HEALTH SAVINGS ACCOUNTS (HSAs)
Consumers Frequently Asked Questions

A HSA is a savings product that allows individuals to pay for current and future qualified medical expenses on a tax-free basis.

There are several main tax advantages in connection with having a HSA:

• Ownership.  Unused funds in your HSA roll over from year to year.  There is no “use it or lose it” requirement. 
• Tax Savings.  Tax deductions for your contributions; tax-free earnings through the investment, and tax-free withdrawals for qualified medical expenses.
• Flexibility.  You can use the funds in your account to pay for current qualified medical expenses that your insurance may not cover, save the money for future medical expenses, pay health insurance or medical expenses if unemployed, pay medical expenses after retirement (before Medicare) or long term care expenses.
• Affordability.  You may be able to lower your health insurance premiums by switching to higher deductible coverage.
• Security.  Your high deductible insurance and HSA protect you against high or unexpected bills.
• Control.  You determine all the decisions regarding how much you put into the account, whether to save the funds in the account for future expenses or pay current medical expenses; which medical expenses to pay for with the account, and which bank will hold the account.
• Portability.  You own your HSA even if you change jobs, change your medical coverage, become unemployed or retire.

Consumers can sign up for HSAs with banks and an mployer may also set up a plan for employees, in which case, the employer will generally arrange the HSA for the employee.

There are several main tax advantages in connection with having a HSA:

• An individual must be covered by a High Deductible Health Plan (HDHP)
• An individual must not be covered by other health insurances (does not apply to specific injury insurance and accident, disability, dental care, vision care and long-term care)
• An individual who is not eligible for Medicare
• An individual who is not listed as a dependent on another individual’s tax return

A HDHP is a health insurance plan with lower premiums and higher deductibles than a traditional health plan. In order to qualify for a HSA covering tax year 2009, your minimum deductible must be at least $1,150 for self-only coverage or $2,300 for family coverage. The annual “out-of-pocket” expenses (including deductibles and co-pays) for 2009 cannot exceed $5,800 for self-only coverage or $11,600 for family coverage. These minimum deductibles and maximum out-of-pocket amounts are subject to change annually by the IRS.

No. The policy does not have to be in your name. As long as you have coverage under the HDHP policy, you can be eligible for a HSA as long as you meet the other eligibility requirements for contributions to a HSA. You can still be eligible for a HSA even if the policy is in your spouse’s name.

“Joint” HSAs are not permitted. Each spouse should consider establishing an account in their own name. This allows both individuals to make catch-up contributions to the account when each spouse is 55 or older. If both husband and wife are eligible to contribute to a HSA, they are both eligible to establish separate HSAs. However, if both spouses want to make “catch-up” contributions when they are age 55 or older, they must establish separate accounts.

Your eligibility to contribute to a HSA is determined by the effective date of your HDHP coverage.

If you are not covered on December 1, your contribution depends on the number of months of HDHP coverage you have during the year (technically, the months where you have HDHP coverage on the first day of the month). If you are covered on December 1, you are treated as an eligible individual for the entire year. However, if you cease to be an eligible individual during 2009, the excess amount over the pro-rated contribution is included in income and subject to a 10% additional tax. The amount you can contribute is not determined by the date you establish your account. However, medical expenses incurred before the date your HSA is established cannot be reimbursed from the account.

The table below outlines the amounts that may be contributed for 2008 and 2009

  *go to www.treas.gov under Health Savings Account for more information

Contributions to HSAs can be made by the employer, the individual or both. If contributions are made by the individual, it is an “above-the-line” deduction. If contributions are made by the employer, it is not taxable to the employee (meaning that it is excluded from income). Contributions can also be made by others on behalf of an eligible individual and deducted by the individual. Please note that if contributions come from more than one source, they are aggregated.

No. You can contribute in a lump sum or in any amount or frequency; however, your bank may impose minimum deposit and balance requirements.

HSA contributions must be made for a specific year on or before the due date (without extensions) for filing tax returns for that same year. For example, for 2008, contributions must be made on or before April 15, 2009.

Contributions made by an individual to a HSA are not deductible to the extent that they exceed the maximum limits. Excess contributions by an employer generate taxable income to the employee. In addition, a 6% excise tax is imposed on the excess funds.

The excise tax and any net income attributable to excess contributions are avoided if the excess contributions are paid to the HSA owner prior to the federal income tax deadline for the year at issue.

No. It is your sole responsibility to keep track of the amounts deposited and spent from your account, just like a normal savings or checking account.

Distributions can be used for either qualified medical or other expenses. If the amount distributed is used for qualified medical expenses, then the distribution is tax free. A description of qualified HSA expenditures can be found in IRS Publication 502 and is located at the following website: www.irs.gov/pub/irs-pdf/p502.pdf. Publication 502 provides a list of examples, but it is not the definitive list.

If the amount distributed is used for expenses other than qualified medical expenses, the amount distributed will be taxed and for individuals who are not disabled or over age 65, subject to a 10% tax penalty.

For withdrawals that were made for something you thought were qualified medical expenses, but are not qualified medical expenditures, the distribution can be returned to the HSA if there is clear and convincing evidence that the expenditure was a mistake of fact. Such repayment to the HSA must be made on or before April 15th of the year following when the individual knew, or should have known, the expenditure was a mistake.

It is your responsibility to keep track of your deposits and expenditures along with medical receipts. If you run out of HSA funds (and therefore need to use your HDHP), you may need to send those receipts to your insurer.

No. You may not borrow against it or pledge the funds in it. For more information on prohibitive activities, see Section 4975 of the Internal Revenue Code.

You can continue your account tax free for out-of-pocket expenses. When you enroll in Medicare, you can use your account to pay Medicare premiums, deductibles, copays and coinsurance under any part of Medicare. If you have retiree health benefits through your former employer, you can also use your account to pay for your share of retiree medical insurance premiums. The one expense you cannot use your account for is to purchase a Medicare supplemental insurance or “Medigap” policy.

Once you turn age 65, you can also use your account to pay for things other than medical expenses. If used for other expenses, the amount withdrawn will be taxable as income but will not be subject to any other penalties. Individuals under age 65 who use their accounts for non-medical expenses must pay income tax and a 10% penalty on the amount withdrawn.

What happens will depend on how the HSA is designed. If your spouse is designated as the beneficiary by you, your spouse becomes the owner of the HSA when you die. If you provide that the HSA goes to your estate or other entity, the value of the HSA at death is income to the estate or other entity.