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HSA  Basics


This HSA infomation is for educational purposes only.

 

       FAQ's

 

What is a Health Savings Account (HSA)?

 

A Health Savings Account (HSA) is a special tax-advantaged savings account similar to a traditional Individual Retirement Account (IRA) but designated for medical expenses. An HSA allows you to pay for current covered health care expenses and save for future qualified medical and retiree health care expenses on a tax-favored basis. HSAs provide triple-tax advantages: contributions, investment earnings, and qualified distributions all are exempt from federal income tax, FICA (Social Security and Medicare) tax and state income taxes (for most states).

 

Unused HSA dollars roll over from year to year, making HSAs a convenient and easy way to save and invest for future medical expenses. You own your HSA at all times and can take it with you when you change medical plans, change jobs or retire. This means the funds in the account [both yours and your employer's, if they contribute] are non-forfeitable and portable.

Funds in the account not needed for near term expenses may be invested, providing the opportunity for funds to grow. Investment options include bank accounts, mutual funds, etc.

To be eligible to set up an HSA and to make annual contributions, you must be covered by a qualified high-deductible health plan (HDHP).

What is a high-deductible health plan (HDHP)?


A high-deductible health plan is usually a key component of a consumer-directed health care plan (CDHP).

A qualified high deductible health plan must meet the following requirements:

  • A minimum annual deductible

  • A maximum limit of out-of-pocket expenses

For 2008 the minimum deductible by law is $1,100 for individuals and $2,200 for families.

For 2008 the maximum out-of-pocket expenses by law (including deductible and co-payments, but not including premiums) cannot exceed $5,600 for individuals and $11,200 for families.

The deductible and maximum out-of-pocket expenses are indexed annually for inflation.

In 2009, the minimum deductible will increase to $1,150  for individuals, or $2,300 for families, and the maximum out-of-pocket expenses will increase to $5,800 for individuals or $11,600 for families.

 

How does an HSA work?

 

Basic Overview:

  • To be eligible to contribute to an HSA you must be covered by a qualified high-deductible health plan (HDHP) and have no other first-dollar coverage

  • If you end your HDHP coverage, you can still pay for qualified medical expenses from your HSA -- with all of the tax advantages.

  • You can set up an HSA with any financial institution that has been approved by the IRS to offer HSAs. These institutions are referred to as HSA custodians or trustees.

  • You may use your HSA to help pay the deductible under a high-deductible health plan.

  • HSA funds unused remain in the account, and can be invested in a choice of investment options, providing the opportunity for funds to grow.

  • For 2008, if you enroll for individual coverage, the total amount that you and your employer can contribute to to your HSA is $2900; For family coverage the limit is $5800.  If you accidentally end up with more contributions to your HSA than are allowed for the year, you must withdraw them by April 15th of the following year and pay income tax on the excess contributions you made, without penalty.

  • If you are age 55 or older, you are allowed extra "catch up" contributions each year.

HSAs work in conjunction with a HDHP. All the money you (or your employer) deposit into your HSA up to the maximum annual contribution limit is 100% tax-deductible for federal income tax, FICA (Social Security and Medicare) tax, and in most states, state income tax. This makes HSA dollars tax free. The insurance company pays covered medical expenses above your deductible and you can pay costs below the deductible with tax free money from the HSA.

You can even use these tax free dollars to pay for expenses not covered by the HDHP, such as dental, vision and alternative medicines. The funds in the account also can be used for non-qualified expenses, but are then subject to ordinary tax, plus a 10% penalty if you are under age 65. The 10% penalty does not apply if the distribution occurs after you reach age 65, become disabled or die; however, ordinary income tax may still apply.

Funds remaining in your account at year-end are yours to rollover and accumulate for your future healthcare expenses. You may choose not to spend your HSA dollars on small expenses, instead using after-tax dollars to meet these expenses, and leaving your HSA dollars to grow for future needs. Choosing the expenses on which to spend your HSA dollars and which to pay out-of-pocket with after-tax dollars is entirely up to you.

 

Who is eligible to open an HSA?

 

If you meet all the criteria listed below you are eligible to open and contribute to an HSA. The Medicare Act of 2003, which established HSAs, defines "eligible individuals" as those who:

  • are covered by a qualified HDHP;

  • have no other coverage that pays first-dollar for any benefit that is covered by the HDHP;

  • are not enrolled in Medicare; and

  • cannot be claimed as a dependent on another individual's tax return.

You are eligible to establish an HSA if you are entitled to benefits under an Employee Assistance Plan (EAP), disease management or wellness program or have a discount card for prescriptions.

 

Who is eligible to contribute to an HSA?

 

If you meet all the criteria listed below you are eligible to open and contribute to an HSA. The Medicare Act of 2003, which established HSAs, defines "eligible individuals" as those who:

  • are covered by a qualified HDHP;

  • are not covered by any medical plan that is not a qualified HDHP (dental and vision plans are excluded from this restriction);

  • have no other coverage that pays first-dollar for any benefit that is covered by the HDHP;

  • are not enrolled in Medicare; and

  • cannot be claimed as a dependent on another individual's tax return.

You are eligible to establish an HSA if you are entitled to benefits under an Employee Assistance Plan (EAP), disease management or wellness program or have a discount card for prescriptions.

 

How is money deposited to my HSA?

 

Money may be deposited to your HSA through payroll deduction, if your employer participates in such a program, or you may make deposits directly to your account. Deposits may be made periodically or in a lump sum.

If you make deposits to your account with after-tax dollars, you may take a deduction on your taxes equal to that amount.

 

How do I open an HSA?

 

To open and make tax-deductible contributions to an HSA, you must be covered by a qualified high-deductible health plan (HDHP). The account must be established and maintained by a financial institution (such as a bank) that has been approved by the IRS to offer HSAs. You may open an account at any approved financial institution regardless of which insurance company provides your high-deductible plan or where you live.

 

What is first-dollar coverage?

 

A: First-dollar coverage means that you may receive a reimbursement for expenses immediately, without meeting a deductible.

First-dollar benefits may include reimbursement from an HRA or FSA for covered expenses applied to the deductible. So that you may have an HSA and an HRA and/or FSA, distributions must be restricted. Limited purpose HRA/FSAs are examples of plans that create the necessary restrictions.

First-dollar benefits paid for permitted insurance expenses do not disqualify you from making HSA contributions.

 

What first-dollar benefits make me ineligible for an HSA?

 

A: First dollar reimbursements for covered expenses from the following may make you ineligible for an HSA:

  • Medicare

  • Medicaid

  • Flexible Spending Arrangements

  • Health Reimbursement Arrangements

  • Coverage under a spouse's plan, including:

  • Low-deductible insurance coverage

  • FSA or HRA through spouse's employer

 

This HSA infomation is for educational purposes only.
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