HSA 101
| Q | What is an HSA and how does it work? | |
| A | An HSA is a tax-advantaged account established to pay for qualified medical expenses of an accountholder who is covered under a high-deductible health plan. With money from this account, you pay for healthcare expenses until your deductible is met. Then, in accordance with healthcare plan, your insurance company pays for covered expenses in excess of your deductible. Any unused funds are yours to retain in your HSA and accumulate towards your future healthcare expenses or your retirement. | |
| Q | Who qualifies for an HSA? | |
| A | An eligible individual in anyone who: -is covered under a high deductible health plan -is not covered by any other health plan that is not an HDHP -is not currently entitled to Medicare benefits, and -may not be claimed as a dependent on another person’s tax return |
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| Q | What kind of other health coverage makes an individual ineligible for an HSA? | |
| A | Generally, an individual is ineligible for an HSA if the individual, while covered under an HDHP, is also covered under a health plan (whether individual, spouse or dependent) that is not an HDHP. | |
| Q | What other kinds of coverage may an individual maintain without losing eligibility for an HSA? | |
| A | An individual does not fail to be eligible for an HSA merely because, in addition to an HDHP, the individual has coverage for any benefit provided by “permitted insurance.” Permitted insurance is insurance under which substantially all of the coverage provided relates to liabilities incurred under worker’s compensation laws, tort liabilities, liabilities relating to ownership of property (i.e. automobile insurance), insurance for a specific disease or illness, and insurance that pays a fixed amount per day (or other period) of hospitalization.
In addition to permitted insurance, an individual does not fail to be eligible for an HSA merely because, in addition to an HDHP, the individual has coverage (whether provided through insurance or otherwise) for accidents, disability, dental care, vision care or long term care. If a plan that is intended to be an HDHP is one in which substantially all of the coverage is through permitted insurance or other coverage as described in this answer, it is not an HDHP. |
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| Q | Who may contribute to an HSA? | |
| A | Any eligible individual may contribute to an HSA. If an employee establishes an HSA, that employee, the employee’s employer, or both may contribute to the employee’s HSA in a given year. If a self employed or an unemployed individual establishes an HSA, that 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. | |
| Q | How much can I contribute to my HSA? | |
| A | Your annual HSA contribution may not exceed limits of $2700 for individual coverage or $5450 for family coverage. The amount of your HDHP deductible up to these amounts, as applicable, is the amount you may contribute to your HSA annually. | |
| Q | How is the contribution limit computed for an individual who begins self-only coverage under an HDHP on June 1st and continues to be covered under the HDHP for the rest of the year? | |
| A | Your contribution limit is computed each month. If the annual deductible is $3000 for the HDHP, then the HSA rules require that the lesser of the annual deductible or the annual tax-deductible limit be used. The annual tax-deductible limit is $2650. Therefore, because the lesser of $3000 and $2650 is $2650, the monthly contribution limit is $220.83 ($2650/12). The annual contribution limit is $1545.81 (7x$220.83). | |
| Q | How do I make contributions? | |
| A | You can set up contributions through payroll deduction or set up ad hoc or recurring contributions from a bank account to the HSA. | |
| Q | What happens when HSA contributions exceed the amount that may be deducted or executed from gross income in a taxable year? | |
| A | Contributions by an individual to an HSA, or if made on behalf of an individual to an HSA, are not deductible to the extent they exceed the limits. Contributions by an employer to an HSA for an employee are included in the income of the employee to the extent that they exceed the limits or if they are made on behalf of an employee who is not an eligible individual. In addition, if not withdrawn in a timely manner, an annual assessed excise tax of 6% is imposed on the accountholder for excess individual and employer contributions. | |
| Q | What are catch-up contributions for individuals age 55 or older? | |
| A | For individuals between the ages of 55 and 65, the HSA contribution limit is increased be $600 in calendar year 2005. This catch-up amount will increase by $100 annually until it reaches $1000 in calendar year 2009. | |
| Q | When can I receive distributions from an HSA? | |
| A | You can receive distributions from the HSA at any time. | |
| Q | What are “qualified medical expenses” that are eligible for tax-free distributions? | |
| A | Qualified medical expenses are expenses paid by the accountholder for diagnosis, cure, mitigation, treatment, or prevention of disease. Examples of these expenses are prescription drugs, transportation to care providers, qualified long-term care expenses, and health insurance premiums for individuals eligible for Medicare (other than premiums for Medigap policies). Such expenses are qualified medical expenses” only if they are ineligible for insurance or any other type of coverage. | |
| Q | What are the tax rules of an HSA? | |
| A | An HSA is tax-free if used for qualified medical expenses. Earnings on money in the HSA are not considered part of gross income. | |
| Q | How are distributions taxed after the accountholder is not longer an eligible individual? | |
| A | If the accountholder is no longer an eligible individual, distributions used exclusively to pay for qualified medical expenses are not taxed. | |
| Q | How are distributions from an HSA taxed? | |
| A | Distributions from an HSSA used exclusively for qualified medical expenses of the accountholder, his or her spouse, or dependents are excluded from gross income. In general, amounts retained 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 accountholder, spouse or dependents is includable in gross income of the accountholder. Such distributions are subject to an additional 10% tax on the amount includable, except in the case of distributions made after the accountholder’s death, disability, or attaining age 65. |
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| Q | How do I pay for medical services? | |
| A | Medical services can be paid for with your special debit card or HSA checkbook. | |
| Q | What are the income tax consequences after the HSA accountholder’s death? | |
| A | Upon death, any balance remaining in the accountholder’s HSA becomes the property of the individual names in the HSA instrument as the beneficiary of the account. If the accountholder’s surviving spouse is named the beneficiary of the HSA, the HSA becomes the HSA of the surviving spouse. The surviving spouse is subject to income tax to the extent the distributions from the HSA are not used for qualified medical expenses.
If, by reason of death of the accountholder, the HSA passes to the person other than the accountholder’s surviving spouse, the HSA ceases to be an HSA as of the date of the accountholder’s death, and the person is required to include in gross income the fair market value of the HSA assets as of the date of death. |
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| Q | Who is responsible for determining whether HSA distributions are used exclusively for qualified medical expenses? | |
| A | As the HSA accountholder, you must ensure that distributions are used for qualified medical expenses. Records of medical expenses should be maintained as evidence that distributions have been made for these purposes. You must also ensure that contributions to the HSA do not exceed the maximum limits. | |
| Q | If I change employers, what happens to my HSA? | |
| A | Since you are the owner of the HSA, it is your account and it is portable allowing you to maintain the account if you change employers. |
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