Questions and Answers on the Health Savings Account (HSA)
General Information
Legislation authorizing Health Savings Accounts (HSAs) was signed by the President on
December 8, 2003.
HSA Plans
Q. What is a Health Savings Account (HSA)?
A. An HSA works like an IRA, except that money is used to pay health care costs. Participants enroll in a relatively inexpensive high deductible insurance plan. Then, a tax-deductible savings account may be opened to cover current and future medical expenses. The money deposited, as well as the earnings, are not taxable. The funds can then be withdrawn to cover qualified medical expenses tax free. Unused balances roll over from year to year.
HSAs are a significant expansion of the MSA program. HSAs provide the following:
- Everyone with a qualified high deductible plan is eligible to participate (includes all size employers, the self-employed, individual and families who are not self-employed)
- HSAs can be funded by the employer, employee or combination of both within the same calendar year
- HSAs are permanent and portable
- Larger tax-deferred contributions to custodial accounts
- Broader deductible ranges
Q. Who can qualify?
A. Everyone (not just self-employed or small businesses) with a qualified high deductible insurance plan is eligible for a tax-deductible HSA.
Q. What is a high deductible insurance plan?
A. A high deductible insurance plan is a health plan with a minimum deductible of $1,050 for single coverage and $2,100 for family coverage. The maximum out-of-pocket expenses for allowed costs must be no more than $5,250 for single coverage and no more than $10,500 for family.
Q. What deductible amounts are available?
A. As of January 1, 2006, the deductibles available are single: $1,100, $1,600, $2,100, $2,700, and $5,000; family: $2,200, $3,200, $4,200, $5,400, and $10,000
Q. Does the maximum OOP expense of $5,250 for individuals and $10,500 for families include the deductible?
A. Yes. Total OOP expenses including the deductible can be no greater than $5,250 for an individual and $10,500 for a family.
Q: Is an integrated (common) deductible part of the definition of high deductible health plan/HSA legislation?
A: No, a “common” deductible is not required. However, no family member may receive benefits until at least $2,100 has been incurred. Our plans have deductibles that are compliant with the HSA law.
Q: Will existing qualified plans continue to have deductibles increasing annually according to the Cost of Living Adjustment (COLA)?
A: Yes.
Q: Can minors have a “self-only” HSA?
A: According to the Treasury guidance, minors who are claimed as a dependent on another person’s tax return are not eligible to have a “self-only” HSA. They can be covered by their parent’s or guardian’s HSA plan.
Q: Does a person buying an HSA need to have “earned” income in order to deduct the contribution? Can they deduct it against “unearned” income i.e. pension, investment, etc.?
A: An individual who has less earned income (even no earned income) than his/her HSA contribution may still take the full above-the-line deduction.
Q: How are wellness benefits handled under an HSA plan?
A: There is no legal requirement for a high deductible health plan (HDHP) to provide benefits for preventive care or to cover these services before the minimum deductible is reached. We will continue to offer coverage for preventive care subject to deductible and coinsurance unless state mandated. This is similar to our other plans.
Q: How are prescription drug benefits handled under an HSA plan?
A: Prescription drugs are subject to the health plan’s deductible and coinsurance. Under the HSA legislation, individuals with an HDHP are not allowed to have prescription drug coverage that has no deductible or has a deductible that is lower than the minimum deductible required for an HDHP. However, individuals participating in an HSA who also have prescription drug coverage under a separate insurance plan or rider
that does not meet the HDHP requirements may continue to be eligible for an HSA until January 1, 2006. We do not offer separate prescription drug coverage.
Q. What are the annual contribution limits?
A. As of January 1, 2006, annual contribution limits are either the high deductible plan deductible, or $2,700 for an individual or $5,450 for a family – whichever amount is less.
Q. What is the annual contribution deadline?
A. Participants have until the tax-filing deadline of the following year to make a contribution for the previous tax year.
Q. Is the HSA contribution pro-rated for the year?
A. Yes, if a participant’s plan isn't effective for the entire calendar year, only the pro-rated portion of the maximum may be contributed and deducted. For example, if the participant’s plan is effective February 1st, he/she could contribute 11/12 of the maximum contribution limit.
Q: How much can a participant contribute to an HSA account if he/she changes the plan deductible mid-year?
A: If a participant changes his/her deductible mid-year, his/her contribution will be pro-rated based on the new deductible. For example, if your participant changes the deductible from $1,100 to $2,700 in June, his/her contribution is 6/12 of $1,100 ($550) plus 6/12 of $2,700 ($1,350), for a total of $1,900 for the year.
Q: If a Participant files an extension on his/her taxes, would he/she have extra time to contribute money into his/her HSA custodial account?
A: The participant could contribute until the tax-filing deadline. An extension does not affect the amount that a participant can contribute to the HSA.
Q: May an employer contribute to an employee’s HSA even if the employer does not provide health insurance for employees?
A: The new HSA law expressly permits an employer to contribute funds to an employee’s HSA on a tax-favored basis. Generally, HSAs are not subject to ERISA and an employer’s contribution to an employee’s HSA will not render the HSA an “employee welfare benefit plan.”
Q: What happens under the HSA law once someone becomes eligible for Medicare?
A: Once a person enrolls in Medicare, he/she can no longer contribute to an HSA. However, he/she can use the accumulated funds to cover qualified medical expenses not covered under Medicare or his/her supplemental plan.
Tax Implications
Q: Since deposits can be made by anyone on behalf of the account beneficiary, who can legally take the tax deduction?
A: 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. Employer contributions to the employee’s HSA are excludable from the employee’s gross income. The employee cannot deduct employer contributions on his/her federal income tax return.
Q: Who can deduct premium payments from their taxes?
A: Today, the self-employed can deduct their premiums. Many are working with congress to pass legislation that will allow everyone to deduct 100% of their premium payments. Until such legislation is passed, only the self-employed can deduct any portion of their premium payments.
Q: Can participants roll funds from an IRA, HRA or FSA into an HSA?
A: Rollovers from an IRA, HRA or FSA are not permitted.
Q: Can participants roll funds from an HSA into another investment vehicle, such as an IRA, HRA or FSA?
A: No.
Disbursement and Qualified Medical Expenses
Q: How are HSA-qualified medical expenses paid?
A: On the HSA Adoption Agreement, participants choose whether they prefer a manual or an automated disbursement. As long as there is money in their HSA, the automated disbursement occurs regardless of whether the deductible has been met. If the customer just wants the disbursement to be distributed without a lot of intervention on his/her part, then automated disbursement may be the better choice. Otherwise, if the customer wants tighter control on the funds, then the manual disbursement may be the way to go. Either way, checks will be sent to the participant, not the provider.
Q: What is the timing of disbursements relative to an incurred medical expense?
A: Federal law places no restriction on when disbursements must occur. We offer feeless/seamless administration of the participant’s account and the participant can expect prompt disbursements of qualified medical expenses. Disbursements of $100 or more are issued on a monthly basis. Checks will be issued quarterly for requests that total less than $100. A claim total that is less than $10 will be addressed at year-end.
Q: Can medical expenses incurred before the HSA was established be paid from the HSA?
A: Individuals who establish an HSA on or before April 15, 2005 can use the HSA to reimburse qualified medical expenses incurred on or after the later of: 1) January 1, 2004; or 2) the first day of the first month that they are covered under an HDHP. For HSAs established after April 15, 2005, medical expenses may not be paid from an HSA if the expenses were incurred before the HSA was established.
Q: Are health insurance premiums considered a qualified medical expense?
A: Health insurance premiums are not qualified eligible medical expenses except for the following scenarios: qualified long-term care insurance, COBRA and health care coverage while receiving unemployment compensation. Funds can also be used to pay for Medicare Part A or B premiums (not Medicare supplement premiums).
Q: If an unmarried insured has single coverage, can HSA funds be used to pay for qualified medical expenses for his/her dependents?
A: Yes.
Q. Is there an age at which an individual must withdraw their money from an HSA?
A. With an IRA or 401K once the person reaches 70 12/ they are required to make withdrawals from the money in these tax-deferred accounts. That is not the case with HSAs. There is no requirement that withdrawals from an HSA begin at 70 1 / 2 as there is with IRAs and 401Ks.
Medical Savings Accounts (MSAs)
Q. Can a Medical Savings Account be rolled into a Health Savings Account?
A. Yes. MSAs can be rolled into HSAs on a tax-free basis, but it is not necessary.
Q: Can participants roll their MSA funds into an HSA any time?
A: Yes, participants can roll their funds into an HSA and increase their deductible at any time.
Q: Can a policyholder continue to deposit into an MSA as long as the insurance plan is a qualified high deductible plan?
A: Yes. MSA policyholders have a lifetime right to their MSA custodial account under the MSA rules.
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