Additional Information about Health Savings Accounts
Learning About Health Savings Accounts
If you are considering financing your medical expenses using a Health Savings Account (HSA), especially in California, you will need a qualified HSA compatible health insurance plan. You should also figure that you will need to spend a little bit of time learning about some of the details of how these plans work. You will likely be rewarded by saving money on your health insurance premium, accumulating savings in a tax favored account and reducing your taxable income. Feel free to call us (800)746-0045 if you have any questions.
The information on our web site should provide a good basis for learning about HSAs. Remember that BenefitsCafe.com, Inc. is an insurance agency and not an accounting firm. We don’t give tax advice and we encourage you to speak with your accountant about tax matters.
There is NO additional charge for the services of BenefitsCafe.com. We are compensated by insurance companies when you enroll in one of their policies through us. The way that we compete is by providing superior service. This web site and the information you are reading on HSAs are examples of our expertise and desire to have you as a client. To show you our appreciation, we’ll even give you a free coffee mug as our way of saying thanks when you become our client.
Legislative Authority and Government Resources
The U.S. Congress created Health Savings Accounts (HSA) in December 2003 as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Section 1201 of this Act describes Health Savings Accounts. The Tax Relief and Health Care Act of 2006 made significant changes to HSAs and you may find this information helpful.
The Internal Revenue Service web site also has very useful information. Publication 969 describes IRS treatment of Health Savings Accounts. IRS Publication 502 describes qualified medical expenses for which HSA funds can be withdrawn without penalty. The Health Opportunity Patient Empowerment Act of 2006 revised portions the HSA law and you may find this summary helpful.
The U.S. Department of the Treasury’s HSA web site has good source information.
Eligibility to Open an HSA
In order to open an HSA you must first have a qualified high deductible health insurance plan (HDHP) that meets the HSA requirements. You can't open an HSA account until you are enrolled in the health plan - first the health insurance plan - then the HSA savings account. Additionally, you can't be covered by any health insurance plan other than the qualified HDHP.
You can't be enrolled in Medicare, which usually begins at age 65. You can not open an HSA if someone else claims you as a dependent on his tax return. You can purchase a HSA compatible health insurance plan in these situations; however, you just can't fund the deductible with the HSA account.
If you become ineligible for an HSA and you already have an account, you keep all of the money in the HSA account and you can use the money for qualified medical expenses. However, you can not deposit additional money into the HSA account once ineligible.
An HSA is a tax-exempt trust or custodial account established with a bank, insurance company or other IRS-approved entity. The HSA has unique features and must be set up with an approved entity. You can't just set up an ordinary savings account and label it an HSA. Nor can someone deem his IRA to be an HSA.
An HSA is NOT like an FSA (Flexible Spending Account) which has a “use it or lose it” provision. Money deposited into an HSA account, unless withdrawn, stays in the account and remains the possession of the account holder. So, HSA’s provide you with a good opportunity to save a lot of money.
Maximum Contribution Limits to an HSA
1) Contributions Calculated Monthly – with an exception: The IRS calculates the HSA contribution limits on a monthly basis. You can contribute one-twelfth of the contribution limit for each full month of the year that you are covered by a qualified HSA compatible health insurance plan. For example, if you start your HSA compatible health insurance plan May 1st and have it the entire year, you can deposit eight-twelfths or two-thirds of the allowable annual amount.
2) Exception: Starting January 1, 2007 the IRS allows an exception to the pro-rated contribution requirement described above. People who become eligible to open an HSA account after January are able to make the maximum HSA contribution based on their coverage during the last month of the year. People making the maximum HSA contribution must stay on an HSA-compatible plan for an entire 12 month period. If they enroll in an HSA compatible plan after January, make the maximum contribution but do not stay enrolled for a 12 month period the pro-rated excess contribution would be considered income and become subject to a 10 percent penalty.
There are two types of contributions to an HSA: regular contributions and catch-up contributions.
3) Regular Contribution Limits. In 2012 and 2013 the annual contribution limit for self-only coverage is $3,100 and $3,250 respectively. For family coverage (two or more people) the 2012 annual HSA limit is $6,250 and $6,450 in 2013. Beginning in 2007 the maximum contribution limits are not related to the calendar year health plan deductible. As an example, for self-coverage if your qualified health insurance plan had a $2,000 deductible, then the regular annual contribution limit would be $3,100 in 2012 and $3,250 in 2013. In another example, if your family qualified health insurance plan deductible were $10,000, the maximum annual contribution limit to the HSA would be $6,250 in 2012 and $6,450 in 2013. In this latter example, you would still have to pay $10,000 before the insurance company paid any money towards medical claims, yet you could only fund $6,250 ($6,450 in 2013) into your HSA. In future years the IRS will adjust the contribution limits annually for inflation and round to the nearest $50.
4) Catch-up Contribution Limits. People who are at least 55 years of age but not yet eligible for Medicare can contribute an $1,000 in 2009, 2010 and subsequent years.
5) Excess Contributions: If a person mistakenly deposits more than the annual allowed amount into his HSA account he can withdraw the excess contribution and any earnings before the income tax filing date (usually April 15th) and not have to pay the IRS a penalty. If not withdrawn prior to the filing date a person will have to pay a 6 percent excise tax each year until it is withdrawn.
Employer Contributions to Employee HSAs
Employers do not have to contribute to an employee's HSA. However, when an employer chooses to deposit money into an employee's HSA, employers should consider three issues:
1) Ownership of the funds: Employers must understand that any money they deposit into an employee's HSA immediately becomes the possession of the employee. To borrow terms from the pension world, the employee is 100 percent "vested" in his HSA immediately.
2) Tax treatment of employer contributions:Employer contributions to employee HSAs are a business expense and are tax deductible to the employer. Employer contributions are excluded from the gross income of employees. Additionally, employer contributions to employee HSAs are exempt from:
a) Social Security taxes (6.2% of wages up to $110,100 in 2012 and $113,700 in 2013),
b) Medicare taxes (1.45% of total wages.), and
c) Federal Unemployment Insurance taxes.
Both an employer and an employee can deposit money into an employee's HSA up to the maximum contribution limit. Employees can contribute money into their HSA through salary deduction when the employer has set up a Section 125 Premium Only Plan that allows HSA contributions.
Note: States tax HSAs differently. As an example, in California, HSA contributions are not tax deductible, yet they are fully tax deductible Arizona. For a detailed information on the tax treatment of HSAs by various States, click here.
3) Equitable contributions: Employers must contribute an equal dollar amount or equal percentage to ALL employees with HSAs if the employer contributes to ANY employee’s HSA. As an example, an employer can contribute $50 or $100 per month per employee or 50 percent of the deductible. Contributions do not have to be monthly – they can be in lump sums. Just keep in mind that if you deposit a lump of money into an employee’s HSA, he can leave the next day and take all of the money with him. Also employers have the freedom to only contribute money for employees who participate in the employer’s group HDHP insurance plan. The IRS allows different treatment for full-time and part-time employees and for self-only and family coverage – as different deductibles apply in the latter case.
Section 306 of theTax Relief and Health Care Act of 2006 created an exception where an employer is allowed to contribute more money into the HSA account of a “non-highly compensated employee.” The definition of a non-highly compensated employee is the same as in a qualified pension plan. If you’re an employer and you want to put more money into the accounts of lower paid employees you should consult your HSA trustee, your tax adviser and/or a third party administrator familiar with pension plan discrimination testing.
Timing of HSA Contributions
An employee, employer or individual can deposit money into his HSA at any time during the calendar year up to the tax filing date (without extensions) of the following year, usually April 15th. You just can't exceed the annual HSA limit described above.
Eligible HSA Medical Expenses
The IRS describes medical expenses which can be paid from an HSA in IRS Publication 502.
According to the IRS, you can withdraw money from an HSA to pay for the following expenses:
Eligible Medical Expenses (For HSA Distributions)
Health Insurance may not be purchased with HSA Funds. There are 3 situations which are exceptions whereby HSA funds can be used to pay for:
1) A health plan during any period of continuation coverage required under any Federal law
2) A qualified long-term care insurance contract
3) A health plan during a period in which the individual is receiving unemployment compensation under any Federal or State Law
¹ Revenue Ruling 2003-102, 2003-38 I.R.B. 559
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