The FACTS About Health Savings Accounts (HSA)
IF YOU NEED to quickly educate yourself about the Health Saving Account (HSA), this comprehensive and well-researched article is for you!
What is a HSA?
The Health Savings Account (HSA), established by the U.S government in 2003, is a tax-free savings account available to folks enrolled in a high-deductible health insurance plan (HDHP). The money deposited, up to a maximum amount, is tax deductible, interest accrues tax-free or tax-deferred, and you use the money to pay for qualified expenses for medical care.
What high deductible health insurance plans qualify?
A qualifying HDHP must follow government guidelines regarding the in-network deductible amount and out-of-pocket maximums. These numbers are adjusted each year for inflation. For a HDHP to be HSA-compatible:
- The insurance company must state that the plan is HSA-compatible
- For 2009, the minimum deductible for individual coverage is $1,150 and the maximum deductible is $3,000
- For 2009, the minimum deductible for family coverage is $2,300 and the maximum deductible is $5,950
- For 2009, the maximum out-of-pocket is $5,800 for an individual and $11,600 for a family
Who is eligible for a HSA (Health Savings Account)?
Anyone who:
- Has enrolled in a high deductible health insurance plan (HDHP) that is HSA compatible
- Is not covered by any other health insurance individually or via another family member
- Is not eligible for coverage by the plan of a family member (even if you declined, you would not eligible for a HSA plan if you had the option of enrolling in the plan of your spouse/partner.)
- Is not claimed as a dependent on anybody’s tax return
- Is under age 65 or - if 65 or older - has not elected Medicare Parts A or B
How do I know if I have a HSA eligible plan?
If your plan is through your employer, they can provide this information. If you obtained your health insurance on your own, the documentation you received when you registered will describe the deductibles, and also state if the plan is HSA-compatible. If you are not sure, call the customer service number on your insurance card.
How much can I deposit into my HSA?
The maximum you can contribute to your HSA is the amount of your in-network deductible discussed above. Please see your tax advisor for details.
- If you are enrolled in a HDHP on the first day of the last month of your taxable year (December for most folks), you are allowed to contribute the full amount allowed for that year
- If you are enrolled in a HDHP on the first day of the last month of your taxable year, you can contribute money to your HSA between January 1st and April 15th of the following year and have it apply for the current year
- The IRS has approved an additional catch-up contribution for folks 55 — 65. For 2009, the amount is $1,000 for an individual and $2,000 for a couple if both spouses are 55 or older.
- Rollovers from other tax-deferred accounts into a HSA account may be possible. Please see your tax advisor
Do I have to open my HSA account with the health insurance company or my employer?
No. A HSA account is your personal account. Make sure the institution is a member of the FDIC insurance and you have compared rates, fees, and investment options.
Will my HSA account trustee provide me with a debit card or checks with which to pay my medical expenses?
Some financial institutions provide both, others perhaps just a debit card. Decide what you want and make that part of your decision criteria. We prefer both - a debit card is handy for most service providers, but there are single-provider offices that do not take credit or debit cards.
How do I choose which financial institution to use for my HSA account?
There are many financial institutions offering HSAs. Here are the two basic factors to consider:
- What are the fees and interest rate
- What are the investment options
Some institutions charge so many fees (setup, monthly, annual, transaction, withdrawal, etc.) that they eat up any interest you have earned. Investment options may not be important to you, depending on your age and health. Some younger folks see the HSA as tax-free retirement savings, so the ability to invest in mutual funds is important to them. Others need to save money for medical expenses and just want low fees and as high an interest rate as possible.
First, ask your friends. Second, call your local banks. Third, check the Internet. Several blogs discuss HSAs, and a couple of websites provide a list of HSA providers, though not comprehensive. Check out: www.vimo.com, which lists over 400 institutions, and lets you search based on the criteria that are important to you. Also, www.hsafinder.com provides a list of banks, but little information about them. Don’t enter any criteria on the search screen. Their results screen shows 0.00 interest rate for most entries, which is not true. But you can do a quick Internet search on the bank name and "HSA."
If a bank’s website does not fully disclose all fees, look elsewhere. Many will not provide an interest rate, which is understandable, but a quick phone call should answer that questions. Always get rate, full fee schedule, minimum balance, and other information about the account before applying.
It is not necessary that the financial institution be local to your home. We have our account with a small bank a thousand miles away and have been happy with their service.
Can I pay my health insurance premiums from my HSA account?
No. The only time this is permissible is if you are collecting Federal or State unemployment benefits, or if you are paying premiums to COBRA through your previous employer.
What happens if I spend more from my HSA account than I have on balance?
Overdrafts of your HSA account may cause the IRS to disqualify your HSA account - with all the penalties ensuing. Therefore, be very careful about knowing your account balance at all times.
What happens to the money in my HSA account if I no longer have a HDHP?
Even if you cease to be enrolled in a high-deductible plan, the money in your HSA account is yours to pay for qualified expenses with no time limit. And any interest earned remains tax-free or tax-deferred.
Can I deduct from my federal income taxes the amount of my HSA contribution?
Yes. Here are some general guidelines, but you must seek the advice of your tax advisor:
- You cannot write-off more than you have actually contributed or deposited into your HSA account
- Your contribution is an "above-the-line" deduction - meaning that the full amount is deducted from your adjusted gross income. And many states allow the same deduction when filing state income tax
- You cannot deduct the contribution for any month that you were enrolled in Medicare
- If this is your first year, you can write off the contribution, up to the maximum allowable, for the current year if you were enrolled by December 1st of the current year
- However, if you do not stay enrolled throughout the entire following year, then you’ll have to "reimburse" the IRS the pro-rated amount for the months you were not enrolled, and pay a 10% penalty as well
- If it is not the first year of your HSA account, you must pro-rate your contribution if you were not enrolled for the entire year
- Your contribution amount will be reduced in certain instances; i.e. if your employer contributed to your HSA account, if you made contributions to an Archer MSA, changed plans, etc. Please see your tax advisor
Do I pay federal income taxes on the interest earned by the money in my HSA account?
No. Similar to an IRA, the interest is tax-deferred. If you are under age 65 and not disabled, then you must use the money for approved health expenses. Any money that is spent on non-eligible items is taxable and incurs a 10% penalty. If you spend all of the money in the account, you will never owe taxes on the interest you accrued. If you are 65 years or older, or disabled, you may withdraw money for any purpose and the amount will be taxed as normal income.
What do I have to do at income tax preparation time?
The financial institution, or trustee, must report to you each year the amount of distributions (money you spent) and contributions (money you deposited) on forms 1099-SA and 5498-SA (as of this date). These forms must be sent to the IRS with your income tax forms. You must also complete the appropriate IRS forms declaring the amount of your contributions and distributions. Please consult with your tax advisor.
Must I itemize my deductions on Form 1040 in order to claim a tax deduction for my HSA contribution?
No.
What are the "qualified expenses" that I may pay for with my HSA account?
Many of your qualified expenses will be to pay down the large deductible for health services that are covered by your health insurance. These type of eligible expenses include doctor, lab, X-ray, and hospital expenses. Other qualified expenses that may not be covered by your insurance include:
- Alternative medicine, such as chiropractic and acupuncture
- Dental care - excluding cosmetic procedures
- Physical therapy, and medically- related transportation and lodging
- Mental Health services
- Eye and Hearing care, including contactless lenses, eye glasses, and hearing aids
- Prescription (purchased in US only) and over-the-counter drugs
- a percentage of long-term care insurance costs
- healthcare received in another country
According to the US Treasury FAQ at www.ustreas.gov, you may use the money to pay for any qualified expense not covered by your health insurance. To be eligible, it must be "primarily" for the prevention or alleviation of a physical or mental defect or illness.
The FAQ refers readers to the partial list of qualified expenses discussed in IRS Publication 502 at www.irs.gov, under Medical and Dental Expenses. This publication has a section titled "What Medical Expenses are Includible?" and one titled "What Expenses Are Not Includible." The exceptions are:
- the publication states that over-the-counter (OTC) medicines are not covered, but they are covered under an HSA account
- the publication states that insurance premiums are deductible, but according to the FAQ above, regular insurance premiums are not qualified expenses except in certain situations (see above question)
The IRS recommends that you save all receipts so in the case of an audit so you can explain why you believed a certain expense was a qualified expense. For good information about HSAs, see IRS Publication 969, also at www.irs.gov.
I have to find a high deductible health insurance plan. How do I find the best one?
We recommend two steps. First, get on the Internet and compare HSA-compatible plans. Type "health insurance quotes" in your browser and the most popular sites will be listed first. You can get estimate quotes without providing personal contact information.
After you have a few plans singled out, contact an insurance agent in your area that deals with health insurance. The agent will do much of the work for you and look out for your best interests. He or she can help you choose which plan is best for you and your family, explain things to you that you may not know, provide a list of in-network providers for the plans you are considering, and get answers to specific questions from their insurance company contacts. A good agent will help you complete the registration form and interface on your behalf if problems arise during the registration process. Do work with an agent if there is one within driving distance. It is a free service as the insurance agent receives a commission from whichever health insurance company you eventually choose.
We hope this article has been helpful. Please see our disclaimer below. Cheers!
Disclaimer: Keynote Support is providing general information in a highly readable format as a service to the visitor. We have made every effort to provide information accurate as to the date of this article, but the reader cannot infer from this article that Keynote Support is providing financial or income tax advice. Please consult with your Tax Advisor before proceeding. This article was last updated for content January 3, 2009.
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