An Employer’s Guide to Health Savings Accounts (HSA)

jar of coins to pay for medical expenses

What is a Health Savings Account?

Health Savings Accounts (HSA) were created in 2003. They are special individual-owned accounts used to pay for current and future medical expenses. They are used with High Deductible Health Plans (HDHP). This is an insurance plan that does not cover first dollar medical expenses (except for preven- tive care). It can be a n HMO, POS, PPO of indemnity plan as long as it meets this requirement

Advantages to the Employer:

♦ Funds deposited in an HSA are 100% tax deductible
♦ HDHP plans are designed to make employees more aware of health care expenses and help them become better consumers. This reduces claims and lowers health insurance expenses
♦ Reduced premiums
♦ Employees are more aware of health care costs because the funds in the HSA account belong to them
♦ Younger employees feel they have a meaningful benefit

Advantages to the Employee:

♦ Funds deposited in an HSA are 100% tax deductible
♦ Funds in an HSA are available for any medical expense that are not covered by the health insurance plan but quality as a deduction according to the IRS (i.e. eye glasses)
♦ The money can accrue for future use
♦ Can use funds to pay for COBRA, Medicare or long-term care premiums

Who Is Eligible for an HSA?

Any individual that:
♦ Is covered by an High Deductible Health Plan (HDHP)
♦ Is not covered by other health insurance
♦ Is not enrolled in Medicare
♦ Can’t be claimed as a dependent on someone else’s tax return
♦ Children cannot establish their own HSAs
♦ Spouse’s can establish their own HSAs if eligible
♦ There are not income limits on who may contribute to an HSA
♦ No requirement of having earned income to contribute to an HSA

What Other Health Coverage is Allowed for You to Still be Eligible for an HSA?

♦ Specific disease or illness insurance and accident, disability, dental care, vision and long-term care insurance.
♦ Employee Assistance Programs (EAP), diseases management programs, or wellness programs providing they do not provide significant benefits in the nature of medical care or treatment
♦ Discount pharmacy cards
♦ Eligibility for VA benefits, unless you have received benefits in the prior three months

HSA Account Details

Accounts are owned by the individual who can decide whether or not to contribute, how much to use for medical expenses, which medical expenses to pay from the account, if any and what type of investment to grow the account. The employer cannot restrict distributions or rollovers. However, the Custodian or Trustee can put reasonable limits on accessing the money in the account.

Unspent balances remain in the account. This is the reason HSAs are expects to hold down claims. It is believed that since the funds belong to the account holders they will be encouraged to sped their funds more wisely on their medical care and to shop for the best value for their health care dollars. The ac-
counts can also grow through investment earnings just like an IRA

What is a High Deductible Health Plan (HDHP)?

For calendar year 2013 an HDHP is defined as a health plan with an annual deductible that is not less than $1,350 for self-only coverage or $2,700 for family coverage, and under which the annual out-of- pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed
$6,650 for self-only coverage or $13,300 for family coverage. The maximum contribution allowed is
$3,450 per individual and $6,900 per family. In addition, for individuals over age 55, there is a catch up provision of an additional $1,000.

Benefits, including prescription drugs, are not paid until the deductible is met. In the case of families, the deductible works differently than a traditional plan. Here it is an aggregate deductible, meaning that the entire family deductible must be met before any benefits will be paid.

Preventive care can be covered before the deductible is met. These services include:

♦ Periodic health screenings (e.g. mammograms)
♦ Routine pre-natal and well-child care)
♦ Child and adult immunizations
♦ Tobacco cessation programs
♦ Obesity weight loss programs
♦ Certain mediations taken to prevent a medical condition by an individual who has developed risk factors for a disease that has not yet manifested itself or the prevent reoccurrence of a disease

Key Conditions & Requirements

HSA Contribution Rules

Both the employer and the employee can make contributions to the HSA. If made by the employer, it is not taxable to the employee and if made by the employee it is an “above-the-line” deduction. Funds from an IRA can also be transferred to an HSA subject to the annual contribution limits. Contributions must stop once an individual is enrolled in Medicare.

Contributions in excess of the annual limits must be withdrawn by the individual or will be subject to an
excise tax.

If an employer funds an HSA, he must offer all his employees the comparable funding, meaning either the same dollar amount or the same percentage of premium. If not there is a 35% excise tax on the amount contributed to the HSAs. In 2007 the legislation was amended to allow employers to contribute higher amounts on behalf of non-highly compensated employees. Comparability rules do not apply in collective bargaining situations.

Using a Section 125 plan, also know as a cafeteria plan, can give an employer more flexibility. For ex- ample, he can offer to match the employee’s contribution in the account. Using this plan will allow the employee contributions to be made on a pre-tax basis, to change contributions on a monthly basis, and automatically make contributions on individuals’ behalf unless the individual affirmatively elects not to have such contributions made. In addition, employer contributions based on employee participation in health assessments, disease management or wellness programs do not have to satisfy the comparability rules if employees are allowed to contribute to the HSA through a cafeteria plan In all cases cafeteria nondiscrimination rules apply, meaning contributions cannot favor the highly compensated.

The self-employed, partners and S-Corporation shareholders are not generally considered employees and cannot receive an employer contribution. They can make deductible contributions to the HSA on the own

HSA Distributions

When an HSA account is opened the owner will get a check book, debit card or both to use to pay for qualified medical expenses. These distributions are tax-free as long as the expense was incurred on or after the HSA was established. HSA accounts can be established the first day of any month, so it is important to make sure they are opened in advance of making a plan change.

Distributions can be taken for qualified medical expenses of the person covered by the HDHP or the per- son’s spouse or dependents even if they are not covered by a HDHP. If the funds are used for non- qualified expenses they are subject to ordinary income taxes plus a 10% penalty. This penalty is sched- uled to increase under health care reform legislations. The exception to this is if the individual dies or becomes disabled, or attains age 65.

Qualified medical expenses generally do not include other health insurance. However, there are excep- tions: COBRA, any health plan while receiving unemployment compensation, Medicare premiums and out-of-pocket expenses and long-term care insurance.

Key Conditions & Requirements

Individual should keep the receipts for any payments they’ve made with HSA funds. They may need to prove to the IRS that the distributions were for medical expenses or that the HDHP deductible was met. The individual needs to be able to keep records sufficient enough to prove that:
♦ The expenses were incurred
♦ They were not paid for or reimbursed by another source or taken as an itemized deduction

There is no time limit on when a distribution must occur. For example it there was not enough funds in the HSA to cover a qualified expense when the HSA was first established, the funds can be taken out of the HSA at a later time when the money is available

If money was withdrawn from an HSA by mistake it can be repaid before April 15th of the year follow- ing the year to avoid a penalty.