Health Savings Accounts (HSA)
- Health Savings Accounts (HSA)
- Health Reimbursement Arrangements (HRA)
- Flexible Spending Accounts (FSA)
- Eligible/ineligible medical expenses
- Eligible/ineligible dependent care expenses
An HSA is a tax-exempt trust or custodial account in which you can save money for qualified medical expenses. Benefits include:
- You own the account. Your rights to the account are non-forfeitable.
- The interest or other earnings added to your account balance are not taxable.
- You can make tax-deductible contributions (up to certain limits) or you can make tax-exempt contributions if your HSA is part of your employer's cafeteria plan.
- Your employer may also make contributions to your HSA that are excluded from your taxable income.
Who Is Eligible?
You must be covered by a qualified high-deductible health plan and have no other coverage in order to start a Health Savings Account (HSA) or make contributions to your HSA.
High-Deductible Health Plans
In 2012, the maximum contribution to an HSA for employees with single coverage is $3,100 — up from $3,050 in 2011. The maximum contribution for those with family coverage is $6,250.
In addition, the maximum out-of-pocket expense — including deductibles — that employees with single coverage can be required to pay is $6,050. For those with family coverage, the maximum is $12,100. The minimum deductible of the health plan to which HSAs must be linked is $1,200 for employees with single coverage, and the minimum deductible for those with family coverage is $2,400. The catch up contribution for individuals 55 and older has remained to be $1,000 for 2012 and all years going forward.
People with Additional Coverage
If you have coverage in addition to your high deductible health plan, you may not be eligible for an HSA. For example, if you are covered by a spouse's Flexible Spending Account, you are disqualified.
You remain eligible for an HSA if you have coverage (whether provided through insurance or otherwise) for accidents, disability, dental care, vision care, long-term care, insurance for a specified disease or illness, insurance that pays a fixed amount per day (or other period) of hospitalization or insurance under which substantially all of the coverage provided relates to liabilities from workers' compensation laws, torts, or ownership or use of property (such as automobile insurance). See IRS Notice 96-53 for more information. Other types of health care coverage that are not high-deductible health plans often disqualify you. This includes certain Flexible Spending Accounts and Health Reimbursement Accounts.
According to IRS regulations, individuals enrolled in Medicare coverage are not eligible to start an HSA or make contributions to an existing HSA. If you are enrolled in Part A or B, you are not eligible for an HSA. Be aware that enrollment for Social Security benefits includes automatic enrollment in Part A of Medicare.
If you are eligible to enroll in Medicare but have not done so, you are eligible for an HSA. Please consult with your tax advisor if you have questions regarding your eligibility. If you already have an HSA and you become eligible for Medicare or become disabled, a distribution that exceeds your qualified medical expenses will be included in your taxable income but will not be subject to the 10% additional tax.
An individual, an employer, or both can make contributions to an HSA. Employer contributions are not taxed to the employee. Contributions do not need to be made to an HSA every year. Contributions to an HSA must be made in cash or by check.
How much can be contributed to an HSA?
The amount that can be contributed to an HSA is based on the IRS annual maximum contribution limits. You become eligible to contribute on the first of the month after your high deductible health plan coverage begins. If you enroll mid-month, you are not eligible until the first of the next month. The annual contribution limits are:
- In 2012, for an individual plan, $3,100 can be contributed regardless of the deductible amount.
- In 2012, for a family plan, $6,250 can be contributed regardless of the deductible amount.
These amounts are for 2012 and indexed yearly to changes in the Consumer Price Index. If you establish your high deductible health plan after January 1 but before December 2 you may now also contribute the full annual amount to your HSA for that calendar year. To do so you must maintain your high deductible health plan coverage during a "testing period" that runs through December 31 of the following calendar year. Under all other circumstances or if the "testing period" is not met, 1/12th of the annual limit may be contributed for each month of coverage under a high-deductible health plan. Tax consequences and penalties will generally apply to contributions not meeting these rules.
The annual contribution limit is increased for individuals who have attained age 55 before the close of the taxable year. The additional catch up contribution amount is $1000 in 2012.
What happens if contributions are made that exceed the annual limit?
Generally HSA account holders must pay a 6% excise tax on contributions made to an HSA that are greater than the annual limit. (See IRS Form 5329 to determine this tax.) If HSA account holders determine that an excess contribution has been made, they may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if:
- Excess contributions are withdrawn by the due date, including extensions, of their tax return,
- Any income earned on the contributions is withdrawn and included in "other income" on their tax return for the year, and
- A deduction is not claimed on Form 1040 for the amount of the withdrawn contributions. If an employer made the contribution, the amount should be included in taxable income.
When making a withdrawal of excess contributions, HSA account holders must tell the custodian that the withdrawal is for that purpose. The withdrawal for excess contributions, and the earnings, will be reported to the HSA account holder on IRS Form 1099-SA. Form 1099-SA is issued to the account holder by January 31 of each year.
You can make a withdrawal from your HSA at any time. When the withdrawal is for qualified medical expenses that are not covered by any other insurance or account, you do not pay tax on the withdrawal. Unless you are disabled, age 65 or older, or die during the year; you must pay income taxes plus an additional 10% tax on any amount not used for qualified medical expenses. If you become disabled or when you reach age 65, distributions can be made for non-medical reasons without the additional tax, but amounts must be reported as taxable income.
Generally, you can not pay health insurance premiums with HSA funds. There are three exceptions:
- A health plan during any period of continuation of coverage required under any federal law,
- A qualified long-term care plan, or
- A health plan during a period in which the individual is receiving unemployment compensation under federal law