate contributions made to the HSA during that period.

Effective January 1, 2007, new rules provide an exception to the comparability rules allowing employers to contribute more to the HSAs of non-highly compensated individuals. For this purpose, the definition of “highly compensated employee” is based on the same definition used for qualified retirement plans.

The comparability rule does not apply to contributions made under a cafeteria plan, or to rollovers from an MSA or another HSA.

Are there reporting requirements?
Employer contributions must be reported on the employee’s W-2.

Forms and instructions will be available from the IRS on how to report HSA contributions, deductions, and distributions.

Are HSA accounts subject to COBRA continuation?
HSA accounts are not subject to COBRA continuation.

Are HSAs compatible with Flexible Spending Accounts (FSAs)?
HSAs and HDHP plans may be offered as options under a cafeteria plan.

As of January 1, 2007, employers can transfer funds from FSAs or HRAs to an HSA for employees switching to coverage under an HSA-compatible plan. The amounts rolled over to HSAs from FSAs or HRAs are over and above the amounts allowed as annual contributions. The maximum contribution is the balance in the FSA or HRA as of September 21, 2006, or – if less – the balances as of the date of the transfer. This provision is limited to one distribution with respect to each health FSA or HRA of the individual. This provision is allowed through 2011.

If the individual does not remain an eligible individual for the 12 months following the months of the contribution, the transferred amount is included in income and is subject to a 10% additional tax.

How does an HSA interact with the FSA grace period?
Should an employer modify the FSA – through a plan amendment - to incorporate the grace period, plan participants will be able to apply unused FSA balances for health & dependent care expenses incurred in the first two & one-half months of the following plan year.

Once a plan is modified, an employee covered by the FSA grace period cannot contribute to an HSA during that grace period. Employers may, however, convert their health FSA to an HSA-compatible arrangement that allows a health FSA participant to become HSA-eligible during the grace period. These HSA-compatible arrangements may include: a limited purpose FSA to pay or reimburse only for preventive care and permitted coverage; or a post-deductible health FSA to pay or reimburse preventive care & other qualified medical expenses incurred after the minimum annual deductible for the health plan has been satisfied.

Effective January 1, 2007, new rules treat certain FSA coverage during a grace period as disregarded coverage, eliminating any resulting reduction in the HSA contribution for the year. First, the coverage is disregarded if the balance in the health FSA at the end of the plan year is zero. Second, the coverage is disregarded if the year-end balance is transferred directly to an HSA from the FSA.

How are employer contributions taxed?
Employer contributions to an employee’s HSA are excludable from the employee’s gross income, and are not taxable to the individual.

Contributions to an employee’s HSA through a cafeteria plan are treated as employer contributions.

Employer contributions are not subject to withholding from wages for income tax, FICA (Social Security) or FUTA (Federal Unemployment Tax)

Self-Employed: Contributions 100% tax-deductible
S-Corp Owners: Contributions 100% tax-deductible
Business Partners: Contributions 100% tax-deductible

How are employee/individual contributions taxed?
Individual contributions are deductible “above the line” (i.e., deductions do not have to be itemized to use the contributions as deductions)

Earnings on amounts in an HSA are not includable in gross income while held in the HSA (i.e., accruals are tax free)

Contributions made by a family member on behalf of an eligible individual to an HSA are deductible by the eligible individual in computing adjusted gross income. The contributions are deductible whether or not the eligible individual itemizes deductions.

An individual who can be claimed as a dependent on another person’s tax return is not an eligible individual and may not deduct contributions to an HSA.

Excess contributions are subject to an annual excise tax of 6% unless:

withdrawn prior to the due date of the employee’s tax return
taken as a taxable distribution
applied against a subsequent year’s funding limit

Net income attributable to the excess contributions is included in the account beneficiary’s gross income for the tax year in which the distribution is received. But, the excise tax is not imposed, and the distribution of the excess contributions is not taxed.

Individual account owners are responsible for ensuring that contributions are not in excess, even if the account includes employer contributions.

Effective January 1, 2007, new rules allow for a one-time contribution to an HSA of amounts distributed from an Individual Retirement Account (IRA). The transfer is limited to the maximum HSA contribution for the year, and the amount contributed is not allowed as a deduction.

Effective January 1, 2007, new provisions provide an exception that will allow individuals who become covered under an HSA-eligible plan in a month other than January to make the maximum HSA contribution for the year based on their coverage in the last month of the year. If an individual does not stay in the HSA-eligible plan 12 months following the last month of the year of the first year of eligibility, the amount that could not have been contributed except for this provision will be included in income and subject to a 10% additional tax.

How are account distributions taxed?
Distributions are tax-free if used for qualifying medical expenses.

Distributions not used exclusively for qualified medical expenses for the account beneficiary, spouse or dependents are taxed as income, plus a 10% penalty.

If the account beneficiary is no longer an eligible individual (e.g., over 65 & eligible for Medicare, or no longer has an HDHP), distributions used to pay for qualified medical expenses continue to be tax-free (excludable from gross income.)

Does a withdrawal penalty apply to account distributions?
Distributions not used exclusively for qualified medical expenses for the account beneficiary, spouse or dependents are taxed as income, plus a 10% penalty.

What HSA-compatible plans are available through Claremont Insurance Services?

Small Group Plans (2-50 employees)

Shield Savings QS 4800

Shield Savings QS 3000/6000

Shield Savings 4800

Shield Savings 2500

Shield Savings 3000/6000

Shield Savings QS 2000/4000

Shield Savings 2250/4500

Shield Savings 2000/4000

Shield Savings 1800/3600

CaliforniaChoice Lumenos HSA 1800

CaliforniaChoice Lumenos HSA 2500

Kaiser Permanente Choice Solution HDHP 1900

Kaiser Permanente Choice Solution HDHP 2700

Mid/Large Group (51+ employees)

Shield PPO Savings Plus 1500

Shield PPO Savings Plus 2250

Shield PPO Savings Plus 2400/4800

Shield PPO Savings Plus 2600/5200

CaliforniaChoice51+ HSA 1500

CaliforniaChoice51+ HSA 2000

Qualified medical expenses include the following, but only to the extent that these expenses are not covered by insurance or otherwise:

For more information, see IRS Publication 969: Health Savings Accounts & Other Tax-Favored Health Plans.