What is an HSA?
A Health Savings Account allows individuals to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis. It is the only account that is triple tax advantaged. To have this account, the account holder must be insured by a qualified health insurance plan.
What is considered an HSA qualified health plan?
1) You must pay medical expenses (at the insurance carrier’s negotiated, discounted rates) until the deductible is met before insurance begins to pay (much like auto and home owners insurance).
2) In general, no co-pays. There are no co-pays prior to deductible except for possibly preventive care. A few insurance carriers’ HSA plans require co-pays after the deductible and/or the coinsurance is met. Typically co-pays never apply to the deductible or coinsurance.
3) Minimum deductible of $1,100 (self-only coverage) or $2,200 (family coverage) for 2007. (These amounts are adjusted annually for inflation.)
4) Annual in-network, out-of-pocket maximum (including deductible and coinsurance) cannot exceed $5,600 (self-only coverage) or $11,200 (family coverage) for 2008. (These amounts are adjusted annually for inflation.)
- If both you and your spouse are over 55, you can contribute more if you set up two separate accounts; you may each contribute individual max+ catch up (example: for 2008 $2900+$900=$3800 each).
5) First-dollar coverage (before deductible is met) is allowed for preventive care only. Co-pays may apply to preventive care.
What is the definition, or eligibility criteria, for qualified preventive health care expenses covered by HSA policies?
Preventive care can include routine pre-natal and well-child care, child and adult immunizations, annual physicals, mammograms, pap smears, etc.
Is it true that HSA qualified plans have lower premiums than traditional plans?
Yes, because you, the insured, are accepting more first dollar out-of-pocket risk, the premiums are often 30% to 60% less, depending on the type of plans being compared. This difference in premium gives you savings to funnel into your health savings account.
Is there a higher annual, maximum out-of-pocket risk with an HSA qualified plan compared to a traditional plan?
Usually not. When you add the co-pays (they can be unlimited and do not apply to deductible), to the deductible (generally $500) and to the coinsurance (often $2,000) of a traditional plan, the maximum annual risk is over $2,500. Then compare that to the actual maximum out-of-pocket (most commonly $2,000 to $2,500) of an HSA qualified plan, the risks can be less with an HSA plan. In fact, the only plan with a true out-of-pocket maximum is an HSA plan, making it easier to budget. For a more in-depth review of maximum risk see “Out of Pocket.”
How do I know if I am eligible to have an HSA?
If you are an adult, you can own a Health Savings Account if you:
- Are insured by a qualified health plan (see above)
- Have no other first-dollar medical coverage. In other words, you are not insured by another health plan that covers the first dollar expenses prior to the deductible. You may, however, be covered by other types of insurance, such as specific injury insurance or accident, disability, dental care, vision care, or long-term care insurance.
- Are not enrolled in Medicare
- Cannot be claimed as a dependent on someone else’s tax return
Where can I set up this account?
Any bank, credit union, or financial institution that is a custodian for an Individual Retirement Account (IRA) or Medical Savings Account (MSA) is automatically eligible to be the custodian for an HSA. Other nonbank entities may apply to the IRS to become a custodian. Some insurance carriers have partnered with banks or have established their own banks, but you may set up your health savings account at the financial institution of your choice regardless if it is affiliated with your health insurance policy.
As HSAs have become increasingly popular, more banking institutions are now offering these triple tax-advantaged accounts. With competition among banks, there are now lower (even no) set up and monthly fees. Interest rates are even more competitive with some banks paying 4% to 5% interest on your first dollar deposited. Though most banks charge a transfer fee, you may find it beneficial to move your account to a financial institution with lower fees, higher interest rates, or broader investment options. Click here to see the banks recommended by HSA Benefits Consulting.
Who can contribute to my Health Savings Account?
Contributions to HSAs can be made by either your employer or you, or both. If contributions are made by you with after tax dollars, it is an “above-the-line” deduction and is entered on your 1040 income tax form. If contributions are made by your employer or are payroll deducted through your employer, they are not taxable to you, the employee. They are excluded from income. Contributions can also be made by others on your behalf and are tax deductable for you, the account holder.
Do Health Savings Account funds roll over year after year and get invested?
Yes, the money deposited in your Health Savings Account rolls over year after year, and some financial institutions permit you to invest the funds after they accumulate to a certain amount.
Is an HSA portable?
Yes, they are completely portable, meaning you can keep your HSA even if you change jobs, change your medical coverage carrier (you will limit the use of the account if you do not choose another qualified health plan), become unemployed, move to another state, change your marital status, etc.
What are the Tax advantages to having a Health Savings Account?
An HSA is the only account that provides you triple tax savings:
1) Tax deductions when you contribute to your account
2) Tax-free earnings through interest and investments
3) Tax-free withdrawals for qualified medical expenses
How much can I contribute to a HSA?
- The maximum contribution for 2007 is $2,850 for individuals (if you are the only person on your plan) or $5,650 (if you have one or more dependents on your plan) for family coverage. These dollar limits will be adjusted for inflation each year.
- The maximum contribution for 2008 is $2900 for individuals and $5800 for families
- If you are 55 to 64, you may take advantage of the “catch up” contribution: for 2007 that amount is $800. (2008 is $900, and 2009 and thereafter will be $1000.)
- If both you and your spouse are over 55, you can contribute more if you set up two separate accounts; you may each contribute individual max+ catch up (example: $2850+$800=$3650 each).
- You may contribute the maximum contribution for a calendar year if you have a qualified health coverage by December 1st of that year and remained covered under a qualified plan for the next 12 months.
- If you fail to remain covered under a qualified plan for the next 12 months, the maximum contribution is prorated for the number of months in which your qualified plan was in force, and any extra contribution over the allowed prorated amount will be subject to tax, including an additional ten percent tax penalty.
Who has control over the money invested and ultimate responsibility for how funds are used in an HSA?
Custodians are not responsible for ensuring that expenses paid under the account are qualified medical expenses. You, the account holder, are responsible for verification of account uses and contribution levels even when an employer makes partial contribution. Though it is always best to retain receipts for medically qualified expenses, most financial institutions offer debit cards and checks and provide end-of-month statements of purchases, making it convenient to keep records of expenditures and contributions. They will also file an end-of-year statement with the IRS. You will have full control over the assets.
You have the control to determine:
- How much money (up to the annual limit) that you would like to contribute.
- Whether to save the account for future expenses or pay current medical expenses
- Which medical expenses to pay from the account
- Which company will hold the account
- Whether to invest any of the money in the account
- Which investments to make
Can I roll the money from an IRA into a Health Savings Account, or vice versa?
Since HSAs have greater tax advantages than an IRA, many account holders are asking to roll an IRA into an HSA. The Dept. of Treasury permits a one-time rollover of an IRA into an HSA as long as the amount does not cause your account to exceed that year’s contribution limit. You cannot roll the HSA funds over into an IRA.
For what can funds from the HSA be used?
HSA distributions are tax-free if they are used to pay for qualified medical expenses for you, your spouse, and/or your dependent children. You can pay for expenses of your spouse and dependent children even if they are not covered by your qualified health plan. This includes most medical care and services, dental and vision care, and also over-the-counter drugs such as aspirin.
Are dental and vision care considered qualified medical expenses under a Health Savings Account?
Yes, as long as these are tax deductible under the current rules. For example, cosmetic procedures, like cosmetic dentistry, are generally not deductible and would not be considered qualified medical expenses.
Can HSA funds be used to pay for health insurance premium payments?
In general, you cannot use the money to pay for medical insurance premiums, except under specific circumstances, including:
- Any health plan coverage while receiving federal or state unemployment benefits.
- COBRA continuation coverage after leaving employment with a company that offers health insurance coverage.
- Qualified long-term care insurance.
- Medicare premiums and out-of-pocket expenses, including deductibles, co-pays, and coinsurance for:
- Part A (hospital and inpatient services)
- Part B (physician and outpatient services)
- Part C (Medicare HMO and PPO plans)
- Part D (Prescription drugs)
What happens to the money in a Health Savings Account after I turn age 65 or become disabled?
Once you are 65 (or become disabled) and enroll in Medicare, you may no longer contribute to an HSA; however, the funds remaining in the account may be used for health expenses and to pay certain insurance premiums like Medicare Part A,B,C &D, Medicare HMO and the employee’s share of retiree medical insurance premiums. They cannot be used to purchase a Medigap policy. If used for medical expenses, the disbursements come out of the account tax free. If used for nonmedical expenses, the amount withdrawn will be taxable, but no penalty will be assessed.
What happens to the account when I die?
Upon death, HSA ownership may transfer to the spouse on a tax-free basis, and the spouse may continue to use the account as an HSA. S(he) may continue to contribute to the account; it may continue to gain interest tax free, and s(he) may use the funds for medical expenses as long as s(he) is covered by the qualified plan. If the spouse is no longer covered by an HSA qualified plan, s(he) may use the funds for medical expenses until the account is depleted but may not contribute additional funds to the account.
If the beneficiary is someone other than your spouse or you are no longer married, the account will become part of your estate and will be transferred subject to tax and is viewed as any other savings account from that time forward.
Where can I find an HSA qualified insurance plan?
To get a personalized quote, click here.
What should I look for when comparing HSA qualified plans?
When comparing HSA plans, there is more to look for than price and deductible. For example, some plans have first dollar preventive physicals capped at a certain amount paid for by the insurance carrier, while others allow a limited amount of preventive care to apply to the deductible but you pay for them out of your pocket. It is best to have a trusted independent agent who is knowledgeable about the HSA plans offered by the carriers in your state and can give you an in depth comparison of the benefits and options available.
Where can I set up an account?
For a review of financial institutions offering HSAs, click here.