Health Insurance for individuals and Families
HSA Frequently Asked Questions
1) What is an HSA?
HSA stands for Health Savings Account. An HSA is a tax-exempt account established exclusively for the purpose of paying qualified medical expenses. The HSA is a very flexible tool for obtaining quality, affordable health insurance for you or your family, yet it remains one of the industry’s best-kept secrets. Read on and take the mystery out of the HSA.
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, an HDHP has an annual deductible of at least $1,200 (for an individual) and annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) not exceeding $5,950 (again, for an individual).
For family coverage, an HDHP has an annual deductible of at least $2,400 and annual out-of-pocket expenses not-to-exceed $11,900. 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.
4) What are the special rules for determining whether a network health 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) 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.
6) 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 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.
7) How much may be contributed to an HSA in calendar year?
Please see contribution limits.
8) 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.
9) What is the tax treatment of an eligible individual’s HSA contributions?
Contributions made by an eligible individual to an HSA are deductible from his or her adjusted gross income. 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.
10) 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.
11) 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.
12) What is the tax treatment of an HSA?
An HSA is generally exempt from taxation (like an IRA), unless it has ceased to be an HSA. Earnings on amounts in an HSA are not to be included in gross income while held in the HSA (i.e., inside buildup is not taxable).
13) 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: Bill has self-only coverage under an HDHP with a deductible of $1,500 and also has an HSA. Bill’s employer contributes $200 to Bill’s HSA at the end of every quarter in 2009 and at the end of the first quarter in 2010 (March 31, 2010). Bill can exclude from income in 2004 all of the employer contributions (i.e., $1,000) because Bill’s exclusion for all contributions does not exceed the maximum annual HSA contributions.
14) What happens when HSA contributions exceed the maximum amount that may be deducted or excluded from gross income in a taxable year?
Contributions above the maximum amount made by individuals to an HSA, or made on behalf of an individual to an HSA, are not tax deductible.
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.
15) 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.
16) When is an individual permitted to receive distributions from an HSA?
An individual is permitted to receive distributions from an HSA at any time.
17) 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.
18) What are the “qualified medical expenses” that are eligible for tax-free distributions?
“Qualified medical expenses” are expenses paid by the account beneficiary, his or her spouse or dependents for medical care, 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.
19) Are health insurance premiums considered qualified medical expenses?
Generally, health insurance premiums are not considered to be 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.
20) 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.
21) 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.
22) 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.
23) 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.
24) What reporting is required for an HSA?
Employer contributions to an HSA must be reported on the employee’s Form W-2.