Health Savings Accounts Who s Eligible? Covered by a high deductible health plan (HDHP) Not covered by other health insurance Not enrolled in Medicare Not claimed as a dependent on someone else s tax return Children cannot establish their own HSA s Spouses can establish their own HSA s if eligible Allowable Other Health Coverage Specific disease or illness Accident Disability Dental Vision Long-term Care 1
Ineligible Coverage Medicare Flexible spending account reimbursement Unless restricted to certain benefits Vision Dental Preventive care High Deductible Health Plan Minimum deductible (2008) Single coverage $1,100 Family coverage $2,200 Annual out of pocket expenses Single $5,600 Family $11,200 High Deductible Health Plan No coverage until deductible is satisfied Except preventive care If HDHP provides prescription drug benefit, drug expenses must apply to deductible Certain drugs can be considered preventive care Cholesterol-lowering medication 2
Preventive Care Annual physicals Screening Routine prenatal and well-child care Child and adult immunizations Tobacco cessation programs Obesity weight loss programs HSA Contributions Maximum Contributions in 2008 Single coverage - $2,900 Family coverage - $5,800 Catch up contribution for individuals over 55 $900 HSA contributions can be made pre-tax through a Section 125 Cafeteria Plan Does not apply to 2% shareholders in an S-Corp HSA Contributions Can be made by employer, employee, or both Above the line deduction if made by individual If made by employer, non-taxable to employee Contributions must stop once individual is enrolled in Medicare 3
HSA Contributions (cont.) Based on number of months individual was covered by HDHP Based on coverage on first day of the month Ex: Single employee entering plan July 1 has maximum contribution of ($2,900/12) x 6 months = $1,450 Can be made throughout the year or in lump sums Catch Up Contributions Maximum $900 (2008) Individual at least age 55 Does not matter when 55 th birthday falls during year Contributions prorated for partial years of HDHP coverage Excess Contributions Must be withdrawn before end of year or subject to 10% excise tax Pro-rata portion of earnings must also be withdrawn Taxable when withdrawn 4
HSA Establishment Established at any financial institution or under insurance company HSA must be established before claims can be reimbursed Expenses can be incurred prior to account being established as long as individual was covered by HDHP Employee Contributions Can be made through cafeteria plan (125) Can change on a month by month basis Pre-tax not subject to: FICA Federal State Employer Contributions Always excluded from employee income Must be comparable for all employees participating in the HSA Not eligible for employer contribution: Self-employed Partners S-Corporation shareholders Can make deductible contributions on their own 5
Comparable Contributions Same amount to all employees Same percentage of annual deductible Count eligible employees with same category of benefits Single or family Part time employees considered separately More can be contributed to non-highly compensated employees than to HCE s Violations of Comparable Extra contributions due to attainment of certain age or qualification for catch up contributions Contributions based on length of service HSA s vs. Medical FSA s HSA s Contributions made pre-tax Annual election Reimbursement up to the amount funded FSA s Contributions made pre-tax Annual election Reimbursement up to the annual amount elected Any unused funds carry over to subsequent years Any unused funds are lost if not claimed by the end of the year 6
HSA s vs. FSA s (continued) HSA FSA Qualified medical expenses paid tax-free, including over-the-counter drugs Account earns interest Qualified medical expenses paid tax-free, including overthe-counter drugs Account does not earn interest Distributions for nonmedical expenses taxable plus 10% penalty if under age 65 Distributions not made for non-medical expenses Limited Medical FSA s HSA participants cannot participate in full Medical FSA Vision care Dental care Preventive care The above expenses can also be paid through the HSA if desired Example HSA or FSA? Employee plans surgery early in 2008 FSA full annual election paid when incurred HSA reimbursement up to amount of funding to date; subsequent reimbursement as funded Employee considering laser surgery in 2008, but not sure FSA any unused amounts lost if not used HSA unused amounts can be carried over 7
More examples HSA vs. FSA Employee s child needs braces sometime in the future, probably not 2008 Fund HSA ahead of time with same tax benefits as FSA (if maximum medical expenses not anticipated) Employee wants to maximize saving for retirement in addition to 401(k) HSA can be used for medical expenses after 65 without tax; non-medical expenses taxable Distributions from HSA s Tax free for qualified medical expenses Taxable for distributions for non-medical reasons PLUS 10% penalty for distributions made for nonqualified medical expenses if under age 65 Distributions can be taken for: Covered individual Spouse (even if not covered by HDHP) Any dependent (even if not covered by HDHP) Documentation Validity of claims between the individual and the IRS Individual is responsible for maintaining records KEEP RECEIPTS! 8
Distributions (continued) Distributions can be made for prior years expenses as long as they were incurred after the date the HSA was established No time limit KEEP RECEIPTS!! Obviously, cannot claim reimbursement for expenses that were already reimbursed elsewhere or taken as an itemized deduction Oops! Mistaken HSA distribution can be returned to HSA Clear and convincing evidence that distribution was mistake Must be repaid by April 15 of year following year of error Year-End Reporting Will receive Form 1099-SA from HSA administrator reporting distributions for the year Need to file Form 8889 with Form 1040 reporting HSA contributions/distributions for year 9
Qualified Medical Expenses Medical expenses (not insurance premiums) Dental expenses (not insurance premiums) Over-the-counter drugs Not all expenses have to apply toward deductible (i.e., dental, vision care) Qualified Premiums COBRA continuation coverage Health care coverage while receiving unemployment benefits Medicare premiums (not supplemental coverage) Part A Part B Prescription Drug Premiums for long-term care coverage Coordination Between Spouses Individual covered by HSA may not have coverage that provides payment before the HDHP deductible is met i.e., if covered under spouse s insurance as well as own HDHP, spouse s insurance must be HDHP in order to participate in HSA Each spouse may have individual HSA if each is covered under HDHP 10
Spouses (continued) Expenses may be paid for spouse and dependents under an individual s HSA, even if the spouse is not covered by a HDHP Important to ensure the individual is not covered under spouse s Medical FSA Example Employee takes single coverage Employee Spouse takes family coverage in non-hdhp, covering Employee Employee is not eligible to participate in the HSA HSA Treatment Upon Death If spouse is beneficiary, spouse becomes owner of HSA If spouse not beneficiary, account is taxable to recipient Or to decedent s estate if estate is beneficiary Taxable amount reduced by qualified medical expenses incurred before death and paid by beneficiary Taxable amount also reduced by any estate tax paid due to inclusion of HSA in estate 11
HSA Benefits You Decide: How much money to contribute, up to deductible amounts Whether to save for future expenses or pay current medical expenses Whether to invest account HSA s are Portable Even if you change jobs Even if you change medical coverage Even if you become unemployed Even if you move to another state Even if you change your marital status HSA s are Tax Efficient Tax deduction when making contribution Tax-free earnings on investments Tax-free withdrawals for qualified medical expenses 12
For More Information... www.treas.gov/offices/public-affairs/hsa www.irs.gov Publication 502 Medical Expenses 13