HSAs (Health Savings Accounts) have become more popular. They involve a qualified high deductible health insurance plan plus a savings account that allows you to deposit money for health related expense tax free.
These days, everyone is looking to save costs on health insurance. And health care reform is working towards “Consumer Driven Health Care”. That means that people are becoming more involved in their own care. The Health Savings Account achieves both goals. It involves a large deductible health insurance plan, and a savings account that you and your employees fund with pre-tax money. Most HSA qualified plans now offer free preventive care, so your employees can take care of routine exams for their families without a large out of pocket expense. HSAs are available for both individuals and employer sponsored plans. Let us show you how affordable this type of health coverage can be.
A Health Savings Account (HSA) is an account that you can put money into to save for future medical expenses. There are certain advantages to putting money into these accounts, including favorable tax treatment. HSAs were signed into law by President Bush on December 8, 2003.
Who Can Have an HSA
Any adult can contribute to an HSA if they:
- Have coverage under an HSA-qualified “high deductible health plan” (HDHP)
- Have no other first-dollar medical coverage (other types of insurance like specific injury insurance or accident, disability, dental care, vision care, or long-term care insurance are permitted).
- Are not enrolled in Medicare.
- Cannot be claimed as a dependent on someone else’s tax return.
Contributions to your HSA can be made by you, your employer, or both. However, the total contributions are limited annually. If you make a contribution, you can deduct the contributions (even if you do not itemize deductions) when completing your federal income tax return.
Contributions to the account must stop once you are enrolled in Medicare. However, you can keep the money in your account and use it pay for medical expenses tax-free.
High Deductible Health Plans (HDHPs)
You must have coverage under an HSA-qualified “high deductible health plan” (HDHP) to open and contribute to an HSA. Generally, this is health insurance that does not cover first dollar medical expenses. For 2013, federal law requires that the health insurance deductible be at least:
HSA contribution limits:
- Individuals (self-only coverage) – $3,250 (up $150 from 2012)
- Family coverage – $6,450 (up $200 from 2012)
HDHP minimum required deductibles:
- $1,250 for self-only coverage
- $2,500 for family coverage
(Out-of-pocket expenses include deductibles, co-payments, and other amounts, but not premiums)
- $6,250 for self-only coverage
- $12,500 for family coverage
Under guidelines implemented in the Patient Protection and Affordable Care Act, over-the-counter drugs may only be reimbursed if they have a prescription. If a policyholder uses an HSA to pay for items or services that aren’t qualified medical expenses, the tax penalty is 20 percent of the HSA distribution.
In general, the deductible must apply to all medical expenses (including prescriptions) covered by the plan. However, plans can pay for “preventive care” services on a first-dollar basis (with or without a co-pay). “Preventive care” can include routine pre-natal and well-child care, child and adult immunizations, annual physicals, mammograms, pap smears, etc.
Finding HDHP Coverage
Any company that sells health insurance coverage in your state may offer HDHP policies. Although Treasury cannot recommend any specific names of companies selling these policies, you should be able to find a qualified policy by contacting your current insurance company, an agent or broker licensed to sell health insurance in your state, or your state insurance department.
Determining Your Contribution
Your eligibility to contribute to an HSA for each month is generally determined by the whether you have HDHP coverage on the first day of the month. Your maximum contribution for the year is the greater of: (1) the full contribution, or (2) the pro rated amount. The full contribution is the maximum annual contribution for the type of coverage you have on December 1. The prorated amount is 1/12 of the maximum annual contribution for the type of HDHP coverage you have times the number of months you have that type of coverage. If your contribution is greater than the pro rated amount, and you fail to remain covered by an HDHP for the entire following year, the extra contribution above the pro rated amount is included in income and subject to an additional 10% tax.
Using Your HSA
You can use the money in the account to pay for any “qualified medical expense” permitted under federal tax law. This includes most medical care and services, and dental and vision care, and also includes over-the counter drugs such as aspirin. You can generally not use the money to pay for medical insurance premiums, except under specific circumstances, including:
- Any health plan coverage while receiving federal or state unemployment benefits.
- COBRA continuation coverage after leaving employment with a company that offers health insurance coverage.
- Qualified long-term care insurance.
Medicare premiums and out-of-pocket expenses, including deductibles, co-pays, and coinsurance for:
- Part A (hospital and inpatient services)
- Part B (physician and outpatient services)
- Part C (Medicare HMO and PPO plans)
- Part D (prescription drugs)
You can use the money in the account to pay for medical expenses of yourself, your spouse, or your dependent children. You can pay for expenses of your spouse and dependent children even if they are not covered by your HDHP. Any amounts used for purposes other than to pay for “qualified medical expenses” are taxable as income and subject to an additional 10% tax penalty.
- Medical expenses that are not considered “qualified medical expenses” under federal tax law (e.g., cosmetic surgery).
- Other types of health insurance unless specifically described above.
- Medicare supplement insurance premiums.
- Expenses that are not medical or health-related.
After you turn age 65, the 10% additional tax penalty no longer applies. If you become disabled and/or enroll in Medicare, the account can be used for other purposes without paying the additional 10% penalty.
Advantages of HSAs
Your high deductible insurance and HSA protect you against high or unexpected medical bills.
You should be able to lower your health insurance premiums by switching to health insurance coverage with a higher deductible.
You can use the funds in your account to pay for current medical expenses, including expenses that your insurance may not cover, or save the money in your account for future needs, such as:
- Health insurance or medical expenses if unemployed
- Medical expenses after retirement (before Medicare)
- Out-of-pocket expenses when covered by Medicare
- Long-term care expenses and insurance
- Savings – You can save the money in your account for future medical expenses and grow your account through investment earnings
You make all the decisions about:
- How much money to put into the account
- Whether to save the account for future expenses or pay current medical expenses
- Which medical expenses to pay from the account
- Which company will hold the account
- Whether to invest any of the money in the account
- Which investments to make
Accounts are completely portable, meaning you can keep your HSA even if you:
- Change jobs
- Change your medical coverage
- Become unemployed
- Move to another state
- Change your marital status
Funds remain in the account from year to year, just like an IRA. There are no “use it or lose it” rules for HSAs.
An HSA provides you triple tax savings:
- tax deductions when you contribute to your account,
- tax-free earnings through investment, and
- tax-free withdrawals for qualified medical expenses.
What Happens to My HSA When I Die?
If your spouse becomes the owner of the account, your spouse can use it as if it were their own HSA. If you are not married, the account will no longer be treated as an HSA upon your death. The account will pass to your beneficiary or become part of your estate (and be subject to any applicable taxes).
Opening Your Health Savings Account
Banks, credit unions, insurance companies and other financial institutions are permitted to be trustees or custodians of these accounts. Other financial institutions that handle IRAs or Archer MSAs are also automatically qualified to establish HSAs
Need More Information about HSA’s?
Treasury’s web site has additional information about Health Savings Accounts, including answers to frequently asked questions, related IRS forms and publications, technical guidance, and links to other helpful web sites. Treasury’s HSA website can be found through www.treas.gov.