Visit 2hsa.com for the best HSA offerings

dot_clear.gif - 43 Bytes
Home Page

Latest Updates

HSA Basics

Free Healthcare & You Newsletter

Links to related resources

Get an insurance policy for college

Get a short term health insurance policy

Get travel insurance

FEATURED ADVERTISERS:

Free: Fortune Special HSA section


Frequently Asked Questions about HSAs

Do you have a question not answered here?

Email us at:

customerservice@ hsafinder.com
Q: What Are Health Savings Accounts?

Health Savings Accounts (HSAs) are a new healthcare program.

HSAs pair a high-deductible health insurance plan with a health savings account to cover medical expenses until the deductible is reached.

HSAs are an important tool for employers and employees to improve their healthcare options. HSAs were created to offer individuals a tax-advantaged way to accumulate savings for medical expenses. Business owners who offer such a plan to their employees can benefit modestly from tax relief, and, most importantly, can realize substantial healthcare cost savings on a day-to-day basis. HSAs are not for everyone. Yet for the self-employed, and for many other small business employers and their employees, HSAs represent a breakthrough strategy that can lower healthcare costs today and increase retirement savings for future health care needs.

Q: How Do HSAs Compare to Other Tax Advantage Programs?

To those familiar with IRA, Keogh and 401(K) plans, HSAs operate in much the same manner, with several important differences. The most important difference is that money placed into an HSA can be withdrawn at any time, before as well as after retirement, if the money is used for medical care expenses. What constitutes a medical expense is pretty basic. Treating a broken nose is okay. Getting wrinkles removed is not. Equally as important, money not spent in one year may be rollover to the next and even beyond age 65.

Q: Who Qualifies?

Any taxpayer under the age of 65 can open an HSA account, provided that he or she has also contracted for a high-deductible insurance policy.

Self-employed or those employed by others can participate.

Spouses or dependents covered by other insurance may not be able to participate

Q: What's Covered?

Dollars put into an HSA account can be used for any medical expense that qualifies as a "medical expense" as defined in U.S. tax code. Expenses usually not covered under a standard health insurance policy, such as contact lenses, chiropractic care, physical therapy, and nursing home care, do qualify here and can be paid for out of the HSA.

Because the HSA is tied to a high-deductible (HD) health insurance policy, the individual will "pay as they go" for medical care until they spend up to the deductible. Once the deductible is met, the health insurance policy kicks in and pays for everything else after that. HSAs don't "replace" a "normal" or "typical" health insurance policy. They are meant to be used as a supplement to a plan. HSAs can only be set up if you've already got a high-deductible health insurance coverage policy.

Q: What Can It Pay For?

  • Dental and Optical care, including glasses and contact lenses
  • Self-pay for COBRA health care continuation when you leave a job
  • Long-term care insurance coverage for family members
  • Fertility treatments, birth control prescriptions, well-baby care
  • Physical therapy, chiropractic care, psychoanalysis, acupuncture

Q: Do HSAs Lower Health Care Costs For Individuals And Business Owners?

Compared to full-coverage health insurance, the premium payments for HD plans can be substantially less than half the price. So it's no surprise that young, single, and relatively healthy workers prefer high-deductible plans, when the money for premiums comes out of their pocket (for the self-employed) or is taken out of a paycheck (through a HD plan offered as a job benefit by an employer). Employers whose worker base is primarily young and single people have probably noticed that, when given a choice, most of these employees will choose a high-deductible plan.

High-deductible plans are sometimes called "hit-by-a-truck-insurance." Good plans pay for both catastrophic and routine medical care, once the insured person has paid out-of-pocket for the first $500 or $1,000 worth of medical fees. And in the unlikely eventuality that the insured person does get hit by a truck, or needs that trip to the emergency room ($1,500 average in Manhattan), a few days hospitalization, ($600 per day) or surgery (thousands of dollars), the HD plan will cover all the costs.

Under the HSA program, deductibles are quite high:

  • Individuals must have an annual deductible of at least $1,000.
  • Families must have an annual deductible of at least $2,000.

Not every high-deductible health plan qualifies. Another stipulation is that the plan must have what is considered a reasonable cap on out-of-pocket expenses:

Q: Are there any tips you can provide for installing an HSA in my company?

We have a number of tips that are listed in our corporate section: click here.

Q: What Are Some Of The Parameters of HSAs?

For individuals, the maximum amount of money that can be deposited into an HSA account is $2,650. If the account has been set up for a family group, the maximum that can be deposited is $5,250. The actual amounts allowable for contributions that qualify as a tax deduction depend on a few factors, such as the deductible on your health insurance plan

Q: Who Is Best Suited To An HSA account?

Clearly, those who would prefer, or already have, a high-deductible on their health insurance policy are poised to get the most benefit from this new program.

For the self-employed, and don't have any insurance policy at all, a low-cost, high-deductible plan that qualifies for an HSAs is a good starting point.

Small business owners thinking about adding health care insurance coverage as a new benefit to your workers, offering them only a high-deductible plan is 1) a good first step; 2) the least expensive health benefit available; and 3) probably a better deal than is offered by competitors.

If a company already offers a different type of health insurance plan, such as a PPO, POS or HMO, with a low deductible ($500 or less) it's safe to assume that at least some employees will be unhappy if they're forced to switch to plans that require them to pay more for a higher (at least $1000) deductible.

Generally, the program will be better received if the worker base is:

  • Young adult (over 21 but under age 30)
  • Predominantly single,
  • And/or responsible only for their own insurance needs
  • Highly paid (over $50,000) on the strength of its tax-advantaged possibilities.

Conversely, if the worker base relies on a relative for health insurance coverage, they will be less enthusiastic.

Also, workers getting good insurance through their spouse or parent may consider switching if financial incentives are offered to them.

If any of these workers are already participating in an IRA or 401(k) program through your business, odds are very good that they will go for this program as well. If the worker base is paid low wages (under $23,000) they will have very little enthusiasm. These employees may find it hard to set aside anything for savings, especially if they have family to support.

Q: What are Consumer Driven Healthcare Plans?

Here we briefly describe three types of consumer-driven health care plans as described in the recent Commonwealth Fund Study.

In the first group, health reimbursement arrangements (HRAs), a spending account is established for employees to draw upon for health care purchases. When the account is depleted, the employee must pay for services out of pocket until the deductible is met, at which point the HRA plan becomes a traditional major medical plan. At the employer’s discretion, unspent funds can be carried over to the next year. Typically, HRA plans’ deductibles exceed $1,000. They are not portable from employer to employer and cannot be used for non-medical expenses. Employees may not contribute to the spending account.

A second class of plans, termed “personalized” or “design-your-own” plans, allows employees to design their own networks and benefit packages. Using a Web-based tool, employees select individual physicians and hospitals along with their benefit package. These choices determine the cost of each person’s plan. Employers contribute a fixed amount for the cost of the plans, and employees bear the financial risk for their choice of providers and benefit packages. Only a few U.S. employers now offer a “design-your-own” plan.

A third class of plans, “customized-package plans,” allows employees using Web-based tools to choose from a predetermined selection of network offerings (for example, broad, medium, and narrow networks) and benefit packages (for example, rich, medium, or thin). From this hypothetical set of offerings described above, employees choose one of nine options. Employers contribute a fixed amount, and employees are at financial risk for their selection of plans. Health plans offer customized plans primarily in the small and midsize employer market, and typically only one carrier’s products are available to the firm’s workers.

Health Savings Accounts allow employees or their employers to contribute on a pretax basis to an account—if the person selects a high-deductible plan. Contributions may not exceed $2,650 per year for a single person or $5,250 for a family, nor may they exceed the size of the deductible. HSAs are portable from employer to employer and are not subject to any taxation as the account grows and when it is used. Hence, HSAs have substantial tax subsidies that are not conferred for other health plans.

Q: Can a shareholder of a corporation have an HSA account, and can a corporate owner who owns most of the company have an HSA account, and can someone with just 2% ownership participate?

For simplicity, we'll assume that the 2% S Corporation shareholder is the sole employee.

According to Notice 2004-2:

Q-11. Who may contribute to an HSA?

A-11. Any eligible individual may contribute to an HSA. For an HSA established by an employee, the employee, the employee's employer or both may contribute to the HSA of the employee in a given year. For an HSA established by a self-employed (or unemployed) individual, the individual may contribute to the HSA.

Sec. 1372(a) treats 2% S Corporation shareholders as partners in a partnership for health plan purposes thereby requiring inclusion of the premium paid in compensation income and permitting a 100% self-employed health insurance deductibility at the individual shareholder level subject to certain limitations.

Also, according to Notice 2004-2:

Q-2. Who is eligible to establish an HSA?

A-2. An "eligible individual" can establish an HSA. An "eligible individual" means, with respect to any month, any individual who: (1) is covered under a high-deductible health plan (HDHP) on the first day of such month; (2) is not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing certain limited types of coverage); (3) is not entitled to benefits under Medicare (generally, has not yet reached age 65); and (4) may not be claimed as a dependent on another person's tax return.

Since the 2% S Corporation shareholder is such an eligible individual, he may contribute to an HSA he establishes for himself.

Q: I am working with my insurance agent on establishing health coverage for our small business. My partner and I are going to go with the HSA in the coverage while the rest of the employees, approximately 10 others, are going to go with normal styled insurance. Are we able to rollover funds from a pre-taxed retirement account, such as a pension fund or 401k and fund the HSA fund? I understand the $5,250 cap for each year.

Rollovers from a qualified pension plan or 401K are not permitted tax-free into an HSA. Such rollovers will be taxable and subject to premature withdrawal penalties although the otherwise eligible contribution to an HSA will be deductible.

Q: I have a wife and we have 5 children. I run a bee farm and she takes care of the children. I do NOT qualify for standard health insurance. I do NOT cut her a 1099 or a W-2 each year. She takes care of the children and sometimes helps me. She receives essentially no income.Can we buy an HSA on her AND deduct the premiums/deductable on our joint return? What if we are Corporation? Or a sole proprietorship?

Bottom line: Mrs. _____ may set up an HSA for herself alone to which Mr. _____ may make tax-deductible contributions provided that: She obtains High Deductible Health Plan coverage and She is not claimed as an exemption on a married filing separate tax return filed by Mr. Nye.

From Notice 2004-2:

Q-2. Who is eligible to establish an HSA?

A-2. An “eligible individual” can establish an HSA. An “eligible individual” means, with respect to any month, any individual who: (1) is covered under a high-deductible health plan (HDHP) on the first day of such month; (2) is not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing certain limited types of coverage); (3) is not entitled to benefits under Medicare (generally, has not yet reached age 65); and (4) may not be claimed as a dependent on another person’s tax return.

Q-11. Who may contribute to an HSA?

A-11. Any eligible individual may contribute to an HSA. For an HSA established by an employee, the employee, the employee's employer or both may contribute to the HSA of the employee in a given year. For an HSA established by a self-employed (or unemployed) individual, the individual may contribute to the HSA. Family members may also make contributions to an HSA on behalf of another family member as long as that other family member is an eligible individual.

From Notice 2004-50:

Q-28. Who may make contributions on behalf of an eligible individual?

A-28. Although Q&A 11 of Notice 2004-2 only refers to contributions by employers or family members, any person (an employer, a family member or any other person) may make contributions to an HSA on behalf of an eligible individual.

Answer supplied by:

J. Terence MacAvery, JD, CPA; Partner, Hamilton & MacAvery CPA's tmacavery@hamiltonmacavery.com

Q: I am unemployed, living off my assets, with a private medical health plan from Blue Shield of California. My plan has a $2,400 deductible fee. Do I qualify for a HSA bank account? If I qualify, does the account mature at age 65?

If self-only coverage, it qualifies if total out-of-pocket is less than $5,000. Contributions are not permitted after age 65 if enrolled in Medicare. Distributions after age 65 not used for medical expenses are taxable but not subject to penalty.

From Notice 2004-2:

Q-3. What is a "high-deductible health plan" (HDHP)?

A-3. Generally, an HDHP is a health plan that satisfies certain requirements with respect to deductibles and out-of-pocket expenses. Specifically, for self-only coverage, an HDHP has an annual deductible of at least $1,000 and annual out-of-pocket expenses required to be paid (deductibles, co-payments and other amounts, but not premiums) not exceeding $5,000.

Q-2. Who is eligible to establish an HSA?

A-2. An “eligible individual” can establish an HSA. An “eligible individual” means, with respect to any month, any individual who: (1) is covered under a high-deductible health plan (HDHP) on the first day of such month; (2) is not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing certain limited types of coverage); (3) is not entitled to benefits under Medicare (generally, has not yet reached age 65); and (4) may not be claimed as a dependent on another person’s tax return.

Q-25. How are distributions from an HSA taxed?

A-25. Distributions from an HSA used exclusively to pay for qualified medical expenses of the account beneficiary, his or her spouse, or dependents are excludable from gross income. In general, amounts in an HSA can be used for qualified medical expenses and will be excludable from gross income even if the individual is not currently eligible for contributions to the HSA.

However, any amount of the distribution not used exclusively to pay for qualified medical expenses of the account beneficiary, spouse or dependents is includable in gross income of the account beneficiary and is subject to an additional 10% tax on the amount includable, except in the case of distributions made after the account beneficiary's death, disability, or attaining age 65.

Answer supplied by:

J. Terence MacAvery, JD, CPA; Partner, Hamilton & MacAvery CPA's tmacavery@hamiltonmacavery.com

Q: Situation - In 2005, I change to a high-deductibe medical insurance plan compatible with an HSA. At some future date I change to a medical plan which makes me ineligible for an HSA. What happens to the balance in the HSA? Can I still make contributions? Can I still spend the balance on medical expenses?

What happens to the balance in the HSA? The amount you have placed into a health savings account remains available to you and acculumates interest and/or dividends depending on the investment vehicle used. Can I still make contributions? As long as you have a qualified high-deductible policy, you can make contributions to your health savings account. If you switch to another plan (one that is not a qualified high-deductible plan), you can no longer make contributions. Can I still spend the balance on medical expenses? Yes, you can spend the balance, tax-free, on qualified medical expenses.

Q: How much may you contribute to an HSA on an annual basis? Is this account similar to a Roth IRA where you contribute after-tax dollars and then the distributions are tax free? Can you invest in mutual funds, stocks, bonds, etc. with the money in the HSA?

There are limits to setting aside for an HSA...$5,1,50 (about) for a family and $2,000 for an individual. Also, there are catchup provisions for people over 55.

As long as the account is being handled by an IRS approved account custodian, you may invest in all of those you list.

Q: I am wondering if you can provide guidance on HSA payroll deductions? Our company is an HSA administrator and now, as an employer, we are offering HSAs. Our payroll service is having difficulty understanding we need the amount of our employer contribution reported on the W-2, but not to count this as salary to the HSA participant. This is the first month of our HDHP eligibility and we haven't made our contributions yet. Do you have any information on HSA payroll deduction we can share with our payroll processor?

Following is a three-part answer to your query regarding reporting employer HSA contributions on the W-2.  The first part confirms HSAs contributions are excludable from an employee's taxable income.  The second part addresses the
rules for reporting HSA contributions (and premium costs.  And, the third part outlines setting-up your payroll for HSAs.

I.   Excluding Contributions From An Employee's Taxable Income

On a payroll you must calculate withholding in accordance with government tables to cover the employee's income tax.  Federal Income Tax requires this withholding, as do the majority of states that have State and/or Local Income Tax.  Contributions to HSAs on behalf of employees are exempt from
these taxes, and join the list of other forms of worker compensation that are not taxed:

  • Generally all health coverage policy premiums
  • Generally all employer contributions to employee retirement plans
  • All worker's compensation premiums or benefits
  • Extra sick pay or disability (after the first six months)
  • Reimbursements for moving expenses, parking garages, public transit (subject to certain limits)
  • Reimbursements for business expenses by employees (T & E) when these are accounted for to the employer

II.  Rules For Reporting Premium Costs and HSA Contributions

Contributions into an HSA can be made either by an individual or by an employer.  If the individual makes the contribution, the amount is DEDUCTIBLE from the individual's TOTAL INCOME (Line 22 on the current version (2003) of Form 1040).

If the employer makes the contribution, the amount is EXCLUDABLE from the employee's WAGES (Line 7 on the current version (2003) of Form 1040).  The excluded amount is supposed to be noted on the employee's W-2 paperwork, but
this should be checked by all employees to make sure the wage figure, which is minus the employer contribution, is correct on the W-2, and entered as a correct amount on Line 7 on the Form 1040.

If an employer paid for all of your high-deductible insurance premiums, only that employer is entitled to deduct this sum as a business expense.  If you paid part of the premium out of your salary, your costs for the premium will be noted on the W-2, but this sum is not excludable from your wages.

III. Setting Up Your Payroll For HSAs

Basic First Steps (Checklist)

___ Obtain Employer Identification Number (EIN) for your business.  You must do this if you plan to pay wages to at least one other person beside yourself.  To apply for a number, use IRS form SS-4. You can do this online.

___ Decide how frequently you'll issue paychecks (Weekly? Biweekly? Monthly?).

___ Decide which of your workers are full time employees.  Some of your help
may wish to be paid as independent contractors, if eligible.

___ Obtain a completed withholding application (W-4 form), Social Security Number, for each employee.

___ Make a note to file 1099s for each independent contractor you expect to
pay more than $600 in this tax year.

Q: The Q&As that the Treasury put out says that HSA contributions can be put through a Cafeteria Plan. What exactly does that mean? I thought that the only way to get a tax deduction is on a tax return, but other people are saying that HSA contributions can be pretax. If that is the case an employer can avoid State employment taxes, Federal employment taxes, the employer portion of Social Security, etc. It was my understanding that SS tax can not be avoided on the employee level and the employer level when contributions are being made. Is the contribution like that of an IRA where there is an after tax salary reduction, or is the contribution pretax like an insurance premium? Could you please clarify this issue for me?

Under a cafeteria plan allowing it, an employee can opt to apply funds to an HSA.  This amount will be a reduction of wages subject to FICA, FUTA and SUTA, the latter depending on whether a particular state chooses not to follow federal law.

Q: Please clarify: I have a BC/BS high deductible policy that qualifies me for a HSA. I have paid my deductible up in full and now would like to open a HSA. I have been told by a source that I can still do that and write a check to me using my insurance info to prove that I paid my deductible in full. Can I do this so that I can have a tax deduction this year?

Under a ruling issued earlier this year: For calendar year 2004, an HSA established by an eligible individual on or before April 15, 2005, may pay or reimburse on a tax-free basis an otherwise qualified medical expense if the qualified medical expense was incurred on or after the later of: (1) January 1, 2004, or (2) the first day of the first month that the individual became an eligible individual under section 223. So, you can do it.

Q: We would like to have any info you can supply on how a WA state small biz can join with a group like NFIB or other large national to keep the rates low in conjunction with an HSA, and any info you have on the HSA itself.

For information on joining a large group, go directly to that group as each has different requirements.

Be aware however, joining at group to get better rates may not help you achieve your goal. Often companies with high medical costs seek to join groups or associations to lower their costs. As a result, the group may have a higher cost than what you would get on your own.

For independent information on HSAs, HSAfinder.com offers a free primer on HSAs.

In brief, HSAs save money for most employers, while giving workers healthcare protection. The HSA program has two parts: a high-deductible health plan and a health savings account.

Q: Who can be claimed as a dependent for an HSA?

(provided by Roy Ramthun, Senior Advisor to the Secretary of the Treasury for health initiatives)

If you are talking about the dependent status of the taxpayer's child under age 19 (or a child who is a full-time student under age 24), there is no limit on the amount of income that the child can earn/make - they can still be claimed as a dependent, but the child cannot provide more than half of his or her own support. With other individuals, a dependent cannot make more than $3100.  Whether someone is a dependent or not is somewhat involved and discussed in IRS Publication 501. Here is a link to that publication - http://www.irs.gov/pub/irs-pdf/p501.pdf.



Get an HSA Insurance Quote For You and Your Family

Get an HSA Insurance Quote For Your Business

For an HSA compatible Dental Plan, click here

The Small Business Guide to HSAs is available now!

Unique Educational Programs for Business Managers

Insurance Agents, Partners Wanted