Health Savings Accounts (Part 2)

Health Savings Accounts (Part 2)

by Posted on: October 16, 2014Categories: HR & Compliance   

How Do HSAs Work?

To have an HSA and make contributions to the account, you must meet several basic qualifications.  Here’s what you need to know to start saving with an HSA.

HSA Eligibility – In order to qualify for an HSA, you must be an adult who meets the following qualifications:

  • Have coverage under an HSA-qualified, high deductible health plan (HDHP)
  • Have no other health insurance plan (this exclusion does not apply to certain other types of insurance, such as dental, vision, disability or long-term care coverage)
  • Are not enrolled in Medicare
  • Cannot be claimed as a dependent on someone else’s tax return

HSAs must be used with an HDHP. To qualify as an HDHP, a health plan must satisfy requirements for the minimum annual deductible and the maximum out-of-pocket expenses.

In 2014, the minimum annual deductible for a qualifying HDHP is $1,250 for an individual and $2,500 for a family. For 2015, the HDHP minimum deductible will be $1,300 for an individual and $2,600 for a family.

In addition, annual out-of-pocket expenses under the plan (including deductibles, copays and coinsurance) cannot exceed $6,350 in 2014 and $6,450 in 2015 for single coverage, and $12,700 in 2014 and $12,900 in 2015 for family coverage.

In general, the deductible must apply to all medical expenses (including prescriptions) covered by the plan. However, plans can pay for preventive care services on a first-dollar basis (that is, without a deductible or copay). Preventive care can include care such as routine prenatal and well-child care, child and adult immunizations, annual physicals and mammograms.

Opening Your HSA – Your employer may offer an HSA option, or you can open an account on your own through a bank or other financial institution. Banks, credit unions, insurance companies and other financial institutions are all permitted to be trustees or custodians of these accounts. Other financial institutions that handle IRAs or Archer MSAs are also automatically qualified to establish HSAs.

Contributions – Contributions to your HSA can be deducted when you file your income taxes. If your employer offers a Section 125 plan (sometimes called a “cafeteria plan”), you may be able to make your HSA contributions on a pre-tax basis. That means that your HSA contribution will be taken out of your wages and no federal income tax or employment tax will be withheld on the contribution.

Determining your contribution – Your eligibility to contribute to an HSA is determined monthly. You must have HDHP coverage on the first day of the month to make an HSA contribution for that month.  There is a limited exception that allows individuals who become HSA-eligible during a calendar year to make the full contribution amount for that year. Under this exception, individuals who are eligible to contribute to an HSA on Dec. 1 of a calendar year are allowed to contribute an amount equal to the annual HSA contribution amount provided they remained covered by the HSA for at least the 12-month period following that year. Contributions can be made as late as April 15 of the following year.

Limits – You can make a contribution to your HSA for each month that you are eligible. For each month that you are eligible, you can contribute one-twelfth of the annual maximum for HSA contributions. The full contribution rule described above for individuals who are eligible on Dec. 1 of a calendar year is an exception to the rule that HSA contributions limits are determined monthly. You can contribute no more than the designated annual maximum. For 2014, this is $3,300 for single coverage and $6,550 for family coverage. For 2015, the maximum is $3,350 for single coverage and $6,650 for family coverage. Individuals who are age 55 and older can also make additional “catch-up” contributions of up to $1,000 annually.

Who can contribute – Contributions to your HSA can be made by anyone, including you, your employer or a family member; the combined contributions of you and your employer (and anyone else making contributions to your HSA) can not exceed the HSA maximum contribution limit.

Contributions to the account must stop once you are enrolled in Medicare. However, you can still use your HSA funds to pay for medical expenses tax-free.

Using Your HSA

An HSA is managed by the account holder, giving you the choice of when to use your HSA dollars. You can begin using your HSA money as soon as your account is activated and contributions have been made. You can use your HSA account for any purpose, including paying expenses that are not qualified medical expenses. However, you only get the tax benefits of an HSA when you use the account for qualified medical expenses. If you use it for another purpose, you will be required to pay income tax on the withdrawal, and you may also be required to pay another 20 percent tax, unless you make the withdrawal after you reach age 65, become disabled or after your death.

Qualified Medical Expenses

You can use money in your HSA to pay for any qualified medical expense permitted under federal tax law, which includes most medical care and services, as well as dental and vision care. HSA distributions are tax-free if they are used for qualified medical expenses incurred by the account holder or his or her spouse or dependents. The qualified medical expenses must be incurred after the HSA is established.

Qualified medical expenses are defined in Section 213(d) of the federal tax code. Section 213(d) defines “medical care” to include amounts paid “for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body.”

You can use your HSA account to pay for your health plan deductible, your copay or coinsurance for doctor’s office visits and prescription drugs, your share of the cost for dental care, such as exams and cleanings, and your costs for vision care, such as exams, eyeglasses and contact lenses. See Appendix B for a list of eligible expenses.

Generally, you cannot use your HSA to pay for medical insurance premiums, except specific instances, including:

  • Any health plan coverage while receiving federal or state unemployment benefits
  • Continuation coverage under federal law (COBRA or USERRA coverage)
  • Qualified long-term care insurance
  • Any deductible health insurance for HSA account holders who are age 65 or over (whether or not they are entitled to Medicare) other than a Medicare supplemental policy

You can use your HSA to pay for medical expenses for yourself, your spouse or your dependent children, even if your dependents are not covered by your HDHP. Any amounts used for purposes other than to pay for qualified medical expenses are taxable as income and subject to an additional 20 percent penalty. Examples of taxable expenses include:

  • Medical procedures and expenses not considered qualified under federal tax law
  • Over-the-counter drugs and medications without a prescription (except insulin)
  • Other types of health insurance unless specifically described above
  • Medicare supplement insurance premiums
  • Non health-related expenses

After the age of 65, you can withdraw money for nonmedical expenses without penalty, but you will have to pay taxes on the money. If you become disabled, the account can be used for other purposes without paying the additional penalty. If you withdraw money from an HSA for non-medical expenses before you turn 65 (or become disabled), you will have to both pay taxes and a 20 percent penalty.

To Read Part 1, Click here!

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