Just What is an HSA Health Plan?

FINALLY!  A program that can help you develop a strategy for purchasing health insurance and avoiding runaway rate increases - HEALTH SAVINGS ACCOUNTS!

These portable accounts will allow individuals to deposit money tax free, grow money tax-free, and to withdraw that money tax-free to pay for qualified medical expenses, including preventive care, health insurance deductibles, health insurance premiums for retirees, prescription drugs and long-term care services (including long-term care insurance). As such, HSAs, which are owned by individuals, are the first completely tax-free account in American history. They will begin to move us away from the current model in which insurance companies dominate the health care transaction. Instead, HSAs will enable transactions between doctor and patient in which the patient controls how dollars are spent

There are two components to the Health Savings Account. First you must have a qualified health insurance plan. Once you have the health insurance plan you can optionally open a Health Savings Account. The HSA is a trust account. The trustee can be a bank, insurance company, or an IRS-approved entity.

The HSA owner interacts with the trustee for HSA deposits or withdrawals. The HSA account owner will only deal with the insurance company for their health insurance needs. Some  insurance companies may also be the trustee of your HSA account. However, most insurance companies offer you the choice of selecting another type of trustee.

We represent several health carriers that provide qualified insurance plans for Health Savings Accounts. Get more details on what an HSA is and how you can set one up by clicking here.

First of all, you must understand that for an HSA health plan to work effectively you will be making TWO payments. You will be making your health insurance premium and you will be making a deposit into your HSA account you have setup - that account is called a Health Savings Account. Some trustee's require you to make a monthly deposit into your HSA account; some do not. So, ideally, your insurance premium must be affordable enough to allow you to also set aside money into the HSA account.

Next, the money you deposit into your HSA account is used by you and your family as needed to pay for your out-of-pocket health expenses throughout the year until you reach your health plan deductible. The philosophy behind this believes that if you are spending money out of your own HSA account you will be more frugal with it and shop around for outpatient services. Also, when you are told you need to have some expensive test done you will be more diligent in finding out why and in searching for the best price for that test.

HSA's can also reduce your income taxes.  The amount you elect to deposit into your HSA account each year is deducted directly from your taxable income in the same manner as an IRA account – regardless of whether you spend it or just save it.  Interest and investment earnings in an HSA are also tax-free.  For the average person, for every dollar that you put into your HSA, your taxes will be reduced by about $.25 even if you do not incur any medical expenses.

You, as the the HSA account holder, own the account; not the government and surely not the insurance company. You decide how much to contribute, whether to use the account to pay for medical expenses or whether to save the account for future use. Even if you eventually change your HSA health plan to another carrier, the HSA account remains yours. Unspent balances remain in your account. There is no "use it or lose it" rule.

When Did HSA's Start?

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 added section 223 to the Internal Revenue Code to permit eligible individuals to establish health savings accounts (HSAs) for taxable years beginning after December 31, 2003. An HSA allows individuals to pay for qualified health expenses and save for future qualified medical and retiree health expenses on a tax-free basis. An HSA is similar to an Individual Retirement Account ("IRA"). Like an IRA, an HSA is established for the benefit of an individual, is owned by that individual, and is "portable." Thus, if the individual is an employee who changes employers or leaves employment, the HSA stays with the individual.

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 Who is eligible to establish an HSA?

 To be eligible for an HSA, you must be covered by a high deductible health plan and you must not be covered by other health insurance. (This restriction does not apply to insurance for specified illness or disease or accident, disability, dental care, vision care, long-term care or hospitalization insurance) In addition, you cannot be enrolled in Medicare nor can you be claimed as a dependent on someone else’s tax return. You are also ineligible for an HSA if, while covered under a high deductible health plan, you are also covered (whether as an individual, spouse, or dependent) under a health plan that is not a high deductible health plan.

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

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What coverage is ineligible for an HSA?

 Generally, an individual is ineligible for an HSA if the individual, while covered under an HDHP, is also covered under a health plan (whether as an individual, spouse, or dependent) that is not an HDHP.

What other kinds of health coverage may an individual maintain without losing eligibility for an HSA?

An individual does not fail to be eligible for an HSA merely because, in addition to an HDHP, the individual has coverage for any benefit provided by “permitted insurance.” Permitted insurance is insurance under which substantially all of the coverage provided relates to liabilities incurred under workers' compensation laws, tort liabilities, liabilities relating to ownership or use of property (e.g., automobile insurance), insurance for a specified disease or illness, and insurance that pays a fixed amount per day (or other period) of  hospitalization. In addition to permitted insurance, an individual does not fail to be eligible for an HSA merely because, in addition to an HDHP, the individual has coverage (whether provided through insurance or otherwise) for accidents, disability, dental care, vision care, or long-term care. If a plan that is intended to be an HDHP is one in which substantially all of the coverage of the plan is through permitted insurance or other coverage as described in this answer, it is not an HDHP.

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How does an eligible individual establish an HSA?

 Beginning January 1, 2004, any eligible individual can establish an HSA with a qualified HSA trustee or custodian, in much the same way that individuals establish IRAs or Archer MSAs with qualified IRA or Archer MSA trustees or custodians. No permission or authorization from the Internal Revenue Service (IRS) is necessary to establish an HSA. An eligible individual who is an employee may establish an HSA with or without involvement of the employer. Back to Top

 Who is a qualified HSA trustee or custodian?

 Any insurance company or any bank (including a similar financial institution as defined in section 408(n)) can be an HSA trustee or custodian. In addition, any other person already approved by the IRS to be a trustee or custodian of IRAs or Archer MSAs is automatically approved to be an HSA trustee or custodian.

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Does the HSA have to be opened with the Carrier

 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.

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 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 of the employee 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.

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 How much may be contributed to an HSA in 2007?

 The maximum annual contribution to an HSA is the sum of the limits determined separately for each month, based on status, eligibility and health plan coverage as of the first day of the month. For calendar year 2007, the maximum monthly contribution for eligible individuals with self-only coverage under an HDHP is 1/12 of the lesser of 100% of the annual deductible under the HDHP (minimum of $1,000) but not more than $2,,850. For eligible individuals with family coverage under an HDHP, the maximum monthly contribution is 1/12 of the lesser of 100% of the annual deductible under the HDHP (minimum of $2,000) but not more than $5,650. In addition to the maximum contribution amount, catch-up contributions, may be made by or on behalf of individuals age 55 or older and younger than 65. All HSA contributions made by or on behalf of an eligible individual to an HSA are aggregated for purposes of applying the limit. The annual limit is decreased by the aggregate contributions to an Archer MSA. The same annual contribution limit applies whether an employee, an employer, a self-employed person, or a family member makes the contributions. Unlike Archer MSAs, contributions may be made by or on behalf of eligible individuals even if the individuals have no compensation or if the contributions exceed their compensation. If an individual has more than one HSA, the aggregate annual contributions to all the HSAs are subject to the limit.

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What About Contributions If I Start a Plan After January

The contribution limit is computed each month. If the annual deductible is $5,000 for the  HDHP, then the lesser of the $5,000 annual deductible and $2,850 is $2,850. The monthly contribution limit is $237.50 ($2,850 /12).

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What are the “catch-up contributions” for individual’s age 55 or older?

 For individuals (and their spouses covered under the HDHP) between ages 55 and 65, the HSA contribution limit is increased by $500 in calendar year 2004. This catch-up amount will increase in $100 increments annually, until it reaches $1,000 in calendar year 2009. As with the annual contribution limit, the catch-up contribution is also computed on a monthly basis. After an individual has attained age 65 (the Medicare eligibility age), contributions, including catch-up contributions, cannot be made to an individual’s HSA.

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 Is there a deadline for contributions to an HSA?

 Contributions for any taxable year can be made in one or more payments, at any time prior to the deadline, without extensions, for filing your federal income tax return for that year, but not before the beginning of that year. For calendar year taxpayers, this deadline for contributions is generally April 15 following the year for which the contributions are made.

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 What is the tax treatment of an HSA contributions?

 Contributions made by an eligible individual to an HSA are deductible by the eligible individual in determining adjusted gross income (i.e., “above-the-line”). 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.

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What is the tax treatment of employer contributions

 In the case of an employee who is an eligible individual, employer contributions (provided they are within the limits) 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.

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 When may HSA contributions be made?

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.

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 Are rollover contributions 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.

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When is an individual permitted to receive HSA distributions?

 An individual is permitted to receive distributions from an HSA at any time.

 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.

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 What are Eligible “qualified medical expenses”?

 The term “qualified medical expenses” are expenses paid by the account beneficiary, his or her spouse or dependents for medical care as defined in section 213(d) (including nonprescription drugs as described in Rev. Rule. 2003-102, 2003-38 I.R.B. 559), 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 under section 213.

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Are health insurance premiums qualified medical expenses?

 Generally, health insurance premiums are not 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 Medi-gap policies are not qualified medical expenses.

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 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.

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 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.

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 What reporting is required for an HSA?

 Employer contributions to an HSA must be reported on the employee’s Form W-2. In addition, information reporting for HSAs will be similar to information reporting for Archer MSAs. The IRS will release forms and instructions, similar to those required for Archer MSAs, on how to report HSA contributions, deductions, and distributions.

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Are HSAs subject to COBRA continuation coverage?

 No. Like Archer MSAs, HSAs are not subject to COBRA continuation coverage.

 May eligible individuals use debit, credit or stored-value cards to receive distributions from an HSA for qualified medical expenses?

 Yes.

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What medical expenses are eligible for tax-free distributions from your HSA?

  At present, qualified medical expenses include the following, but only to the extent these expenses are not covered by insurance or otherwise:

• Abdominal supports
• Abortion
• Acupuncture
• Air conditioner (when necessary for relief from difficulty in breathing)
• Alcoholism treatment
• Ambulance
• Anesthetist
• Arch supports
• Artificial limbs
• Autoette (when used for relief of sickness/disability)
• Birth control pills (by prescription)
• Blood tests
• Blood transfusions
• Braces
• Cardiographs
• Chiropractor
• Christian Science Practitioner
• Contact Lenses
• Contraceptive devices (by prescription)
• Convalescent home (for medical treatment only)
• Crutches
• Dental treatment
• Dental x-rays
• Dentures
• Dermatologist
• Diagnostic fees
• Diathermy
• Drug addiction therapy
• Drugs (by prescription)
• Elastic hosiery (by prescription)
• Eyeglasses (by prescription)
• Fees paid to health institute prescribed by a doctor
• FICA and FUTA taxes paid for medical services
• Fluoridation unit
• Guide dog
• Gum treatment
• Gynecologist
• Healing services
• Hearing aids and batteries
• Hospital bills
• Hydrotherapy
• Insulin treatment
• Lab tests
• Lead paint removal
• Legal fees
• Lodging (away from home for outpatient care)
• Long term care insurance premiums
• Medicare Parts A & B after age 65
• Metabolism tests
• Neurologist
• Nursing (including board and meals)
• Obstetrician
• Operating room costs
• Ophthalmologist
• Optician
• Optometrist
• Oral surgery
• Organ transplant (including donor·s expenses)
• Orthopedic shoes
• Orthopedist
• Osteopath
• Oxygen and oxygen equipment
• Pediatrician
• Physician
• Physiotherapist
• Podiatrist
• Postnatal treatments
• Practical nurse for medical services
• Prenatal care
• Prescription medicines
• Psychiatrist
• Psychoanalyst
• Psychologist
• Psychotherapy
• Radium therapy
• Registered nurse
• Special school costs for the handicapped
• Spinal fluid test
• Splints
• Sterilization
• Surgeon
• Telephone or TV equipment to assist the hard-of-hearing
• Therapy equipment
• Transportation expenses (relative to health care)
• Ultra-violet ray treatment
• Vaccines
• Vasectomy
• Vitamins (by prescription)
• Wheelchair
• X-rays

Certain permissible premiums for dental insurance, accident, cancer and COBRA.

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Advantages of an HSA Health Plan

1. Premiums are also 100% tax deductible for the Self Employed

2. Tax free contributions in to the HSA account “above the line”

3. Lower net premium cost compared to traditional insurance

4. Tax deferred growth on earnings inside the HSA account

5. Tax free distributions from HSA account when used to pay for qualified medical expenses.

6. HSA account may rollover from year to year to fund future qualified medical expenses including long term care, or it may be used as a retirement account

7. Use Visa, MasterCard or checks issued by the administrator to pay for qualified medical expenses

8. Complete accounting from your HSA bank of all your qualified expenses for the year.