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HSA  FAQ's


This HSA infomation is for educational purposes only.

 

      HSA BASICs

 

1. What is a Health Savings Account (HSA)?

 

A: 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)

 

2. How does an HSA work?

 

A: 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.

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.

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.

 

3. Who is eligible to open an HSA?

 

A: 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.

 

4. Who is eligible to contribute to an HSA?

 

A: 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.

 

5. How is money deposited to my HSA?

 

A: 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.

 

6. I can choose a low-deductible health plan with higher employee contributions and once I've met the HSA deductible my covered expenses will be paid for by the health plan. Why should I choose a high-deductible plan with lower employee contributions and have to pay for what is covered by the other health plan until I meet the higher deductible?

 

A: Unless you have a large, catastrophic-type medical claim, it is highly unlikely that you will recoup the amount of money you pay in employee contributions today for health insurance.

For example, assume you contribute $550 a month for family coverage, which is $6,600 per year (12 x $550). Now assume that your family has only three doctor visits during the year at $200 each ($600 total) plus 4 prescriptions at an average of $75 ($300 total). That's a total of covered expenses for the year of $900. Assuming the co-payment for each doctor visit was $20 (3 x $20 = $60) and each prescription was $30 (4 x $30 = $120), that's a total in of $180 you paid. When you subtract the total expenses from the co-pays, you get a total of $720. This means you paid $6,600 in contributions for just $720 in covered charges.

A qualified HDHP , with an HSA, may make sense for you because these types of plans allow you to be fully covered for large expenses, while self-insuring yourself for smaller ones with tax free dollars. Also, you save on contributions for coverage. These savings can be deposited to your HSA and used to pay for expenses now or at a later date.

 

7. Why doesn't it make more sense to pay higher employee contributions (health insurance premiums) to have smaller deductibles and co-pays for doctor visits and prescriptions?

 

A: Unless you have a large, catastrophic-type medical claim, it is highly unlikely that you will recoup the amount of money you pay in employee contributions today for health insurance.

For example, assume you contribute $550 a month for family coverage, which is $6,600 per year (12 x $550). Now assume that your family has only three doctor visits during the year at $200 each ($600 total) plus 4 prescriptions at an average of $75 ($300 total). That's a total of covered expenses for the year of $900. Assuming the co-payment for each doctor visit was $20 (3 x $20 = $60) and each prescription was $30 (4 x $30 = $120), that's a total in of $180 you paid. When you subtract the total expenses from the co-pays, you get a total of $720. This means you paid $6,600 in contributions for just $720 in covered charges.

A qualified HDHP , with an HSA, may make sense for you because these types of plans allow you to be fully covered for large expenses, while self-insuring yourself for smaller ones with tax free dollars. Also, you save on contributions for coverage. These savings can be deposited to your HSA and used to pay for expenses now or at a later date.

 

8. Why does it make sense to switch from my current health plan to a qualified HDHP and open an HSA?

 

A: A traditional plan may have smaller deductibles and/or co-pays for doctor visits and prescriptions. Unless you have a large, catastrophic-type medical claim, it is highly unlikely that you will recoup the amount of money you pay in employee contributions today for health insurance.

A qualified HDHP with an HSA, may make sense for you because these types of plans allow you to be fully covered for large expenses while self-insuring yourself for smaller ones with tax free dollars. Also, you save on contributions for coverage. These savings can be deposited to your HSA and used to pay for expenses now or at a later date.

 

9. How do I open an HSA?

 

A: 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.

 

10. What does it take to open an HSA?

 

A: 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.

 

11. Who, in addition to me, can contribute to my HSA?

 

A: Contributions can come from multiple sources. As long as you are covered by a qualified HDHP, you, your employer, family members, or anyone else may contribute to your HSA.

You can deposit after-tax contributions to your HSA using personal check, cash or money order, and take an above the line deduction for the contributions when filing annual income taxes.

If your employer offers payroll deductions, your contributions will be pre-tax. If your employer contributes to your account, those funds will be excluded from your total income and are therefore tax free.

If a family member or anyone else makes a contribution to your account, the tax advantages apply to you and not the person making the contribution. You can take an above the line deduction for the contribution amount when filing your annual income taxes, in the same way you would if you had made a post-tax contribution on your own.

The total of all contributions to the account are combined and subject to your maximum annual contribution limit.

 

12. What are the advantages of having an HSA?

 

A: HSAs are:

Tax-advantaged : Contributions, earnings and withdrawals for qualified expenses are excluded from federal income tax, FICA (Social Security and Medicare) tax and state income tax, in most states.

Flexible : The money is yours. It grows and remains with you, even when you change medical plans, change employers or retire. There are no "use it or lose it" rules. Even if you are no longer eligible to make contributions, funds in your account may still be used to pay for qualified expenses tax free. The funds in the account can be used for non-qualified expenses, but are then subject to ordinary tax, plus a 10 percent 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 pass away.

Portable : Accounts move with you when you change medical plans, change employers or retire.

Savings mechanism for future health needs : Unused funds can grow through interest and investment earnings and can be "banked" for future medical expenses.

Contributions can come from multiple sources : As long as you are covered by a qualified HDHP, you, your employer, family members, or anyone else may contribute to your HSA.

You can deposit after-tax contributions to your HSA using personal check, cash or money order, and take an above the line deduction for the contributions when filing annual income taxes.

If your employer offers payroll deductions, your contributions will be pre-tax. If your employer contributes to your account, those funds will be excluded from your total income and are therefore tax free.

If a family member or anyone else makes a contribution to your account, the tax advantages apply to you and not the person making the contribution. You can take an above the line deduction for the contribution amount when filing your annual income taxes, in the same way you would if you had made a post-tax contribution on your own.

The total of all contributions to the account are combined and subject to your maximum annual contribution limit.

 

13. Why establish an HSA?

 

A: HSAs are:

Tax-advantaged : Contributions, earnings and withdrawals for qualified expenses are excluded from federal income tax, FICA (Social Security and Medicare) tax and state income tax, in most states.

Flexible : The money is yours. It grows and remains with you, even when you change medical plans, change employers or retire. There are no "use it or lose it" rules. Even if you are no longer eligible to make contributions, funds in your account may still be used to pay for qualified expenses tax free. The funds in the account can be used for non-qualified expenses, but are then subject to ordinary tax, plus a 10 percent 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 pass away.

Portable : Accounts move with you when you change medical plans, change employers or retire.

Savings mechanism for future health needs : Unused funds can grow through interest and investment earnings and can be "banked" for future medical expenses.

Contributions can come from multiple sources : As long as you are covered by a qualified HDHP, you, your employer, family members, or anyone else may contribute to your HSA.

You can deposit after-tax contributions to your HSA using personal check, cash or money order, and take an above the line deduction for the contributions when filing annual income taxes.

If your employer offers payroll deductions, your contributions will be pre-tax. If your employer contributes to your account, those funds will be excluded from your total income and are therefore tax free.

If a family member or anyone else makes a contribution to your account, the tax advantages apply to you and not the person making the contribution. You can take an above the line deduction for the contribution amount when filing your annual income taxes, in the same way you would if you had made a post-tax contribution on your own.

The total of all contributions to the account are combined and subject to your maximum annual contribution limit.

 

14. What is a "high deductible health plan" (HDHP)?

 

A: 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 may be 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.

 

15. How do I know if my health plan is a "qualifying high deductible health plan (HDHP)"?

 

A: The health insurance company or plan administrator will provide you a written statement verifying this status. The words "qualifying (or qualified) high-deductible health plan" or a reference to IRC Section 223 will be included in the declaration page of the policy or in another official communication from the insurance company. If this documentation is not available, it is NOT a qualifying high-deductible health plan.

To be a qualified plan the deductible cannot be below the minimum and out-of-pocket expenses cannot exceed the maximum as outlined:

The minimum annual deductible cannot be less than $1,100 for individual coverage or $2,200 for family coverage in 2008;

The maximum out-of-pocket expenses are capped at $5,600 for individual coverage and $11,200 for family coverage; and

Deductibles and out-of-pocket maximums may be adjusted 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.

A qualified HDHP with family coverage may have deductibles for both the family as a whole (the umbrella deductible) and for individual family members (the embedded deductible). Under this arrangement, if one family member meets the individual (embedded) deductible, that individual does not have to wait until the higher family deductible is met before being reimbursed for eligible expenses. If either the deductible for the family (umbrella) or the deductible for an individual (embedded) is below the minimum annual deductible for family coverage ($2,200), the plan is not a qualified HDHP.

 

16. What are consumer-directed health care plans [CDHPs]?

 

A: Consumer-directed health care plans (CDHPs) provide you with incentives and tools to manage both health care decisions and the costs associated with them. A typical consumer-directed plan may include:

Web-based tools that help you make decisions about your health plan choices, how much to contribute to your health savings account;

Web-based tools that provide you access to educational information you need to make informed decisions about your healthcare;

Preventive coverage included at little or no cost, and deductibles do not apply; and/or

Extensive health and wellness management tools, as well as other support features, such as care coaches and disease management programs.

 

17. What is the difference between health care flexible spending accounts (FSAs) and HSAs?

 

A: Both HSAs and FSAs allow you to pay for qualified expenses with pre-tax dollars. One key difference, however, is that HSA balances can roll over from year to year, while FSA money left unspent at the end of the year is forfeited. If you have both an HSA and an FSA, you must pay certain expenses, such as those that apply to the HDHP deductible, out of your HSA before you may use your FSA.

 

18. How does a health care FSA work in conjunction with an HSA?

 

A: According to IRS rules, you must use the funds in your HSA before you can be reimbursed for qualified medical expenses from your FSA. Your FSA can only be used to cover dental, vision, preventive care expenses and other expenses not covered by your high deductible health plan.

 

 

19. How is an HSA different from a savings account?  
Is there an advantage to using an HSA instead of a savings account to cover medical expenses?

 

A: The funds in a regular savings account do not have the tax advantages of an HSA. HSA contributions, earnings and withdrawals for qualified expenses are not subject to federal income tax, FICA (Social Security and Medicare) tax, and in many states, state income tax.

 

20. Can my spouse and I have a joint HSA, like our regular checking account?

 

A: No, only one person can be named the account owner. If both you and your spouse are covered by qualified HDHPs, you must each have your own account.

 

21. Why is my employer offering an HSA in conjunction with a qualified HDHP?

 

A: Offering an HSA is an excellent way to help you save for future medical expenses while paying for current expenses. HSAs offer you tax advantages and investment opportunities unavailable through other reimbursement plans.

 

22. May I have more than one HSA?

 

A: Yes, you may have more than one HSA and you may contribute to them all. However, this does not give you any additional tax advantages, as the total contributions to your accounts cannot exceed your maximum annual contribution. Contributions from your employer, family members, or any other person must be included in the total.

 

23. What health care expenses does an HSA cover?

 

A: Your HSA funds can be used tax free to pay for out-of-pocket qualified expenses, even if the expenses are not covered by your HDHP. This includes expenses incurred by your family.

Examples of other qualified expenses include: for over-the-counter medications; dental visits; orthodontics; glasses; long-term care insurance premiums; cost of COBRA coverage; medical insurance premiums while receiving federal or state unemployment compensation and post age-65 premiums for coverage other than Medigap or Medicare supplemental plans. HSA funds may be used to pay your Medicare parts A and B premiums and for employer-sponsored retiree plans.

All of these expenses may be paid for with your tax free HSA funds. You do not pay income tax or any penalty for these distributions.

 

24. What can funds in an HSA be used for?

 

A: HSA funds can be used for either qualified or non-qualified expenses. If funds are used for qualified expenses, then the distribution is tax free. If you use HSA funds for non-qualified expenses and you are not disabled or over age 65, distributions will be subject to ordinary income tax, and a 10 percent penalty.

Dental and vision care expenses are qualified expenses, as long as these are deductible for your income tax under the current IRS rules. For example, cosmetic procedures, like cosmetic dentistry, are generally not deductible and would not be considered qualified expenses.

Qualified expenses, in addition to dental and vision expenses, include over-the-counter medications [OTC], covered expenses applied to the deductible, co-pays above the deductible, payments for continuation of coverage [COBRA], health insurance premiums while receiving federal or state unemployment, Medicare Part A and/or B premiums and qualified long-term care insurance premiums. Premiums for Medigap or Medicare supplemental plans are not qualified distributions.

Only qualified expenses incurred after you have established your HSA meet the requirements for tax free reimbursement.

 

25. How do HSAs save me on taxes?

 

A: 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). Therefore, you keep more of the money you earn.

 

26. How is my HSA taxed?

 

A: Your HSA is exempt from federal income tax, and in most states, state income tax, unless or until it is considered to no longer be an HSA.

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).

 

27. I participated in my employer’s consumer-driven health care plan and have a rollover balance in my health reimbursement account (HRA). Can those funds be transferred into my HSA?

 

A: No. The HSA and HRA are two different types of accounts. You may transfer funds from one HSA to another, but not to an HRA.

 

28. Can I have an HSA in addition to an IRA or other qualified retirement plan?

 

A: Yes. Although an HSA operates under many of the same rules that apply to traditional IRAs, it is not an IRA.

 

29. Can I pay out-of-pocket medical expenses with after-tax dollars instead of using HSA funds?

 

A: Yes. HSA participants have the option not to use their HSA balances for qualified medical expenses. Account holders may instead pay out-of-pocket expenses with after-tax dollars - allowing their HSA balances to grow tax-free. An individual must elect to "opt out" of automatic claim administration in order to have this opportunity.

 

Note: This is not intended to be a complete summary of all provisions relating to Health Savings Accounts (HSAs).

 

 

This HSA infomation is for educational purposes only.
2004 © Copyright Mellon Financial Corporation.

 

 

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