What is a Health Savings Accounts (HSA)? How do they work? What are the benefits? Am I eligible for an HSA?
Sound confusing? Find your HSA answers below!
What is an HSA?
HSA Overview
The Health Savings Account (HSA) was created in 2003 by the Medicare Prescription Drug Improvement and Modernization Act.
An HSA is a tax-advantaged, individually-owned account that is established for paying or reimbursing qualified medical expenses.
An HSA is a tax-advantaged, individually-owned account that is established for paying or reimbursing qualified medical expenses.
How does an HSA work?
- Individual account-owners, employers, and family members deposit money to an HSA.
- Account owners then withdraw money from the account to pay/reimburse qualified medical expenses (for themselves or family) on a tax-free basis.
- Depending on the HSA provider, account owners generally are provided a debit card or checks to easily access the funds.
What are the tax benefits of having an HSA?
HSAs provide tax advantages in three ways.
- First, contributions (deposits) to the account are generally 100% deductible (upto annual IRS maximum annual amounts).
- Secondly, the funds in an HSA earn money (i.e., via high-interest account, mutual funds, etc.) on a tax-deferred basis.
- Third, distibutions (withdrawals) used for qualified medical expenses are generally tax-free.
Am I eligible for an HSA?
Individuals are generally eligible for an HSA if they are:
- covered by a high deductible health plan (HDHP)
- not covered by a non-HDHP insurance
- not enrolled in Medicare
- claimed as a dependent on another person's tax return
What are the other (non-tax-related) benefits of an HSA?
In addition to the tax benefits, HSAs are attractive for the following reasons:
- HSAs are "portable." This simply means that the account is individually-owned and follows the owner through job changes, relocation and retirement. An HSA is not tied to a specific employer or location.
- There is no "use-it-or-lose-it" limitation. Unlike other reimbursement accounts, unused money in the account is "rolled over" from year-to-year for future savings or expenses.
- Because individuals own the account, there is much more control and flexibility in managing health care expenses.
What is a High-Deductible Health Plan (HDHP)?
High Deductible Health Plan (HDHP) is a a type of health insurance characterized by a minimum deductible and an out-of-pocket expense requirement (the below dollar amounts are adjusted each year per IRS):
- Annual (2006) HDHP minimum deductibles is $1,050 individual coverage and $2,100 for family coverage
- Annual (2006)out-of-pocket costs cannot exceed:
$5,250 for individuals and $10,500 for families
HSA Resources
- Department of Treasury HSA site
- Provides HSA tax information, FAQ, technical guidance, press releases, and more.
- IRS Publication 969
- HSA tax information for preparing tax returns
Frequently Asked Questions
- How are excess contributions handled?
Contributions beyond the maximum allowable amount may be withdrawn (along with earnings on the excess amount) before April 15th of the following year. Excess contributions and earnings are subject to income tax for the account owner. If these amounts are not withdrawn, account owners must pay a 6% excise tax on the excess contributions and earnings. - Which medical expenses are "qualified" for Health Savings Account distributions?
IRS Publication 502 provides a list of allowable expenditures. There is a wide range of allowable tax-free HSA expenditures, including vision and dental expenses, and for example, braces for children. Account owners are to determine which expenses are qualified and calculate deductibility with their accounting or tax professional. - Are employers responsible for determining whether employees use distributions from the account for qualified medical expenses?
No. Individual account owners are responsible for this determination. The HSA owner should maintain medical expense records and receipts for demonstrating that distributions have been applied to qualified expenses. - Do employer discrimination rules apply to Health Savings Accounts?
Employers must make comparable contributions to all employee health savings accounts during the same period. This means contributions must be of the same dollar amount, or of the same percentage of the annual deductible under the HDHP. The comparability rule is applied separately to part-time employees, and to employees with individual coverage versus family coverage. If contributions are not comparable, employers must pay an excise tax. Matching contributions through a cafeteria plan are not subject to the comparability rule; they are subject to the non-discrimination rules section 125 plans. - What reporting is required for Health Savings Account?
Employer contributions are reported on employee W-2 Forms (in Box 12, using code W). Individual account owners report contributions and distributions on Form 8889 (completed as an attachment to form 1040). - Is there a deadline for contributions?
Yes. The deadline for contributions is April 15th of year following the year for which the contribution is made.
Additional HSA Information
Consumer's Guide to HSAs: Health Savings Accounts (Brick Tower Press Financial Guide)
Amazon Price: $14.95 (as of 10/13/2008)
The New Health Insurance Solution: How to Get Cheaper, Better Coverage Without a Traditional Employer Plan
Amazon Price: $19.96 (as of 10/13/2008)
Hassle-Free Health Coverage: How to Buy the Right Medical Insurance Cheaply and Effectively (How to Insure Series)
Amazon Price: $11.95 (as of 10/13/2008)
HSA eligibility when spouse has non-HDHP family coverage.(health savings account, high-deductible): An article from: The Tax Adviser
Amazon Price: $5.95 (as of 10/13/2008)
