Health Saving Account Facts, Rules & Regulations 1
Table of Contents Page 3 Page 3 Page 4 Page 4 Page 4 Page 5 Page 5 Page 7 Page 7 Page 7 Page 8 Page 9 Page 9 Page 9-10 Page 10 Page 10 Page 10 What is an HSA? Why an HSA? Who is eligible for an HSA? Is an HSA right for everyone? Do I need certain type of Insurance Plan? Employer Benefits of HSA Plans Employee Benefits of HSA Plans HSA Tax Treatment Tax Treatment: Individuals Tax Treatment: Employer Contributions How are Distributions Taxed? Who May Contribute? How much may be contributed to an HSA in calendar year 2008? Tax Treatment of Contributions What are catch up Contributions? What are Qualified Medical Expenses? Are health insurance premiums qualified medical expenses? How are claims adjudicated and processed? What other kinds of coverage are permissible? Coordinating with Cafeteria & Flexible Benefit Plans How does an HSA Differ from an MSA? HRA's vs HSA s Laws, Regulations 2
What is an HSA? An HSA is an innovative approach to health insurance signed into law in December of 2003, made available January 1st 2004 An HSA plan has 2 components: 1. A qualified high deductible health insurance plan 2. An Individual Tax-exempt Trust (savings/investments) The trust account is designed to pay for routine medical expenses/and or provide savings for the future. Money put into the account can be used either during the year or accumulated in the account. Allowable medical expenses are defined by the IRS, and are much broader than most insurance carriers (i.e. includes dental, vision). Individuals can deduct dollars contributed to the HSA account from their gross income, resulting in taxfree medical dollars. The account is similar to an IRA account, however it is for qualified medical expenses. HSA premiums are lower than other fully insured plans with co-pays. In theory, the funding of the health savings account comes from the dollars not being spent on a plan, which "pays" for the privilege of co-pays and lower deductibles. By allowing individuals to keep the money in the account not used, the government reintroduces the consumer into the health insurance equation; creating an incentive to check bills, compare costs, and evaluate urgency/frequency of appointments. The plan must meet certain criteria (see Do I need a certain type of Insurance Plan?) Why an HSA? To combat the rising cost of healthcare Recent trends in cost- shifting from employers to employees is noticeable, and has employees vested in finding a solution to the problem To make the healthcare system cost-efficient by reducing the subsidies inherent in a third-party payment system Reward individuals that efficiently manage their healthcare dollars Desire for individuals to take more control over HOW medical dollars are spent Provide a lifetime savings vehicle for medical expenses Individuals want to have more control over their financial destiny With a an HSA, Health insurance plans start looking AND COSTING like other types of insurance i.e. auto, homeowners 3
Who is eligible for an HSA? An individual needs to be covered by a QUALIFIED high-deductible health plan to set up a Health Savings Account. In addition, individuals cannot be covered by a health plan that is not a qualified high-deductible plan claimed as a dependent on someone else s tax return. entitled to Medicare benefits (age 65 or older) Note: A spouse can have single coverage under an HSA, if they are not covered under the other spouses plan. The account however, is for the individual covered under the HSA qualified plan only. HSA rules are determined at the federal level. Individuals may be eligible under state guidelines (domestic partners, civil unions etc.) for qualified-health insurance coverage, BUT not eligible to open the savings account portion of the plan. Is an HSA right for everyone? No. While many people will benefit from the creation of HSA s; individual insurance alternatives, situations and personal preferences will determine if it is the right type of coverage. Individuals that HSA s will benefit most are people that save money on premiums from other insurance alternatives, and that will systematically fund the savings account. A good starting point is to look at recent years medical spending, and calculate the total dollar amount that would have been spent on premiums and medical expenses under terms of the HSA qualified plan. Compare it to the actual amount spent in the same period for insurance premiums, co-pays and co-insurance. Do I need certain type of Insurance Plan? Yes. The plan needs to be a qualified high deductible health plan (HDHP) A qualified HDHP is a health plan that meets the following requirements: Individual coverage Annual deductible: $1,100 Minimum Annual out-of-pocket expense limit: not more than $5,600. Family coverage Annual deductible: $2,200 Minimum Annual out-of-pocket expense limit: not more than $11,200. These plans do not have co-pays for doctor visits or prescription drugs 4
These plans can be network plans Some qualified plans may have a first-dollar benefit or low-deductible benefit for preventive care only. In the case of family coverage, a plan is only an HDHP if under the terms of the plan no amounts are payable until the aggregate family deductible is met An insurance carrier or licensed insurance professional should verify that the plan in question is actually a qualified plan. Penalties exist for individuals that set-up the accounts without the appropriate insurance. Employer Benefits of HSA Plans Reduced Premiums You can reduce your insurance premiums substantially by switching to an HSA-qualified high-deductible health plan. Lower Fixed Costs of Health Insurance Plan 2 Components of the plan; premium and account funding can be decided independently, and reviewed annually Deliver more Benefit Dollars to Employees Instead of paying 100% of insurance dollars to a carrier, you can deliver some of those dollars directly to employees by funding the account. Provide Incentives to Employees to Get Involved with Healthcare Decisions By reallocating insurance premium dollars to individual accounts, individuals have incentives to get involved with the process and get the biggest bang for their buck. Tax savings Your contributions to the HSA are made with pre-tax Employee Benefits of HSA Plans Control You can use the HSA to pay for any qualified medical expense, as defined by the IRS. There's no need for preauthorization of services, unless explicitly stated by the plan. Savings and Investments Unlike premiums, unused HSA dollars remain in the HSA until you use them later. Flexibility Health Care dollars can pay for items identified by the health insurance plan, but also a much broader definition as defined by the IRS which includes dental, vision, orthodontia, over the counter medicine and others (not all of these are applied to deductible) These may be things individuals are currently routinely paying for using posttax dollars. Portability If you leave your current employer, you can take your HSA (the account) with you. Tax savings Your contributions to the HSA are made with pre-tax dollars, so individuals will lower income taxes. No Use-it-or-lose-it Balances roll from year to year, so you don't need a crystal ball to forecast medical expenses in the next year 5
HSA Tax Treatment Qualified Medical expenses can be paid for from the account tax-free. Interest and any capital gains on investments accumulate tax deferred until age 65. At this point individuals have the opportunity to continue to use accumulated savings for medical expenses tax free, or withdraw them for non-qualified expenses at normal tax rates. Tax Treatment: Individuals Individual Contributions Contributions are tax deductible up to the maximum amount. Contributions can be deducted from adjusted Gross Income. Tax Treatment: Employer Contributions Employer receives a business deduction as a normal business expense. How are Distributions Taxed? Distributions from an HSA used exclusively to pay for qualified medical expenses are excludable from gross income and not taxed. Any distribution not used to pay for qualified medical expenses must be reported when filing taxes. The account beneficiary and is subject to an additional 10 percent tax*. Individuals should consult with their HSA administrator, or a CPA before taking a questionable distribution. *Except in the case of distributions made after the account beneficiary's death, disability, or attaining age 65. Who May Contribute? Both Employer and Employee can contribute in the same plan year. How much may be contributed to an HSA in calendar year 2010? For plans with coverage effective Jan 1, 2010: Individual: $3,050 Family: $6,150 6
Tax Treatment of Contributions Employees Contributions made by an eligible individual to an HSA can be deducted from adjusted gross income. The amount paid out of the account, or account balances do not matter. Contributions are deductible whether or not the eligible individual itemizes deductions*. *Individuals cannot also deduct the contributions as medical expense deductions under section 213. Employers Employer contributions to the employee's HSA are treated the same as employerprovided health insurance premiums 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) What are catch up Contributions? For individuals (and their spouses covered under the HDHP) between ages 55 and 65 see beow: Year Catch-up Contribution 2004 $500 2005 $600 2006 $700 2007 $800 2008 $900 2009 and beyond$1,000 What are Qualified Medical Expenses? Qualified medical expenses must be incurred AFTER the HSA coverage has been established. Medical Expenses That Qualify for Tax-Free Withdrawal From an HSA IRS Publication 502 has a checklist of expenses that can be itemized. Most of these expenses (see below) qualify for tax-free withdrawal from an HSA, unless the expenses were reimbursed by your healthcare coverage. One expense, which cannot be reimbursed from an HSA, is the premium for most healthcare plans. The following list is provided as reference only and is not meant to be comprehensive. To order IRS Publication 502, call 1-800-TAX-FORM. 7
Fees: Anesthesia Nurse Blood Donor Oculist Chiropodist Ophthalmologist Chiropractor Optician Clinic Optometrist Dentist Oral Surgery Diagnosis Orthodontia Diathermy Osteopath Examination, physical Pediatrician Eye Examination Physician Gynecologist Physiotherapist Hospital Podiatrist Laboratory Practical Nurse Long-term care insurance premiums and expenses Psychiatrist Lip reading lessons for the deaf Psychologist Medical Information plan Psychoanalyst Midwife Therapy Surgeon Other: Ambulance Hire Nursing care Artificial limbs and teeth Oxygen and equipment Automobile modifications (hand controls, special Radial keratotomy equipment, mechanical lifts) Braille books & magazines Rental of medical or healing equipment Crutches Sanitarium or rest home Over the counter drugs Seeing-eye dog Prescription drugs and medical supplies Special education (limited) Support or corrective devices (including special Elastic hose, medically prescribed mattress and board for arthritis) Eximer laser Telephone for deaf T.V. set modifications to receive closed captions for Eyeglasses/contact lenses hearing impaired Acupuncture Therapy treatments Halfway house residency Treatment center for drug and alcohol addiction Hearing devices Transportation expense relative to illness Hospital bills Wheelchair Iron lung, operating cost X-rays Laetrile, when prescribed by a doctor X-rays Are health insurance premiums qualified medical expenses? In most cases, NO. However, the following are exceptions: Long-term care insurance premiums COBRA health care continuation coverage premiums Premiums for health coverage while an individual is receiving unemployment compensation For individuals over age 65 certain Medicare premiums Check with a licensed insurance professional prior to using any HSA funds to pay premiums. 8
How are claims adjudicated and processed? There is not an independent party that approves claims and releases funds from the account. Individuals typically receive a checkbook and a debit card, and are responsible for paying providers as they are billed. In order for these amounts to be applied towards your deductible and take advantage of any discounts your plan has, you want to make sure the claim gets processed through your insurance carrier. In the event of an IRS audit, it is the individual account holders responsibility to prove that deductions for the account were for qualified medical expenses. Keep good records. What other kinds of coverage are permissible? An individual can still be eligible for an HSA if he or she has: dental care vision care long-term care Permitted insurance is insurance that pays a fixed amount period of hospitalization, or coverage primarily related to: liabilities incurred under workers' compensation laws tort liabilities liabilities relating to ownership or use of property (e.g., automobile insurance) a specified disease or illness accidents disability Specifics policies should be discussed with an insurance professional prior to purchasing an HSA. Coordinating with Cafeteria & Flexible Benefit Plans Flexible benefit plans can co-exist alongside of an HSA Plan, however individuals should not pay for medical expenses out of the Flex Plan (individuals may want to allocate money for dental or vision in the flex plan.) The HSA legislation allows for individuals to contribute to an HSA through a cafeteria plan, however not enough guidance was given on the subject. In practice different Flexible Benefit administrators are interpreting it differently. Some are not allowing it; others are treating it like Insurance Premiums. 9
How does an HSA Differ from an MSA? Contribution amounts have been increased to 100% of the deductible (From 65% single, 75% family) Both employer and employees can contribute to an HSA in the same calendar year Some qualified plans may have a first-dollar benefit or low-deductible benefit for preventive care only More people qualify- individuals do NOT need to be self-employed, and they allow groups over 50 to participate as well "Catch-up" contributions have been established There is no limit on the number of accounts that can be established HSAs are a permanent feature of the Tax Code HRA's vs HSAs Health Reimbursement Arrangements are another type of Consumer-Directed Health Plan. Major difference is that the savings account is not portable if the employee leaves. Any surplus in the account belongs to the employer. When comparing the two, critics point out that ultimately this will NOT change individual s behavior in the long term. i.e. employees will not lose money, they will budget better, but ultimately "use-it" instead of lose-it. Laws, Regulations Section 1201 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 added section 233 to the Internal Revenue Code to permit eligible individuals to establish Health Savings Accounts for taxable years beginning after December 31, 2003. President Bush signed the legislation into law on December 8, 2003. 10