1)
What is a HSA?
HSA stands for Health Saving
Account. An HSA is a tax-exempt account established exclusively
for the purpose of paying qualified medical expenses.
2) Who is eligible
to establish an HSA?
Any individual that is (1)
is covered under a high-deductible health plan (HDHP)
(2) is not also covered by any other
health plan that is not an HDHP (with certain exceptions
for plans providing certain limited types of coverage);
(3) is not entitled to benefits under Medicare (generally,
has not yet reached age 65); and (4) may not be claimed
as a dependent on another person’s tax return.
3) What is a "high-deductible
health plan" (HDHP)?
Generally,
an HDHP is a health plan that satisfies certain requirements
with respect to deductibles and out-of-pocket expenses.
Specifically, for self-only coverage, an HDHP has an annual
deductible of at least $1,050 and annual out-of-pocket
expenses required to be paid (deductibles, co-payments
and other amounts, but not premiums) not
exceeding $5,250.
For
family coverage, an HDHP has an annual deductible of at
least $2,100 and annual out-of-pocket expenses required
to be paid not exceeding $10,500. In the case of family
coverage, a plan is an HDHP only if, under the terms of
the plan and
without regard to which family member or members incur
expenses, no amounts are payable from the HDHP until the
family has incurred annual covered medical expenses in
excess of the minimum annual deductible. Amounts are indexed
for inflation. A plan does not fail to qualify as an HDHP
merely because it does not have a deductible (or has a
small deductible) for preventive care (e.g., first dollar
coverage for preventive care).
However, except for preventive
care, a plan may not provide benefits for any year until
the deductible for that year is met. See A-4 and A-6 for
special rules regarding network plans and plans providing
certain types of coverage.
4) What are the special
rules for determining whether a health plan that is a
network plan meets the requirements of an HDHP?
A network plan is a plan
that generally provides more favorable benefits for services
provided by its network of providers than for services
provided outside of the network.In the case of a plan
using a network of providers, the plan does not fail to
be an HDHP (if it would otherwise meet the requirements
of an HDHP) solely because the out-of pocket expense limits
for services provided outside of the network exceeds the
maximum annual out-of-pocket expense limits allowed for
an HDHP. In addition, the plan's annual deductible for
out-of- network services is not taken into account in
determining the annual contribution limit. Rather, the
annual contribution limit is determined by reference to
the deductible for services within the network.
5) What kind of other
health coverage makes an individual ineligible for an
HSA?
Generally, an individual
is ineligible for an HSA if the individual, while covered
under an HDHP, is also covered under a health plan (whether
as an individual, spouse, or dependent) that is not an
HDHP.
6) What other kinds
of health coverage may an individual maintain without
losing eligibility for an HSA?
An individual does not fail
to be eligible for an HSA merely because, in addition
to an HDHP, the individual has coverage for any benefit
provided by “permitted insurance.” Permitted
insurance is insurance under which substantially all of
the coverage provided relates to liabilities incurred
under workers' compensation laws, tort liabilities, liabilities
relating to ownership or use of property (e.g., automobile
insurance), insurance for a specified disease or illness,
and insurance that pays a fixed amount per day (or other
period) of hospitalization.
In addition to permitted
insurance, an individual does not fail to be eligible
for an HSA merely because, in addition to an HDHP, the
individual has coverage (whether provided through insurance
or otherwise) for accidents, disability, dental care,
vision care, or longterm care. If a plan that is intended
to be an HDHP is one in which substantially all of the
coverage of the plan is through permitted insurance or
other coverage as described in this answer, it is not
an HDHP.
7) Can a self-insured
medical reimbursement plan sponsored by an employer be
an HDHP?
Yes.
8) How does an eligible
individual establish an HSA?
Beginning January 1, 2004, any eligible individual (as
described in A-2) can establish an HSA with a qualified
HSA trustee or custodian, in much the same way that individuals
establish IRAs. No permission or authorization from the
Internal Revenue Service (IRS) is necessary to establish
an HSA. An eligible individual who is an employee may
establish an HSA with or without involvement of the employer.
9) Who is a qualified
HSA trustee or custodian?
Any insurance company or any bank (including a similar
financial institution) can be an HSA trustee or custodian.
10) Does the HSA
have to be opened at the same institution that provides
the HDHP?
No. The HSA can be established through a qualified trustee
or custodian who is different from the HDHP provider.
Where a trustee or custodian does not sponsor the HDHP,
the trustee or custodian may require proof or certification
that the account
beneficiary is an eligible individual, including that
the individual is covered by a health plan that meets
all of the requirements of an HDHP.
11) Who may contribute
to an HSA?
Any eligible individual may contribute to an HSA. For
an HSA established by an employee, the employee, the employee's
employer or both may contribute to the HSA of the employee
in a given year. For an HSA established by a self-employed
(or unemployed) individual, the individual may contribute
to the HSA. Family members may also make contributions
to an HSA on behalf of another family member as long as
that other family member is an eligible individual.
12) How much may
be contributed to an HSA in calendar year 2004?
For eligible individuals
under 55 the maximum annual contribution to an HSA is
equal to the size of the annual deductible under the HDHP
(not to exceed $2,600).
For eligible individuals
with family coverage under an HDHP, the maximum Annual
contribution is equal to size of the annual deductible
under the HDHP (not to exceed $5,150).
In addition to the maximum
contribution amount, catch-up contributions, Individuals
age 55 or older and younger than 65 can make additional
“catch-up contributions” in excess of the
maximum limits stated above.
The same annual contribution
limit applies whether the contributions are made by an
employee, an employer, a self-employed person, or a family
member. Contributions may be made by or on behalf of eligible
individuals even if the individuals have no compensation
or if the contributions exceed their compensation. If
an individual has more than one HSA, the aggregate annual
contributions to all the HSAs are subject to the limit.
13) What are the
“catch-up contributions” for individuals age
55 or older?
For individuals (and their
spouses covered under the HDHP) between ages 55 and 65,
the HSA contribution limit is increased by $500 in calendar
year 2004. This catch-up amount will increase in $100
increments annually, until it reaches $1,000 in calendar
year 2009. As with the annual contribution limit, the
catch- up contribution is also computed on a monthly basis.
After an individual has attained age 65 (the Medicare
eligibility age), contributions, including catch-up contributions,
cannot be made to an individual’s HSA.
14) If one or both
spouses have family coverage, how is the contribution
limit computed?
In the case of individuals
who are married to each other, 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. The contribution limit for
the spouses is the lowest deductible amount, divided equally
between the spouses unless they agree on a different division.
The family coverage limit is reduced further by any contribution
to an Archer MSA. However, both spouses may make the catch-
up contributions for individuals age 55 or
over without exceeding the family coverage limit.
15) In what form
must contributions be made to an HSA?
Contributions to an HSA must
be made in cash. Payments for the HDHP and contributions
to the HSA can also be made through a cafeteria plan.
Contributions may not be made in the form of stock or
other property.
16) What is the tax
treatment of an eligible individual's HSA contributions?
Contributions made by an eligible individual to an HAS
are deductible by the eligible individual in determining
adjusted gross income (i.e., “above-the- line”).
The contributions are deductible whether or not the eligible
individual itemizes deductions. However, the individual
cannot also deduct the contributions as medical expense
deductions under section 213.
17) What is the tax
treatment of contributions made by a family member on
behalf of an eligible individual?
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 may be
claimed as a dependent on another person’s tax return
is not an eligible individual and may not deduct contributions
to an HSA.
18) What is the
tax treatment of employer contributions to an employee’s
HSA?
In the case of an employee
who is an eligible individual, employer contributions(provided
they are within the limits described in A-12) to the employee’s
HSA are treated as employer-provided coverage for medical
expenses under an accident or health plan and are excludable
from the employee’s gross income. The employer contributions
are not subject to withholding from wages for income tax
or subject to the Federal Insurance Contributions Act
(FICA), the Federal Unemployment Tax Act (FUTA), or the
Railroad Retirement Tax Act. Contributions to an employee’s
HSA through a cafeteria plan are treated as employer contributions.
The employee cannot deduct employer contributions
on his or her federal income tax return as HSA contributions
or as medical expense deductions under section 213.
19) What is the tax
treatment of an HSA?
An HSA is generally exempt from tax (like an IRA), unless
it has ceased to be an HSA. Earnings on amounts in an
HSA are not includable in gross income while held in the
HSA (i.e., inside buildup is not taxable).
20) When may HSA
contributions be made? Is there a deadline for contributions
to an HSA for a taxable year?
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 filing
the eligible individual's federal income tax return for
that year, but not before the beginning of that year.
For calendar year taxpayers, the deadline for contributions
to an HSA is generally April 15 following the year for
which the contributions are made. Although the annual
contribution is determined monthly, the maximum contribution
may be made on the first day of the year.
Example: B has self-only
coverage under an HDHP with a deductible of $1,500 and
also has an HSA. B’s employer contributes $200 to
B’s HSA at the end of every quarter in 2004 and
at the end of the first quarter in 2005 (March 31, 2005).
B can exclude from income in 2004 all of the employer
contributions (i.e., $1,000) because B’s exclusion
for
all contributions does not exceed the maximum annual HSA
contributions. See A-12.
21) What happens
when HSA contributions exceed the maximum amount that
may be deducted or excluded from gross income in a taxable
year?
Contributions by individuals
to an HSA, or if made on behalf of an individual to an
HSA, are not deductible to the extent they exceed the
limits described above.
Contributions by an employer
to an HSA for an employee are included in the gross
income of the employee to the extent that they exceed
the limits described in A-12 or if
they are made on behalf of an employee who is not an eligible
individual. In addition, an
excise tax of 6% for each taxable year is imposed on the
account beneficiary for excess
individual and employer contributions.
However, if the excess contributions for a taxable year
and the net income attributable to
such excess contributions are paid to the account beneficiary
before the last day
prescribed by law (including extensions) for filing the
account beneficiary's federal
income tax return for the taxable year, then the net income
attributable to the excess
contributions is included in the account beneficiary's
gross income for the taxable year in
which the distribution is received but the excise tax
is not imposed on the excess
contribution and the distribution of the excess contributions
is not taxed.
22) Are rollover
contribut ions to HSAs permitted?
Rollover contributions from
Archer MSAs and other HSAs into an HSA are
permitted. Rollover contributions need not be in cash.
Rollovers are not subject to the
annual contribution limits. Rollovers from an IRA, from
a health reimbursement
arrangement (HRA), or from a health flexible spending
arrangement (FSA) to an HSA
are not permitted.
23) When is an individual
permitted to receive distributions from an HSA?
An individual is permitted
to receive distributions from an HSA at any time.
24) How are distributions
from an HSA taxed?
Distributions from an HSA
used exclusively to pay for qualified medical expenses
of the account beneficiary, his or her spouse, or dependents
are excludable from gross
income. In general, amounts in an HSA can be used for
qualified medical expenses and
will be excludable from gross income even if the individual
is not currently eligible for
contributions to the HSA.
However, any amount of the
distribution not used exclusively to pay for qualified
medical expenses of the account beneficiary, spouse or
dependents is includable in gross
income of the account beneficiary and is subject to an
additional 10% tax on the amount
includable, except in the case of distributions made after
the account beneficiary's death,
disability, or attaining age 65.
25) What are the
“qualified medical expenses” that are eligible
for tax-free distributions?
The term “qualified
medical expenses” are expenses paid by the account
beneficiary, his or her spouse or dependents for medical
care as defined in section 213(d)
(including nonprescription drugs as described in Rev.
Rul. 2003-102, 2003-38 I.R.B.
559), but only to the extent the expenses are not covered
by insurance or otherwise. The
qualified medical expenses must be incurred only after
the HSA has been established.
For purposes of determining the itemized deduction for
medical expenses, medical
expenses paid or reimbursed by distributions from an HSA
are not treated as expenses
paid for medical care under section 213.
26) Are health insurance
premiums qualified medical expenses?
Generally, health insurance
premiums are not qualified medical expenses except
for the following: qualified long-term care insurance,
COBRA health care continuation
coverage, and health care coverage while an individual
is receiving unemployment
compensation. In addition, for individuals over age 65,
premiums for Medicare Part A or
B, Medicare HMO, and the employee share of premiums for
employer-sponsored health
insurance, including premiums for employer-sponsored retiree
health insurance can be
paid from an HSA. Premiums for Medigap policies are not
qualified medical expenses.
27) Must HSA trustees
or custodians determine whether HSA distributions are
used exclusively for qualified medical expenses?
No. HSA trustees or custodians
are not required to determine whether HSA
distributions are used for qualified medical expenses.
Individuals who establish HSAs
make that determination and should maintain records of
their medical expenses sufficient
to show that the distributions have been made exclusively
for qualified medical expenses
and are therefore excludable from gross income.
Must employers who make contributions
to an employee’s HSA determine
whether HSA distributions are used exclusively for qualified
medical expenses?
No. The same rule that applies to trustees or custodians
applies to employers. See
Above
28) What are the
income tax consequences after the HSA account beneficiary’s
death?
Upon death, any balance remaining
in the account beneficiary’s HSA becomes the
property of the individual named in the HSA instrument
as the beneficiary of the account.
If the account beneficiary’s surviving spouse is
the named beneficiary of the HSA, the
HSA becomes the HSA of the surviving spouse. The surviving
spouse is subject to
income tax only to the extent distributions from the HSA
are not used for qualified
medical expenses.
If, by reason of the death
of the account beneficiary, the HSA passes to a person
other
than the account beneficiary’s surviving spouse,
the HSA ceases to be an HSA as of the
date of the account beneficiary’s death, and the
person is required to include in gross
income the fair market value of the HSA assets as of the
date of death. For such a person
(except the decedent’s estate), the includable amount
is reduced by any payments from
the HSA made for the decedent’s qualified medical
expenses, if paid within one year
after death.
What discrimination
rules apply to HSAs?
If an employer makes HSA
contributions, the employer must make available
comparable contributions on behalf of all "comparable
participating employees" (i.e.,
eligible employees with comparable coverage) during the
same period. Contributions are
considered comparable if they are either the same amount
or same percentage of the
deductible under the HDHP.
The comparability rule is
applied separately to part-time employees (i.e., employees
who
are customarily employed for fewer than 30 hours per week).
The comparability rule
does not apply to amounts rolled over from an employee’s
HSA or to
contributions made through a cafeteria plan. If employer
contributions do not satisfy the
comparability rule during a period, the employer is subject
to an excise tax equal to 35%
of the aggregate amount contributed by the employer to
HSAs for that period.
Example: Employer X offers its collectively bargained
employees three health plans,
including an HDHP with self-only coverage and a $2,000
deductible. For each employee
electing the HDHP self-only coverage, X contributes $1,000
per year on behalf of the
employee to an HSA. X makes no HSA contributions for employees
who do not elect the
HDHP. X’s plans and HSA contributions satisfy the
comparability rule.
Can an HSA be offered
under a cafeteria plan?
Yes. Both an HSA and an HDHP may be offered as options
under a cafeteria
plan. Thus, an employee may elect to have amounts contributed
as employer
contributions to an HSA and an HDHP on a salary-reduction
basis.
What reporting is
required for an HSA?
Employer contributions to
an HSA must be reported on the employee’s Form W-2.
In addition, information reporting for HSAs will be similar
to information reporting for
Archer MSAs. The IRS will release forms and instructions,
similar to those required for
Archer MSAs, on how to report HSA contributions, deductions,
and distributions.
