Health Saving Accounts (HSAs) « Health Insurance Advisory

About Health Saving Accounts (HSAs)

The Health Saving Account (HSA) is an improved version of the original Medical Savings Account (MSA) which became law on January 1, 1997 when President Clinton signed the Kassebaum-Kennedy bill. The passage of the Medicare Modernization Act by President Bush in December 2003 officially created the HSA. The goal was to: 1) promote low cost medical insurance, 2) get patients engaged in the healthcare decision making process and 3) create an incentive for Americans to save for the future.

  • A Health Saving Account is a special bank account that is used in conjunction with a qualified high deductible health plan. The HSA is designed to help the individual fund his or her medical insurance deductible and pay for other qualified out-of-pocket healthcare expenses, such as medical, dental and vision with tax-free money. Monies deposited into a Health Saving Account are tax deductible and funds withdrawn to pay for qualified healthcare expenses are not taxed. Account holders can also invest their Health Saving Account balance and accumulate tax-free money for retirement.

High Deductible Health Plan paired with a Health Savings Account Health Saving Accounts (HSAs)

tip Health Saving Accounts (HSAs)

TIP: Save money by paying or reimbursing yourself for out-of-pocket healthcare expenses from your HSA.

Health Saving Account ownership

You are in control of your HSA because:

  • The HSA is your bank account. You own and have exclusive authority over the account.
  • Upon your death, the HSA becomes the property of your beneficiary. If you are married, your spouse will inherit your Health Saving Account and become the new owner. If you are not married, then the HSA loses it special tax status and the balance becomes taxable to your beneficiary.

tip Health Saving Accounts (HSAs)

TIP: Think of your HSA as a special bank account that is used to pay for qualified out-of-pocket healthcare expenses. Monies deposited in the bank account are tax deductible.

Advantages of a Health Saving Account

An HSA offers the following benefits:

  • Tax deductible deposits – write-off all HSA deposits on IRS Form 1040 up to the maximum annual limit, even if you do not itemize your deductions. Since your taxable income will be lower, your spendable income will increase because your federal and state income tax liability is reduced.
  • Tax-free withdrawals for qualified medical, dental and vision healthcare expenses – qualified out-of-pocket healthcare expenses paid through your Health Saving Account are never subject to federal and state income tax.
  • Easy to use – use your Health Saving Account as you would a regular checking or savings account. Since most banks provide a debit card, checkbook and online banking, paying healthcare expenses and managing the account is simple and easy.
  • Qualified out-of-pocket healthcare expenses of each family member are considered eligible – use your HSA to pay for your family’s qualified out-of-pocket healthcare expenses even if they are covered under another medical insurance plan.
  • Tax free interest and investment earnings – most banks pay interest on the HSA balance and monies can be invested in mutual funds, stocks and bonds. Interest and investment earnings accumulate tax-free.
  • Funds rollover from year-to-year – an HSA can supplement your retirement savings because unused monies rollover from year-to-year. Unlike IRS Section 125 Cafeteria Plans (Flexible Spending Account), there is no “Use-it-or-Lose-it” provision, so you can use your HSA money to pay for Medicare premiums, retiree healthcare and living expenses.
  • Lower health plan insurance premiums – HSAs work in conjunction with a high deductible health plan. The health plan premium for this type of medical insurance plan are generally 25% to 50% less than traditional major medical insurance. The premium savings can be used to help fund the Health Saving Account and pay for your qualified out-of-pocket healthcare expenses.
  • Keep your current healthcare providers – most high deductible health plans use a Preferred Provider Organization (PPO), so you can keep your existing healthcare provider provided that he or she participates in the preferred provider network.
  • Portability – since the Health Saving Account is not tied to employment, your HSA is not impacted by your employment status.

Health Saving Accounts and Qualified High Deductible Health Plans

An HSA is paired with a Qualified High Deductible Health Plan (QHDHP). The QHDHP is a medical insurance policy with a high deductible that provides the financial protection, while the HSA is used to pay for qualified out-of-pocket healthcare expenses.

  • An HSA must be used in conjunction with a QHDHP that meets the federal government’s guidelines (see below for additional government requirements to establish an HSA)
  • The federal government defines a QHDHP as an employer sponsored group health plan or individual medical health insurance that: 1) has a minimum deductible, 2) maximum out-of-pocket cost (when utilizing in-network healthcare providers) and 3) covers healthcare services and supplies subject to a calendar year deductible, with the exception of wellness or preventative care benefits.
Comparison of In-Network Insurance CoverageSINGLE or INDIVIDUAL COVERAGE HSA High Deductible Health Plan v. Traditional Medical Insurance Plan
High Deductible Health Plan Traditional Medical Insurance Plan
Preferred Provider Organization (PPO) Yes Yes
Calendar Year Deductible $3,500 $1,000
Coinsurance (% plan pays after deductible is satisfied) 100% 80%
Out-of-Pocket ($ you pay, then plan pays 100% of expenses for remainder of calendar year) $0 $2,000
Total Annual Maximum Out-of-Pocket (worst case financial obligation) $3,500 $1,000 Deductible + $2,000 Out-of-Pocket + Copays + $500 Rx Deductible & Rx Copays
Physician Office Visits Deductible & Coinsurance $30 Copay
Lab Services Deductible & Coinsurance $30 Copay
X-Ray and Advanced Diagnostic Imaging Deductible & Coinsurance $30 Copay
Ambulance Deductible & Coinsurance Deductible & Coinsurance
Surgery Deductible & Coinsurance Deductible & Coinsurance
Hospitalization Deductible & Coinsurance Deductible & Coinsurance
Prescription Drugs Deductible & Coinsurance $20 Generic Copay, $500 Deductible for Brand, then $50 Copay Formulary/ $75 Copay Non-Formulary
Wellness / Preventive Care 100% 100%
Lifetime Maximum Unlimited Unlimited
Annual Health Plan Premium $1,283 $2,060
(Example: male, age 35, non-smoker, 43001 zip code)

Summary HSA Financial Savings:

  • $777 annual premium savings for the HSA High Deductible Health Plan!
  • Lower annual financial exposure or risk for the individual with an HSA High Deductible Health Plan!
  • Additional tax savings (not included in above example) with HSA High Deductible Health Plan by deducting up to $3,100 (2012 maximum single HSA contribution limit) to pay for out-of-pocket healthcare expenses!

Can I Keep My Existing Healthcare Provider?

Most High Deductible Health Plans use a Preferred Provider Organizations (PPO) and work the same as traditional medical insurance.

  • Keep your existing healthcare provider provided that he or she is a member of the PPO.
  • When visiting an in-network healthcare provider, simply show your health plan ID card, as you normally would. The healthcare provider will bill the health insurance company for the services rendered. Once the claim is processed the bill will be marked down to the PPO negotiated rate. The claim will be applied against your deductible, if you have not previously satisfied it.
  • Use your HSA monies to pay your healthcare provider or let the funds grow and accumulate for future use. You decide.

Requirements to Establish an Health Saving Account

The federal government requires an HSA be established with Qualified High Deductible Health Plan that meets the criteria below:

2010 High Deductible Health Plan Requirements
Coverage Type Minimum Deductible Maximum Out-of-Pocket
Individual $1,200 $5,950
Family $2,400 $11,900
2011 High Deductible Health Plan Requirements
Coverage Type Minimum Deductible Maximum Out-of-Pocket
Individual $1,200 $5,950
Family $2,400 $11,900
2012 High Deductible Health Plan Requirements
Coverage Type Minimum Deductible Maximum Out-of-Pocket
Individual $1,200 $6,050
Family $2,400 $12,100

Additionally, to establish a Health Saving Account, you cannot be:

  • Currently enrolled in Medicare or Tri-Care,
  • Claimed as a dependent on someone else’s tax return,
  • Enrolled in a Flexible Spending Account (FSA), including your spouse’s, unless it is a “Limited Purpose” FSA (only recognizes dental, vision and wellness/ preventative care as eligible expenses for reimbursement), and
  • Have other non-qualified medical insurance.

Health Saving Account Contributions, Deposit Limits and “Catch-Up” Amounts

The following guidelines apply to HSA deposits (contributions):

  • You and your employer can contribute (deposit) up to the maximum amount allowed for each calendar year, as shown below, to your HSA. Monies deposited by your employer are not taxable to you.
  • HSA Deposits (after-tax) are tax deductible on IRS Form 1040 (even if you don’t itemize your deductions). You have up to April 15th of the following year to deposit funds for the current year.
  • If the effective date of the Qualified High Deductible Health Plan (QHDHP) is after January 1st and you deposit the contribution limit, as shown below, the QHDHP must be maintained through the end of the following calendar year to avoid possible taxes and penalties on part of your contribution.
2010 HSA Contribution Limits
Coverage Type Regular Catch-Up (age 55+)
Individual $3,050 $1,000
Family $6,150 $1,000
2011 HSA Contribution Limits
Coverage Type Regular Catch-Up (age 55+)
Individual $3,050 $1,000
Family $6,150 $1,000
2012 HSA Contribution Limits
Coverage Type Regular Catch-Up (age 55+)
Individual $3,100 $1,000
Family $6,250 $1,000

Additionally:

  • Individuals age 55 and older may deposit additional monies to their Health Saving Account, called “Catch-Up” contributions. This money is in addition to the regular maximum contribution allowed for each calendar year. Married couples can each make the allowable “Catch-Up” contributions as long as both are at least 55 years old, however, two HSA’s must be established.
  • Once enrolled in Medicare you are prohibited from contributing funds to your HSA.

tip Health Saving Accounts (HSAs)

TIP: Increase your spendable income by depositing the maximum allowed in your Health Saving Account. Since deposit(s) are tax deductible, you will pay less federal and state income tax.

Unused Health Saving Account Funds

Watch your HSA account balance grow or use the money whenever you want to pay for qualified out-of-pocket healthcare expenses:

  • HSAs work like a checking and saving account, the balance remains in your HSA until you choose to withdraw the money. Unlike IRS Section 125 Cafeteria Plans (Flexible Spending Account), there is no “Use-it-or-Lose-it” provision, so funds roll-over from year-to-year. Let your money grow and accumulate or use it to pay for healthcare expenses. You decide.
  • HSAs were created by the federal government to incentivize individuals to save for the future.

Investing Your HSA Monies

Think of you Health Saving Accounts as a medical IRA:

  • Monies in an HSA can be invested in a variety of ways, such as stocks, bonds and mutual funds. The interest and investment earnings grow and accumulate tax free. Most banks pay interest on the HSA account balance.

Health Saving Account Tax Advantages

HSAs can save you money and increase your spendable income because:

  • Funds deposited into the HSA are deductible on IRS Form 1040, even if you do not itemize your deductions or complete Form 1040 EZ.
  • Your employer can deposit money into your HSA. The contribution(s) is not taxable to you.
  • You can deposit money to your HSA at any time. Contributions for the current calendar year may be made up to April 15th of the next year and deducted from the current calendar year’s tax return.
  • Since there is no time limit regarding when withdrawals must occur, you can reimburse yourself for qualified out-of-pocket healthcare expenses whenever you wish, provided the expenses were incurred on or after the date the HSA was established.
  • Since the health plan premium for the Qualified High Deductible Health Plan is typically 25% to 50% less than traditional major medical insurance, instant financial savings is created and can be used to help fund the HSA.

tip Health Saving Accounts (HSAs)

TIP: Tally your qualified out-of-pocket healthcare expenses at the end of each calendar year. Deposit this sum to your HSA from your regular checking account (do not exceed the maximum allowed contribution).  Transfer the money back to your regular checking account. Deduct the deposit on your tax return.

tip Health Saving Accounts (HSAs)

TIP: If you were previously covered under a traditional medical insurance plan, set up an automatic transfer each month to your HSA that represents the health premium savings that was created by switching to an HSA High Deductible Health Plan.

1040 Health Saving Accounts (HSAs)

Qualified Healthcare Expenses and Insurance Premiums

Healthcare costs incurred for the diagnosis, cure, treatment or prevention of disease, including the cost of treatments affecting any part or function of the body, plus the cost of equipment, supplies, and diagnostic devices are considered qualified healthcare expense under an Health Saving Account.

  • IRS Code Section 213d governs the HSA and spells out eligible healthcare expenses. See partial list below:
HSA Qualified Healthcare Expenses
acupuncture
alcoholism treatment
ambulance
arch supports
artificial limbs
blood tests
blood transfusions
cardiographs
chiropractor
Christian Science Practitioner
contact lenses
convalescent home (medical treatment only)
crutches
dental treatment
dental x-rays
dentures
dermatologist
diagnostic fees
drug addiction therapy
Prescription medication
elastic hosiery (prescription)
eyeglasses
guide dog
gum treatment
hearing aids and batteries
hospital fees
hydrotherapy
insulin treatments
lab tests
lodging (away from home outpatient care)
metabolism tests
obstetrician
operating room costs
ophthalmologist
optometrist
oral surgery
organ transplant
orthodontia
orthopedic shoes
orthopedist
osteopath
oxygen/ oxygen equipment
pediatrician
physician
podiatrist
postnatal treatments
prenatal care prescription medication
psychiatrist
psychoanalyst
psychologist
psychotherapy
special school costs for the handicapped
spinal fluid test
splints
sterilization
surgeon
therapy equipment
vaccines
vasectomy
vitamins (if prescribed)
wheelchair
x-rays

Although over-the-counter medication was considered a qualified healthcare expense, the new healthcare law (Affordable Care Act) changed the rules effective January 1, 2011. Over-the-counter medication is no longer a qualified healthcare expense, unless the drug prescribed by a physician (except insulin).

Additionally,

  • Long-term care insurance premiums can be paid through an HSA
  • Use the HSA to pay for health insurance premiums when you are unemployed
  • Medicare insurance premiums can also be paid through your HSA

A comprehensive summary and list of eligible expenses can be found in IRS Publication 502.

Click to download a free copy of the IRS Publication 502

irs publication 502 Health Saving Accounts (HSAs)

Paying for Your Dependent’s Out-of-Pocket Healthcare Expenses

Use your HSA to pay for your family’s out-of-pocket health care expenses:

  • Pay for eye glasses, contact lenses orthodontia and a variety of other out-of-pocket healthcare expenses of your dependents, even if they are covered under another medical insurance policy or health plan.

tip Health Saving Accounts (HSAs)

TIP: Increase your spendable income by using your HSA to pay for the out-of-pocket healthcare expenses of your family members.

Receipts and Documentation

In the event you are audited by the IRS:

  • Keep copies of all healthcare bills and out-of-pocket medical, dental and vision expenses paid through your HSA so you can substantiate that HSA withdrawals were for qualified healthcare expenses.

Tax Consequences

The following guidelines apply when withdrawing money from an HSA:

  • Qualified out-of-pocket healthcare expenses paid for with HSA monies are not subject to federal and state income tax.
  • Before age 65, HSA funds withdrawn to pay for non-qualified healthcare expenses are subject to a tax penalty (10% in 2010 and 20% in 2011), plus federal and state income tax.
  • Age 65 and older, HSA funds withdrawn to pay for non-qualified healthcare expenses are subject to federal and state income tax.
return Health Saving Accounts (HSAs)

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