Health Savings Accounts, Medical Savings Accounts and Long-Term Care Contracts

Transcription

1 Health Savings Accounts, Medical Savings Accounts and Long-Term Care Contracts Contents In this module the student will review Health Savings Accounts, Archer Medical Savings Accounts and Long -Term Care Insurance contracts. Objectives Recognize the benefits of Health Savings Accounts (HSAs) Identify eligibility requirements for HSAs Determine deductible and contribution amounts for HSAs Recognize the difference between Health Savings Accounts, Archer MSAs and Longterm Insurance Contracts Additional References Publication Health Savings Accounts and Other Tax-Favored Health Plans Instructions for Form Health Savings Accounts (HSAs) Instructions for Form Archer MSAs and Long-Term Care Insurance Contracts ****************************************************************** HEALTH SAVINGS ACCOUNTS A Health Savings Account (HSA) is an alternative to traditional health insurance. It is a taxexempt trust or custodial account that an individual can establish with a qualified HSA trustee to pay or reimburse certain medical expenses. An individual must be an eligible individual to qualify for an HSA. Section 1201 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, added 223 of the Internal Revenue Code to permit eligible individuals to establish Health Savings Accounts (HSAs) for taxable years beginning after December 31, No permission or authorization from the IRS is necessary to establish an HSA. When an individual establishes an HSA, they will need a qualified HSA trustee, which can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. Individuals with an Archer MSA can generally roll it over into an HSA tax free. Benefits of a Health Savings Account Taxpayers can claim a tax deduction for contributions they, or someone other than their employer, make to their HSA even if they do not itemize deductions on Form 1040; Contributions to a taxpayer s HSA made by their employer (including contributions made through a cafeteria plan) may be excluded from the individual s gross income; Gold Level Document: Health/Medical Savings Accounts 1

2 The contributions remain in the individual s account from year to year until they are used; The interest or other earnings on the assets in the account are tax free; Distributions may be tax free if the monies are used to pay qualified medical expenses; and An HSA is portable, so it stays with an individual if they change employers or leave the work force. HSAs enable participants to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis. Individuals own and control the money in their HSA. Decisions on how to spend the money are made by the owner of the account without relying on a third party or a health insurer. The account owner will also decide what types of investments to make with the money in the account in order to make it grow. Consumers can sign up for HSAs with banks, credit unions, insurance companies and other approved companies. Employers may also establish plans for their employees. The account holder controls all decisions over how the money is invested. Likewise, the account holder can also choose not to invest the funds. The same types of investments permitted for IRAs are allowed for HSAs, including stocks, bonds, mutual funds, and certificates of deposit. Eligibility Requirements for a Health Savings Account Eligible Individuals To be eligible to participate in an HSA, an individual must be covered by a High Deductible Health Plan (HDHP). An HDHP generally costs less than what traditional health care coverage costs, so the money that the individual saves on insurance can be put into their HSA. If an individual has coverage under an HDHP, they may establish an HSA even if they are unemployed. An individual does not have to have earned income from employment to have an HSA. The money can be from their own personal savings, income from dividends, unemployment or welfare benefits, etc. In addition, there are no income limits that affect eligibility for an HSA. However, individuals who do not file a federal income tax return may not receive all of the benefits an HSA has to offer. An individual that is claimed as a dependent on someone else s tax return is not eligible to establish a HSA. If eligible, a spouse may have his or her own HSA. Choice of Plans An individual is eligible even if they had the choice of either an HDHP or a low deductible health plan. To determine if an individual is an eligible individual, the actual health coverage selected by the individual is controlling. Thus, it does not matter that the individual could have chosen, but did not choose, a low-deductible health plan or other coverage that would have disqualified the individual from contributing to an HSA. Individuals Eligible for Medicare An individual who is eligible for Medicare but not enrolled in either Part A or Part B may contribute to an HSA. Being eligible for Medicare does not make an individual ineligible to 2 Gold Level Document: Health/Medical Savings Accounts

3 contribute to an HSA. An otherwise eligible individual who is not actually enrolled in Medicare Part A or Part B may contribute to an HSA until the month that the individual is enrolled in Medicare. Example 1. Leroy, age 66, is covered under his employer's HDHP. Although he is eligible for Medicare, Leroy is not actually entitled to Medicare because he did not apply for benefits under Medicare (i.e., enroll in Medicare Part A or Part B). If Leroy is otherwise an eligible individual, he may contribute to an HSA. Example 2. In August 2015, Roy reaches age 65 and applies for and begins receiving Social Security benefits. Roy is automatically enrolled in Medicare. As of August 1, 2015, Roy is no longer an eligible individual and may not contribute to an HSA. Affect of Other Benefits Veterans Administration (VA) Benefits An otherwise eligible individual who is eligible to receive VA medical benefits, but who has not actually received such benefits during the preceding three months, is an eligible individual. An individual is not eligible to make HSA contributions for any month if the individual has received medical benefits from the VA at any time during the previous three months. TRICARE Coverage An eligible individual who is covered by an HDHP and also receives health benefits under TRICARE (the health care program for active duty and retired members of the uniformed services, their families and survivors) may not contribute to a Health Savings Account. Coverage options under TRICARE do not meet the minimum annual deductible requirements for an HDHP under the Internal Revenue Code. Thus, an individual covered under TRICARE is not an eligible individual and may not contribute to an HSA. Insurance Contracts for Specific Disease or Illness An eligible individual who is covered by both an HDHP and also by insurance contracts for one or more specific diseases or illnesses, such as cancer, diabetes, asthma or congestive heart failure, may contribute to an HSA if the insurance provides benefits before the deductible of the HDHP is satisfied. Internal Revenue Code 223(c)(1)(B)(i) provides that an eligible individual covered under an HDHP may also be covered for any benefit provided by permitted insurance. Likewise, 223(c)(3)(B) provides that the term permitted insurance includes insurance for a specified disease or illness. Therefore, an eligible individual may be covered by an HDHP and also by permitted insurance for one or more specific diseases, such as cancer, diabetes, asthma or congestive heart failure, as long as the principal health coverage is provided by the HDHP. Benefits for permitted insurance must generally be provided through insurance contracts and not on a self-insured basis. However, where benefits (such as workers' compensation benefits) are provided in satisfaction of a statutory requirement and any resulting benefits for medical care are secondary or incidental to other benefits, the benefits will qualify as permitted insurance even if self-insured. Gold Level Document: Health/Medical Savings Accounts 3

4 Discount Cards Do Not Affect Eligibility Discount cards that entitle holders to obtain discounts for health care services or products at managed care market rates will not disqualify an individual from being an eligible individual for HSA purposes if the individual is required to pay the costs of the health care (taking into account the discount) until the deductible of the HDHP is satisfied. Employee Assistance Program Coverage under an Employee Assistance Program (EAP), disease management program, or wellness program will not make an individual ineligible to contribute to an HSA if the program does not provide significant benefits in the nature of medical care or treatment, and therefore, is not considered a health plan for purposes of the Internal Revenue Code 223 (c)(1). When Eligibility Begins An eligible individual must have HDHP coverage as of the first day of the month. An individual with employer-provided HDHP coverage on a payroll-by-payroll basis becomes an eligible individual on the first day of the month on or following the first day of the pay period when HDHP coverage begins. Example. An employee begins HDHP coverage on the first day of a pay period, which is August 16, 2015, and continues to be covered by the HDHP throughout For purposes of contributing to an HSA, the employee becomes an eligible individual on September 1, Joint Accounts Prohibited Each spouse who is an eligible individual who wants an HSA must open a separate HSA. Joint accounts are prohibited. Multiple Accounts An eligible individual may have more than one HSA and may contribute to more than one HSA. The same rules governing HSAs apply (e.g., maximum contribution limit), regardless of the number of HSAs established by an eligible individual. Persons with an FSA (Flexible Spending Arrangement) In some cases, an employer may offer employees a FSA. Individuals are allowed to have both types of accounts, but only under certain circumstances. General Flexible Spending Arrangements (FSAs) will probably make an individual ineligible for an HSA. If their employer offers a limited purpose (limited to dental, vision or preventive care) or post-deductible (pay for medical expenses after the plan deductible is met) FSA, then an individual can still be eligible for an HSA. Persons with an HRA (Health Reimbursement Arrangement) An individual can have both an FSA and a General Health Reimbursement Arrangement (HRA) under certain circumstances. General Health Reimbursement Arrangements (HRAs) will probably make an individual ineligible for an HSA. If an employer offers a limited purpose (limited to dental, vision or preventive care) or post-deductible (pay for medical expenses after the plan deductible is met) HRA, then the employee can still be eligible for an HSA. If an 4 Gold Level Document: Health/Medical Savings Accounts

5 employer contributes to an HRA that can only be used when an individual retires, that individual can still be eligible for an HSA. Spouse with an FSA or HRA An individual is not eligible for an HSA if their spouse s FSA or HRA can pay for any of his or her medical expenses before their HDHP deductible is met. HIGH DEDUCTIBLE HEALTH PLAN (HDHP) To participate in an HSA, an individual must either have no health insurance or be covered by an HDHP. Sometimes referred to as a catastrophic health insurance plan, an HDHP is an inexpensive health insurance plan that generally doesn t pay for the first several thousand dollars of health care expenses (i.e., the insured s deductible ) but will generally cover all subsequent expenses. The HSA is then available to cover the expenses not paid by the HDHP. If an individual is covered by an HDHP and another form of health insurance that is not a highdeductible plan, they are not eligible for an HSA. Minimum Deductibles In order to open an HSA, an individual must have a qualified High Deductible Health Plan. The IRS determines the guidelines for qualified HDHPs. The most recent IRS guidelines are listed in the following table: HDHP Deductible Requirements 2015 Single Plan Family Plan Minimum Deductible $1,300 $2,600 Maximum Out-of- Pocket $6,450 $12, Single Plan Family Plan Minimum Deductible $1,300 $2,600 Maximum Out-of- Pocket $6,550 $13,100 Plans with No Express Limit on Out-of-Pocket Expenses A health plan without an express limit on out-of-pocket expenses is generally not an HDHP unless such limit is not necessary to prevent exceeding the out-of-pocket maximum. Example. A plan provides self-only coverage with a $2,000 deductible. The plan imposes a lifetime limit on reimbursements for covered benefits of $1 million. For expenses for covered benefits incurred above the deductible, the plan reimburses 80 percent of the costs. The plan includes no express limit on out-of-pocket expenses. This plan does not qualify as an HDHP because it does not have a limit on out-of-pocket expenses. Gold Level Document: Health/Medical Savings Accounts 5

6 Family Coverage The term family coverage means any coverage other than self-only coverage. Self-only coverage is a health plan covering only one individual; self-only HDHP coverage is an HDHP covering only one individual if that individual is an eligible individual. Family HDHP coverage is a health plan covering one eligible individual and at least one other individual (whether or not the other individual is an eligible individual). For example, if an individual, who is an eligible individual, and his dependent child are covered under an employee plus one HDHP offered by the individual's employer, the coverage is family HDHP coverage. State High-Risk Insurance Plan A state high-risk health insurance plan (high-risk pool) can also qualify as an HDHP if the state's high-risk pool does not pay benefits below the minimum annual deductible of an HDHP. Lifetime Benefits An HDHP may impose a reasonable lifetime limit on benefits provided under the plan. In such cases, amounts paid by the covered individual above the lifetime limit will not be treated as outof-pocket expenses in determining the annual out-of-pocket maximum. However, a lifetime limit on benefits designed to circumvent the maximum annual out-of-pocket amount in the Internal Revenue Code is not reasonable. Example. A health plan has an annual deductible that satisfies the minimum annual deductible for self-only coverage and for family coverage. After satisfying the deductible, the plan pays 100 percent of covered expenses, up to a lifetime limit of $1 million. The lifetime limit of $1 million is reasonable and the health plan is not disqualified from being an HDHP because of the lifetime limit on benefits. The out-of-pocket maximum applies only to covered benefits. Plans may be designed with reasonable benefit restrictions limiting the plan's covered benefits. A restriction or exclusion on benefits is reasonable only if significant other benefits remain available under the plan in addition to the benefits subject to the restriction or exclusion. Out-of-Pocket Expenses Must Be Limited An HDHP generally must limit the out-of-pocket expenses paid by the covered individuals, either by design or by its express terms. A health plan's out-of-pocket limit includes the deductible, co-payments, and other amounts, but not premiums. Amounts incurred for benefits not covered also are not counted toward the deductible or the out-of-pocket limit. If a plan does not take co-payments into account in determining if the deductible is satisfied, the co-payments must still be taken into account in determining if the out-of-pocket maximum is exceeded. OTHER HEALTH COVERAGE Other Medical Savings Plans An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally cannot make contributions to an HSA. However, an employee can make contributions to an HSA while covered under an HDHP and one or more of the following arrangements: 6 Gold Level Document: Health/Medical Savings Accounts

7 Limited-purpose health FSA or HRA. These arrangements can pay or reimburse the certain items except long-term care. Also, these arrangements can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible; Suspended HRA. Before the beginning of an HRA coverage period, an individual may elect to suspend the HRA. The HRA does not pay or reimburse, at any time, the medical expenses incurred during the suspension period except preventive care and specific allowable items. When the suspension period ends, the individual is no longer eligible to make contributions to an HSA; Post-deductible health FSA or HRA. These arrangements do not pay or reimburse any medical expenses incurred before the minimum annual deductible amount is met. The deductible for these arrangements does not have to be the same as the deductible for the HDHP, but benefits may not be provided before the minimum annual deductible amount is met; or Retirement HRA. This arrangement pays or reimburses only those medical expenses incurred after retirement. After retirement, the individual is no longer eligible to make contributions to an HSA. Specific Coverages Permitted To be eligible for an HSA, an individual (and his or her spouse, if they have family coverage) generally cannot have any other health coverage that is not an HDHP. However, an individual can still be an eligible individual even if their spouse has non-hdhp coverage provided they are not covered by that plan. However, an individual can be eligible for a health savings account and have additional insurance that provides benefits only for the following items: Liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property A specific disease or illness A fixed amount per day (or other period) of hospitalization An individual can also have coverage (whether provided through insurance or otherwise) for the following items and remain eligible for a health savings account: Accidents Disability Dental care Vision care Long-term care Plans in which substantially all of the coverage is through the above listed items are not HDHPs. For example, if a plan provides coverage substantially all of which is for a specific disease or illness, the plan is not an HDHP for purposes of establishing an HSA. In addition, an individual can have a prescription drug plan, either as part of an HDHP or a separate plan (or rider), and qualify as an eligible individual if the plan does not provide benefits until the minimum annual deductible of the HDHP has been met. If the individual can receive benefits before that deductible is met, they are not an eligible individual. Gold Level Document: Health/Medical Savings Accounts 7

8 CONTRIBUTIONS TO HEALTH SAVINGS ACCOUNTS For 2015 an individual s maximum annual HSA contribution is based on the statutory limit for their type of coverage. For 2015, if an individual has self-only HDHP coverage, their maximum contribution is $3,350; $6,650 if family HDHP coverage, no matter what their HDHP deductible is. These amounts may be increased for inflation in future years. If an individual is age 55 or older, they can also make additional catch-up contributions of $1,000. A full year s contribution (plus any catch-up, if applicable) may be made to an HSA for someone who first becomes eligible anytime during the year, even if it is in December. If someone contributes a full year s contribution but is only eligible part of the year, they will be subject to taxes and penalties if they fail to remain eligible for 12 months after the year in which they first became eligible. Contributions may be made in a lump sum or in any amounts or frequency the account owner wishes. However, the account trustee/custodian (bank, credit union, insurer, etc.) can impose minimum deposit and balance requirements. In general, a contribution to an HSA for one tax year can be made until the due date of the tax return. Persons Who May Contribute Any eligible individual can contribute to an HSA. For an employee's HSA, the employee, the employee's employer, or both may contribute to the employee's HSA in the same year. For an HSA established by a self-employed (or unemployed) individual, the individual can contribute. Family members or any other person may also make contributions on behalf of an eligible individual. Cash Contributions Only Contributions to an HSA must be made in cash. Contributions of stock or property are not allowed. Limit on Contributions The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have, your age, the date you become an eligible individual, and the date you cease to be an eligible individual. For 2015, if you have self-only HDHP coverage, you can contribute up to $3,350. If you have family HDHP coverage, you can contribute up to $6,650. For 2016, if you have self-only HDHP coverage, you can contribute up to $3,350. If you have family HDHP coverage you can contribute up to $7,750. If you had family HDHP coverage on the first day of the last month of your tax year, your contribution limit for 2015 is $6,650 even if you changed coverage during the year. Last-month rule. Under the last-month rule, if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers), you are considered an eligible individual for the entire year. You are treated as having the same HDHP coverage for the entire year as you had on the first day of that last month. 8 Gold Level Document: Health/Medical Savings Accounts

9 Testing period. If contributions were made to your HSA based on you being an eligible individual for the entire year under the last-month rule, you must remain an eligible individual during the testing period. For the last-month rule, the testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month. For example, December 1, 2015 through December 31, If you fail to remain an eligible individual during the testing period, other than because of death or becoming disabled, you will have to include in income the total contributions made to your HSA that would not have been made except for the last-month rule. You include this amount in your income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. The income and additional tax are shown on Form 8889, Part III. Married Persons Spouse Who May Contribute Although the special rule for married individuals generally allows a married couple to divide the maximum HSA contribution between spouses, if only one spouse is an eligible individual, only that spouse may contribute to an HSA (notwithstanding the treatment of both spouses as having only family coverage). Spousal Agreement to Divide HSA Contribution Limit The Internal Revenue Code provides special rules for married individuals and states that HSA contributions (without regard to the catch-up contribution) shall be divided equally between them unless they agree on a different division. Thus, spouses can divide the annual HSA contribution in any way they want, including allocating nothing to one spouse. Example. Juan is an eligible individual who has self-only HDHP coverage with a $1,200 deductible from January 1 through March 31. In March, Juan and Candy marry. Neither Juan nor Candy qualifies for the catch-up contribution. From April 1 through December 31, Juan and Candy have HDHP family coverage with a $2,400 deductible. Candy is an eligible individual from April 1 through December 31. Juan and Candy s contribution limit for the nine months of family coverage is $1,800 (nine months of the deductible for family coverage. 9/12 x $2,400). Juan and Candy divide the $1,800 between them. Juan's contribution limit to his HSA for the three months of single coverage is $300 (three months of the deductible for self-only coverage. 3/12 x $1,200). The $300 limit is not divided between Juan and Candy. Spouse with Family Coverage If either spouse has family coverage, both spouses are treated as having family coverage. If each spouse has family coverage under a separate plan, both are treated as having family coverage under the plan with the lower annual deductible. Thus, an individual must reduce the limit on contributions, before taking into account any additional contributions, by the amount contributed to both spouse's Archer MSAs. After that reduction, the contribution limit is split equally between the spouses unless the spouses agree on a different division. Note that the rules for married people apply only if both spouses are eligible individuals. If both spouses are 55 or older and not enrolled in Medicare, each spouse's contribution limit is increased by the additional Gold Level Document: Health/Medical Savings Accounts 9

10 contribution. If both spouses meet the age requirement, the total contributions under family coverage cannot be more than $8,650 for Example. For 2015, Russ and his wife are both eligible individuals. They each have family coverage under separate HDHPs. Russ is 58 years old and his wife is 53. Russ and his wife are both treated as being covered under the HDHP. They can split the family contribution limit ($6,650) equally or they can agree on a different division. If they split it equally, Russ can contribute $4,325 ($3,325 + $1,000 and his wife can contribute $3,325. Additional Contributions Individuals who are eligible for a health savings account and are 55 years or older are eligible for an additional catch up contribution of $1,000. Contributions must stop once an individual is enrolled in any type of Medicare. Catch-up contributions are also subject to being pro-rated if the individual was not eligible during a whole year. If an individual had HDHP coverage for the full year, they can make the full catch-up contribution regardless of when their 55th birthday falls during the year. If they did not have HDHP coverage for the full year, they must pro-rate their catch-up contribution for the number of full months they were eligible, i.e., had HDHP coverage. However, if an individual is covered on December 1, they are treated as an eligible individual for the entire year and get the full contribution. If both spouses are 55 and older, both spouses can make catch-up contributions if they have each established an HSA in their name. If only one spouse has an HSA in their name, only that spouse can make a catch-up contribution. Reduction of Contribution Limit An HSA account owner must reduce the amount that can be contributed (including any additional contribution) to their HSA by the amount of any contribution made to an Archer MSA (including employer contributions) for the year. A special rule applies to married people, discussed next, if each spouse has family coverage under an HDHP. In addition, an individual must reduce the amount they, or any other person, can contribute to their HSA by the amount of any contributions made by their employer that are excludable from their income. This includes amounts contributed to an individual s account by their employer through a cafeteria plan. Rules for married people This rule applies only if both spouses are eligible individuals. If either spouse has family HDHP coverage, both spouses are treated as having family coverage. If they have family coverage under separate plans, the contribution limit is $6,650. The contribution (not considering the additional contribution, if allowed) must be reduced by any amount contributed to Archer MSA s. After the reduction, the remaining allowed contribution is split between the spouses as mutually agreed. 10 Gold Level Document: Health/Medical Savings Accounts

11 Qualified HSA funding distribution A qualified HSA funding distribution may be from a traditional IRA or Roth IRA. A distribution cannot be made from an ongoing SEP IRA or SIMPLE IRA. For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within the tax year in which the distribution would be made. Only one qualified distribution can be made during the taxpayer s lifetime. However, if a distribution is made during a month when self-only coverage, another qualified HSA funding distribution in a later month in that tax year if coverage is changed to family coverage. The total qualified HSA funding distribution cannot be more than the contribution limit for family HDHP coverage plus any entitled additional contribution. Enrolled in Medicare Beginning with the first month an individual is enrolled in Medicare, they cannot contribute to an HSA. Example. You turned age 65 in July 2015 and enrolled in Medicare. You had self-only coverage under an HDHP with an annual deductible of $1,150. You are eligible for an additional contribution of $1,000. Your contribution limit is $2,175 ($4, ). You can make contributions for January through June totaling $2,175, but cannot make any contributions for July through December. Rollovers An individual may roll over amounts from Archer MSAs and other HSAs into an HSA. Rollover contributions do not need to be in cash. Rollovers are not subject to the annual contribution limits. In addition, an individual must roll over the amount within 60 days after the date of receipt. Individuals may make only one rollover contribution to an HSA during a 1-year period. In addition, amounts from an IRA, an HRA, or a health FSA cannot be rolled over into an HSA. If an individual instructs the trustee of their HSA to transfer funds directly to the trustee of another HSA, the transfer is not considered a rollover. There is no limit on the number of these transfers. Reporting Contributions Account Owner or Employer. Contributions made by an account owner s employer are not included in their income. Contributions to an employee's account by an employer using the amount of an employee's salary reduction through a cafeteria plan are treated as employer contributions. An individual can claim contributions they made and contributions made by any other person, other than their employer, on their behalf, as an adjustment to income. Partnership. Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. The contributions are treated as a distribution of money and are not included in the partner's gross income. Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are deductible by the partnership and includible in the partner's gross income. In both situations, the partner can deduct the contribution made to the partner's HSA. Gold Level Document: Health/Medical Savings Accounts 11

12 S Corporation. Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are deductible by the S corporation and includible in the shareholder-employee's gross income. The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. Form All contributions to an HSA should be reported to the IRS on Form 8889, Health Savings Accounts (HSAs), and filed with the taxpayer s Form Taxpayers should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount contributed to their HSA during the year. An employer's contributions also will be shown in box 12 of Form W-2, with Code W. Excess Contributions. A taxpayer will have excess contributions if the contributions to their HSA for the year are greater than the limits discussed earlier. Excess contributions are not deductible. Excess contributions made by an employer are included in the recipient s gross income. If the excess contribution is not included in box 1 of Form W-2, the recipient must report the excess as Other income on their tax return. Generally, a taxpayer must pay a 6% excise tax on excess contributions. The excise tax applies to each tax year the excess contribution remains in the account. Withdrawal of Excess Contributions A taxpayer may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if they meet the following conditions: They withdraw the excess contributions by the due date, including extensions, of their tax return for the year the contributions were made; and They withdraw any income earned on the withdrawn contributions and include the earnings in Other income on their tax return for the year they withdraw the contributions and earnings. Distributions from an HSA The following is an overview of the major distribution rules affecting HSAs: Distributions are tax-free when taken for qualified medical expenses. This now includes over-the-counter drugs; Qualified medical expenses must be incurred on or after the HSA was established; Tax-free distributions can be taken for qualified medical expenses of: (1) the person covered by the high deductible, (2) a spouse of the individual, even if not covered by the high deductible, and (3) any dependent of the individual (even if not covered by the high deductible); and If distribution is not taken for qualified medical expenses, the amount of distribution is included in income and there is an additional 20% tax except where the individual is over 65 or becomes ill or dies. Individuals will generally pay medical expenses during the year without being reimbursed by their HDHP until they reach the annual deductible for the plan. When an individual pays medical expenses during the year that are not reimbursed by their HDHP, they can ask the trustee of their HSA to send them a distribution from their HSA. 12 Gold Level Document: Health/Medical Savings Accounts

13 Health savings account owners can receive tax-free distributions from their HSA to pay or be reimbursed for qualified medical expenses they incur after they establish the HSA. If an individual receives distributions for other reasons, the amount they withdraw will be subject to income tax and may be subject to an additional 10% tax. Account owners are not required to take distributions from their HSA each year. If an individual is no longer an eligible individual, they can still receive tax-free distributions to pay or reimburse their qualified medical expenses. QUALIFIED MEDICAL EXPENSES Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. Examples include amounts paid for doctors' fees, prescription medicines, non-prescription medicine that is available over-the-counter (if you get a prescription for it) and necessary hospital services not paid for by insurance. Qualified medical expenses are those incurred by the following persons: The account owner and their spouse; All dependents the account owner claims on their tax return; and Any person the account owner could have claimed as a dependent on their return except that: The person filed a joint return; The person had gross income of $4,000 or more; or The account owner, or their spouse, if filing jointly, could be claimed as a dependent on someone else's return for the applicable tax year. Note also that an account owner may not deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from their HSA. SPECIAL RULES FOR INSURANCE PREMIUMS Generally, an account owner cannot treat insurance premiums as qualified medical expenses for HSAs. An individual may, however, treat premiums for long-term care coverage, health care coverage while they receive unemployment benefits, or health care continuation coverage required under any federal law as qualified medical expenses for HSAs. If an individual is age 65 or older, they can treat insurance premiums (other than premiums for a Medicare supplemental policy, such as Medigap) as qualified medical expenses for HSAs. The premiums for long-term care coverage that an individual can treat as qualified medical expenses are subject to limits based on age and are adjusted annually. Gold Level Document: Health/Medical Savings Accounts 13

14 DEEMED DISTRIBUTIONS The following situations result in deemed taxable distributions from an HSA: The account owner engaged in any transaction prohibited by the IRS with respect to any of their HSAs, at any time during the tax year. The account ceases to be an HSA as of the first day of the tax year and they must include the fair market value of all assets in the account as of that date on Form 8889, line 14a; or They used any portion of any of their HSAs as security for a loan at any time in the tax year. They must therefore include the fair market value of the assets used as security for the loan as income on Form 1040, line 21. RECORDKEEPING Taxpayers should keep records, including receipts for medical treatment and other qualified expenses. They may need to prove to the IRS that distributions from an HSA were for medical expenses and that they were not otherwise reimbursed. They may be required by an insurance company to prove that their HDHP deductible was met. REPORTING DISTRIBUTIONS How a taxpayer reports their distributions depends on whether or not they use the distribution for qualified medical expenses. If a distribution from an HSA is used for qualified medical expenses, the account owner does not pay tax on the distribution but must still report the distribution on Form 8889 (see page 18). However, the distribution of an excess contribution taken out after the due date, including extensions, of their return is subject to tax even if used for qualified medical expenses. If an individual does not use a distribution from their HSA for qualified medical expenses, they must pay tax on the distribution. They should report the amount on Form 8889 and file it with their Form If a taxpayer has a taxable HSA distribution, it should be included in the total on Form 1040, line 21. Distributions from an HSA (and other accounts) are shown on Form 1099-SA, Distributions From HSA, Archer MSA, or Medicare Advantage MSA, see below. Box 1. Shows how much money was paid from the account during the year. Box 2. Shows the earnings on any excess contributions received throughout the year. If there is an amount in Box 2, the amount is already included in total benefits received in Box 1. Box 3. These codes identify the distribution received: 1. Normal distribution 2. Excess contributions 3. Disability 4. Death distribution other than code 6 5. Prohibited transaction 6. Death distribution after year of death to a nonspouse beneficiary 14 Gold Level Document: Health/Medical Savings Accounts

15 Box 4. If the account holder died, shows the FMV of the account on the date of death. Box 5. Shows the type of account that is reported on Form 1099-SA. ADDITIONAL TAX There is an additional 20% tax on the part of an individual s distributions not used for qualified medical expenses. The additional tax is reported on Form 8889, Part III. The exception to this general rule is that there is no additional tax on distributions made after the date an individual becomes disabled, reaches age 65, or dies. BALANCE IN AN HSA An HSA is generally exempt from tax. An individual is permitted to take a distribution from their HSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. Amounts that remain at the end of the year are generally carried over to the next year. Earnings on amounts in an HSA are not included in the account owner s income while held in the HSA. DEATH OF HSA HOLDER The owner of an HSA account should select a beneficiary at the time they establish the account. What happens to that HSA when the account holder dies depends on whom they designated as the beneficiary. Spouse Is the Designated Beneficiary If the account owner s spouse is the designated beneficiary of their HSA, it will be treated as the spouse's HSA after the account owner s death. Spouse Is Not the Designated Beneficiary If the spouse is not the designated beneficiary of the HSA: The account stops being an HSA, and Gold Level Document: Health/Medical Savings Accounts 15

16 The fair market value of the HSA becomes taxable to the beneficiary in the year in which the account owner died. If the account owner s estate is the beneficiary, the value is included on the decedent s final income tax return. Note, however, that the amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within one year after the date of death. Borrowing Prohibited Account owners may not borrow against the HSA or pledge the funds in it. FILING FORM 8889 Form 8889, Health Savings Accounts (HSAs), must be filed with Form 1040 if the taxpayer (or spouse if married filing a joint return) had any activity during the year. The form must be filed even if only the taxpayer's employer or spouse's employer made contributions to the HSA. 16 Gold Level Document: Health/Medical Savings Accounts

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18 MEDICAL SAVINGS ACCOUNTS An Archer MSA is a tax-exempt trust or custodial account that is established with a U.S. financial institution (such as a bank or an insurance company) in which an individual can save money exclusively for future medical expenses. Archer MSAs were created to help self-employed individuals and employees of certain small employers meet the medical care costs of the account holder, the account holder's spouse, or the account holder's dependent(s). After December 31, 2007, an individual cannot be treated as an eligible individual for Archer MSA purposes unless: 1. They were an active participant for any tax year ending before January 1, 2008, or 2. They became an active participant for a tax year ending after December 31, 2007, by reason of coverage under a HDHP of an Archer MSA participating employer. If an eligible individual changes employers, the Archer MSA moves with them. However, they may not make additional contributions unless they are otherwise eligible. A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified medical expenses of the account holder who is enrolled in Medicare and has an HDHP. The benefits of an Archer MSA include the following: Individuals can claim a tax deduction for contributions even if they do not itemize their deductions on Form 1040; The interest or other earnings on the assets in an Archer MSA are tax free; Distributions may be tax free if used to pay qualified medical expenses; The contributions remain in an Archer MSA from year to year until they are used; and An Archer MSA is portable, so it stays with the owner if they change employers or leave the work force. Contributions and distributions from Archer MSAs are reported on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. 18 Gold Level Document: Health/Medical Savings Accounts

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20 LONG TERM CARE INSURANCE CONTRACTS Long-term care insurance contracts are treated as accident and health insurance contracts. Amounts received (other than policyholder dividends or premium refunds) are generally excludable from income as amounts received for personal injury or sickness. To claim an exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract, the taxpayer must file Section C of Form Box 3 of Form 1099-LTC (see next page) will be checked if the gross benefits in box 1 were per diem payments made to the policyholder. Generally $330 a day for 2015 can be excluded from gross income. Excess per diem benefits are reported on Form 1040, line Gold Level Document: Health/Medical Savings Accounts

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