Health Savings Accounts FAQs

Your Rights to Health Insurance

Effective January 1,2004, the Medicare Prescription Drug Improvement and Modernization Act of 2003 added section 223 to the Internal Revenue Code to permit eligible individuals to establish Health Savings Accounts (HSAs). Below are frequently asked questions regarding HSAs.

What are HSAs? An HSA is a tax-advantaged account created by an individual who is covered under a high deductible health plan (HDHP).

Eligibility Requirements: An individual is eligible with the following.
1. Covered by a qualified high deductible health plan.
2. Not also covered on another low or no deductible health plan.
3.Cannot be claimed as a dependent on another person’s tax return.
4. Is under age 65. No additional HSA contribution can be made once the person turns age 65.
5. Not entitled to benefits under Medicare.

High Deductible Health Plan: To open an HSA, you need a qualified insurance plan.
Individual: For individual enrollments, the plan must have a deductible of at least $1,000. The annual out-of-pocket maximum must not exceed $5,000.
Family Coverage: For family coverage, the plan must have a deductible of at least $2,000. The annual out-of-pocket maximum must not exceed $10,000.

Please note that the deductibles may be waived or smaller for preventive care. “Network plans” can still count as an allowable HDHP. The annual deductible for services provided outside the network is disregarded. The annual out –of –pocket maximum for out-of –network services can exceed the limits stated above. For example a plan could have a Family deductible of $2,000 in-network and $5,000 out-of-network. The out-of-pocket maximum could be $10,000 in-network and $15,000 out-of-network.

The individual or family can still qualify if they obtain certain types of other insurance. The permitted additional insurance includes dental, vision, long term care, disability, accident plans, workers compensation insurance, specified disease or illness plans that pay a fixed amount per day or per hospitalization, tort liabilities, and automobile insurance.

A self-insured medical reimbursement plan sponsored by an employer could qualify as a HDHP.

How much can you contribute to an HSA? Employees under age 55 can contribute 100% of the deductible to a limit in 2004 of $2,600 for individuals and $5,150 for families. Employees over age 55, for 2004 can contribute an additional $500. It rises in $100 increments until reaching $1,000 for 2009 and the years following.

Who can contribute to and HSA? Employee, Employer, Family member on behalf of the account holder.

What kind of tax-favored HSA contributions are permitted?
1. Employer contributions that are deductible above the line (i.e. deductible even by non-itemiser).
2. Employer contributions.
3. Salary reduction contributions made through a Section 125 cafeteria plan.

All three forms are exempt from federal income taxes. Employer and salary reduction contributions are exempt from FICA and FUTA as well.

HSA Funds: An eligible individual can establish an HSA with a qualified HSA trustee or custodian. This is typically a bank or brokerage firm who also handles IRAs and or/handled MSAs. Contributions to an HSA must me made in cash. Funds remain tax-free as long as the person owns the account and pays healthcare services from it.

Allowable withdrawals from an HSA: Funds may be withdrawn tax-free to pay for qualified medical expenses. Which include all section 213(d) expenses. HSA funds may be used to pay premiums only for long-term care insurance, COBRA premium, or other health insurance premiums for people receiving unemployment benefits.

When may HSA contributions be made? Contributions for the taxable year can be made in one or more payments at the convenience of the individual or the employer, at any time prior to the time prescribed by law (without extensions) for filling the eligible individual’s federal income tax return the that year. Similar to IRA rules, for calendar year taxpayers, the deadline for contributions to an HSA is generally April 15th of the following year. The maximum contribution may be made on the first day of the year.

Who can spend HSA money? HSA qualifying healthcare expenses include out-of-pocket expenses for IRC.213 medical care for the following people:
1. Account beneficiary
2.Their Spouse
3. Their dependents

Carryover of funds: HSA accounts can carry over any unused funds indefinitely. An individual who is no longer qualified to make contributions can still have access to the HSA funds.

Are rollover contributions to HSAs permitted? Rollover contributions from Archer MSAs and other HSAs into an HSA are permitted. Rollover contributions need not be in cash and are not subject to the annual contribution limits. Rollovers from an IRA, HRA (health reimbursement arrangement) or from a FSA to an HSA are not permitted.

Allowable non-medical withdrawals: Non-medical withdrawals are permitted but are subject to a 10% penalty and income tax. The penalty does not apply in the case of distributions made after the account beneficiary’s death, disability, or attaining age 65.

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