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Frequently Asked Questions about Health Savings Accounts (HSA’s)
• Comparison of HSA – HRA – FSA What is a Health Savings Account (HSA)? A Health Savings Account (HSA) is a tax-advantaged account participants can use to pay for qualified health expenses they incur while covered under a high deductible medical plan. While HSA dollars may also be used to pay for non-qualified health expenses, such use will be subject to taxation. HSA dollars, contributed by the employer, employee or a qualified family member, accumulate over time with interest or investment earnings, are tax-free, are portable after employment and can be used to pay for qualified health expenses tax-free, or for non-health expenses on a taxable basis. When were Health Savings Accounts approved? HSAs were developed as part of the recent Medicare legislation and signed into law late 2003 . They have been offered since January 1, 2004. How do Health Savings Accounts differ from other tax-advantaged accounts? HSAs have certain features that are more favorable for participants than Health Reimbursement Arrangements (HRAs) or Flexible Spending Accounts (FSAs). The participant is immediately vested in the account, meaning the money belongs to the participant. The participant can’t lose it if it isn’t spent during a plan year, as is the case with an FSA. The unused balance accumulates over time and earns interest so the participant can save for future expenses. Although HRA funds can accumulate from one year to the next, they cannot transfer to another employer if the employee changes jobs, as is the case with an HSA. Generally, HSA funds can be easily accessed at any time with an HSA debit card. The HSA balance can accumulate quickly, within IRS guidelines, because HSAs have different funding options than other tax-advantaged accounts. The participant, the employer or a qualified family member can contribute to the account. How are funds in the employee’s HSA typically utilized throughout the plan year? At the beginning of each plan year, the employee will need to satisfy an annual deductible. Initially, the employee’s HSA can be used to pay this deductible. Once the deductible has been met, the insurance portion of the medical plan takes over. HSA funds can then be used to pay for coinsurance or other expenses not covered by the medical plan. At the end of the calendar year, unused funds remain in the employee’s account for use in the next plan year. Can a Health Reimbursement Arrangement or Flexible Spending Account also be offered along with a Health Savings Account? There are limited opportunities to offer HSAs in conjunction with these other tax-advantaged accounts. Perhaps the most likely will be an FSA that is limited to certain types of benefits not covered by the high deductible policy, such as dental, vision or preventive care. Additionally, the IRS guidance allows use of HRAs for retirement or other future purposes (though access to the account must be suspended during HSA participation). Who is eligible to participate in a Health Savings Account? An eligible individual: • Is an individual covered by a high-deductible health plan • Is not covered by any other medical plan that is not a high-deductible (e.g., on a spouse’s plan, except for vision or dental coverage) • Is not entitled to benefits under Medicare • May not be claimed as a dependent on another person’s tax return What are the advantages to a participant enrolled in a Health Savings Account? HSAs offer the benefit of tax-advantaged savings and reduced taxable income, which can appeal to a number of different income-level workers. Individuals can set aside income that is tax-free and are able to build an asset that they can use in their retirement years; and/or can reduce the cost of coverage. What should employers consider when offering a Health Savings Account? Employers should carefully weigh all consumer plan options and choose one (or more) to best fit their needs. HSAs give individuals the opportunity to plan for future health expenses. They provide options to support retiree benefit strategies and/or the needs of employers interested in portability of coverage. The tax advantages of the accounts are valuable to both employer and employee. Employers should carefully consider the following about HSAs: • The individual immediately owns the money contributed to the account; there is no vesting • The HSA funds are portable upon termination of employment • Employers do not control how the money is used • Qualified health expenses include all services listed under IRS Section 213 (d) (except for premiums paid for health coverage), the same section governing FSA coverage • Employees can choose to use their funds for non-qualified health expenses; however, the funds are subject to tax, except following disability, Medicare eligibility or death. What are the requirements for the high-deductible medical plan? According to statutory guidelines, for single coverage, the plan must have an annual deductible of at least $ 1 , 000 , and an annual, in-network out-of-pocket maximum of no more than $ 5 , 000 . For family coverage, the annual deductible must be at least $ 2 , 000 and the annual, in-network out-of-pocket maximum can be no more than $ 10 , 000 . These amounts will be adjusted for inflation beginning in 2005 . Are preventive care services covered under a Health Savings Account? Yes, the HSA may be used to pay for preventive care services, as long as such services are not covered by the high deductible health plan. In many cases, preventive care services may be covered under the high deductible health plan because there is a special exception in the law that allows a high deductible health plan to provide coverage for preventive care services whether or not the deductible has been satisfied. Can the medical plan be network-based? Yes, as long as the plan has a deductible tied to network-based services. For example, a plan with both in-network and out-of-network coverage would qualify, as long as there is a deductible tied to in-network services, and that deductible meets the $ 1 , 000 threshold for single, or $ 2 , 000 for family coverage. A separate, out-of-network deductible can be applied to out-of-network services and could be greater, but not less, than the limits noted here. Who can contribute to a Health Savings Account? Eligible individuals or employers can contribute to a Health Savings Account. Other family members may also contribute, as long as they meet IRS guidelines; however, that account must be established by an individual and funded according to IRS rules. Further guidance from the IRS is anticipated on this subject. When an employer contributes to the Health Savings Account, the funded amount is excluded from the employee’s gross income. As a result, contributions are not subject to withholding from wages for income tax, FICA tax, Federal Unemployment Tax or the Railroad Retirement Tax. Additionally, contributions may not be subject to some State and Local taxes. Contributions to an employee’s Health Savings Account through a cafeteria plan are treated as employer contributions. The employee cannot deduct employer contributions as medical expense deductions under IRS Code Section 213 . What are the tax rules of a Health Savings Account? A Health Savings Account is generally deferred from tax, and its use is exempt from tax if used for qualified expenses. Earnings on amounts in a Health Savings Account may not be taxable, depending upon whether such earnings are used for qualified medical expenses. When can contributions be made to the Health Savings Account? Contributions can be made on the first day of the month that a participant is enrolled in a high-deductible medical plan and/or anytime up until the individual files taxes for that year How much can be contributed to the Health Savings Account in 2004? Employers, employees and/or qualified family members can contribute tax-deductible funds each year up to the amount of the high-deductible health plan policy’s annual deductible; however, this amount cannot exceed $ 2 , 600 for individuals and $ 5 , 150 for families. Contributions in any given month are capped at the lesser of 1 / 12 of the annual deductible or 1 / 12 of $ 2 , 600 /$ 5 , 150 (individual/family). If the full amount has not been funded in the calendar year, additional contributions can be deposited through the April 15 th tax deadline. Is there an exception to these contribution maximums? Yes, individuals between the ages of 55 up to Medicare entitlement age can contribute an additional monthly “catch-up contribution.” The HSA contribution limit for 2004 is $ 500 ; however, this “catch-up” amount will increase by $ 100 each year until it reaches a cap of $ 1 , 000 in 2009 . Do Health Savings Accounts earn interest? Yes, in addition to the savings associated with pre-tax contributions, the funds are deposited in interest-bearing or investment-earning accounts. Plan participants are 100 percent vested in both the employee and employer contributions in their accounts. How do participants access funds from a Health Savings Account? A participant can use checks, a Health Savings Account MasterCard ® Debit Card, or automated debits (ACH transfers) to withdraw funds from the HSA. Under a family plan, how are the Health Savings Account funds distributed if the individual has met his/her single deductible, but the family deductible has not yet been met? HSA funds may be used for anything; qualified medical expenses; non-qualified medical expenses; expenses below the deductible; expenses above the deductible. The only difference comes with whether such use will be subject to taxation. What happens if the contribution amount exceeds the maximum amount allowed in a given tax year? The amounts that exceed the maximum contribution (“excess contribution”) are not eligible for deduction from the employee’s gross income. Also, an excise tax of 6 % on the excess amount is imposed on the account beneficiary for each taxable year. Certain exceptions apply to the excise tax, e.g., if funds are pulled out before the taxfiling deadline for that year. A participant may recover an excess contribution made to their Health Savings Account to avoid the 6 % excise tax. This is done by taking a distribution from the Health Savings Account in an amount equal to the excess contribution, and associated interest, before the day that the income tax return for that year is due. (Note that an excess distribution that is withdrawn before the deadline is neither includable in income nor subject to the 10 % addition to tax. It is also not subject to the 6 % excise tax. Interest income that is distributed must be included in income for the year that the distribution is taken, however.) Are rollover contributions to Health Savings Accounts permitted? Yes, rollover amounts from Archer Medical Savings Accounts (MSAs) and other Health Savings Accounts are permitted. However, rollovers from an IRA or a Health Reimbursement Account (Arrangement), or from a Flexible Spending Account to a Health Savings Account, are not permitted. How are distributions from a Health Savings Account taxed? Distributions from the Health Savings Account are not taxed if they are used exclusively to pay for qualified health expenses for the account beneficiary, covered spouse or covered dependents. Any amount not used for qualified health expenses for individuals noted above is subject to income tax and a 10 % additional tax. This 10 % additional tax does not occur if the distributions are made after the account beneficiary’s death, disability or Medicare eligibility date. Does the employer or the health plan need to verify that distributions from the Health Savings Account are for qualified services? No. The participant needs to make that determination and should maintain records of their medical expenses to verify the expenses are for qualified services and therefore excludable from their gross income. This self-substantiation guideline is used for MSAs and will apply to HSAs. The IRS may request receipts during a tax audit. Employers and plan administrator are not responsible or liable for misuse (i.e., use for non-qualified medical expenses) of HSA dollars by plan participants. What forms does the employer need to file for their contributions to the Health Savings Account? Employer contributions to a Health Savings Account must be reported on the employee’s W-2 form. In addition, participants will be required to complete a new form 8889 . Finally, trustees will be required to report contributions and distributions from the HSA. The IRS has already released the new W-2. The other forms and instructions will be released later this year. Are the funds in a Health Savings Account portable? Yes. The participant can take all of the funds in their Health Savings Account with them when he / she leaves his/her employer. They are not forfeited after termination of employment. Does the use-it-or-lose-it rule apply to a Health Savings Account? No. Any unused amounts in the Health Savings Account will be carried over to the next plan year and can be used at any time. Can the participant use his/her HSA for services that were obtained prior to his/her enrollment in the HSA? Generally, no. The expenses must be incurred only after the participant is enrolled in the HSA to be eligible for tax-free reimbursement (assuming that they are qualified medical expenses). However, the lone exception to this is that if an individual opens an HSA by April 15, 2005, that individual may submit receipts for medical expenses incurred during any months in 2004 in which the individual was a participant in a HDHP. Does the participant have to put the funds in another Health Savings Account when he / she takes an HSA distribution? Participants must transfer funds to another eligible account within 60 days to avoid paying taxes on the amount distributed. Can HSA funds be used for health care premiums? An HSA can generally not be used to pay for health coverage premiums if the HSA participant is under age 65. However, an HSA may be used to pay for certain health coverage premiums (COBRA, long-term care and coverage while receiving unemployment compensation). In addition, when the individual becomes Medicareeligible, an HSA may be used to pay for health coverage premiums (except for Medigap premiums). The information se forth herein is not intended as legal advice. You should consult your legal and tax advisors in choosing benefit options that best suit your needs • Comparison of HSA – HRA – FSA |
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