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Health Savings Accounts & High-Deductible Health Plans What is a Health Savings Account? When did HSAs become effective? What is the relationship of Health Savings Accounts (HSAs) to Medical Savings Accounts (MSAs)? What is a High-Deductible Health Plan (HDHP)? HDHP minimum deductible:
There is no maximum deductible. However, total costs to the insured cannot exceed $5000 for an individual or $10,000 for a family, including deductible and co-pays. Thus, a plan that pays 100% of all costs could have a deductible up to the amounts shown, but not higher. HDHP maximum out-of-pocket expense:
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? Establishing a Health Savings Account How does a Health Savings Account get established? Who can serve as an Account Trustee? Must the HSA and HDHP be held at the same institution? Ownership of a Health Savings Account Who has ownership of a Health Savings Account? Who is eligible to own an HSA? Can a small group employer own an HSA? Portability of a Health Savings Account Are HSAs portable? However, since the employee owns the HSA account, it does not have to be rolled to anywhere; it can stay where it is. Contributions to a Health Savings Account What is the maximum allowable contribution to an HSA? Therefore, for 2008, the maximum contribution for an eligible individual with self-only coverage is $2,900 and the maximum contribution for an eligible individual with family coverage is $5,800. Who can make contributions to an HSA? 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? 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? Although the annual contribution is determined monthly, the maximum contribution may be made on the first day of the year. Additional (Catch-Up Contributions) 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. Aggregate Contributions: HSA(s) and MSA 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. The annual limit is decreased by the aggregate contributions made to an MSA. More than One Health Plan in a Family What if there is more than one health care plan in a family?If either spouse has family coverage, both are treated as having family coverage. If each spouse has family coverage under a separate health plan, both spouses are treated as covered under the plan with the lowest deductible. 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. Family coverage is further reduced by any contribution to an MSA. 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? Do HSAs have “use it or lose it” provisions? What happens to the HSA if its owner becomes insured by a non-HDHP plan? Withdrawals from a Health Savings Account How are HSA funds accessed? What are qualified medical expenses? -Prescription drugs (after the deductible is met) For these premium payments: 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? 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. Plan Benefits & Provider Networks for High Deductible Health Plans Will the HSA account pay for preventive care? Will the HSA pay for office visits? Will the HSA pay for prescription drugs? How is the PPO provider network determined? What happens when the HSA owner turns 65? 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 to pay for: HSA funds cannot be used to pay for Medicare Supplement (Medigap) policies. Account Transfer of a Health Savings Account To whom may an HSA be transferred? What happens to an HSA upon account owner death? 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. Compliance: ERISA, COBRA, Reporting Requirements What constitutes ERISA compliance? 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? 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?
Are HSAs compatible with Flexible Spending Accounts (FSAs)? 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. See also: How does an HSA interact with the FSA grace period?
How does an HSA interact with the FSA grace period? 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. Taxation of Health Savings Accounts How are employer contributions taxed? Employer contributions are not subject to withholding from wages for income tax, FICA (Social Security) or FUTA (Federal Unemployment Tax) Employer and salary reduction contributions are exempt from FICA and FUTA. Self-Employed: Contributions 100% tax-deductible How are employee/individual contributions taxed? Earnings on amounts in an HSA are not includable in gross income while held in the HSA (i.e., accruals are tax free) Salary reduction contributions are exempt from FICA and FUTA. 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:
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. 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. 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 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? Withdrawal penalties are not assessed upon persons over age 65. See also: Age 65 / Medicare-Eligibility What HSA-compatible plans are available through Claremont Insurance Services? 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. |
 
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