Health Savings Accounts
Health Savings Accounts
What is an HSA?
HSAs were created by the Medicare bill signed in December 2003
Designed to help individuals save for qualified medical and retiree
health expenses on a TAX-FREE basis
An HSA combines a savings account with a High Deductible Health
The money deposited is not taxed if used to pay for current and
future qualified medical expenses
WHO IS ELIGIBLE?
Any individual covered under a qualified High Deductible
WHO IS NOT ELIGIBLE?
Individuals covered by Medicare
Individuals covered by another health plan that is not a
High Deductible Health Plan
Dependents listed as dependents on someone else's taxes
What is defined as a High
Deductible Health Plan (HDHP)?
Minimum of $1,000 Individual Annual Deductible
Minimum of $2,000 Family Annual Deductible
Maximum of $5,000 Individual Annual Out-of-Pocket
Maximum of $10,000 Family Annual Out-of-Pocket
What are eligible expenses?
All services and Premiums for Health insurance
products covered Long Term Care premiums for
by IRC 213 (d), individuals
except Health receiving
premiums COBRA benefits
Are there limitations to the
amount of contribution?
$2,600 per individual or $5,150 per family
Account holders age 55 and older are allowed
to contribute an additional $500 in year
2004, increasing in increments of $100 per
year, until 2009 reaching $1,000
Who can contribute?
Post-tax payroll deduction
Pre-tax payroll deduction (Flex)
Family members may also make
contributions to an HSA on behalf
of another family member
How may contributions
Annual contributions may be funded on a monthly basis,
which is 1/12 of 100% of the annual deductible or $2,600,
whichever is less. (Deductibles are a minimum of $1,000,
maximum of $2,600 for individual coverage).
Allowable contribution $2,600.00
Divided by 1/12 12
Total monthly contribution limit $ 216.67
Allowable contribution amounts must be prorated based on
when the policy becomes effective.
Helps Pay Your
Protects You From Big
Tax-Free for Medical Care 9
What funds can be withdrawn?
Tax-Free withdrawal to pay for qualified medical expenses
Non-qualified withdrawal of funds will be taxed
accordingly, included as gross income, and a 10% penalty will
be applied except in the case of:
Tax-Free transfer of funds to a spouse can occur in the case of
death or divorce
Qualified Medical Expenses
A qualified medical expense is defined as an expense paid for care as described in
Section 213 (d) of the Internal Revenue Code. Below are two lists which can serve as a guide in
determining whether an expense is eligible for reimbursement.
Examples of Qualified Medical Expenses
Alcoholism Treatment Nursing Homes and Services
Birth Control Pills (by prescription) Optician/Optometrist
Chiropractor Organ Transplant (Including Donor’s Expenses)
Contact Lenses and Cleaning Solutions Oxygen and Oxygen Equipment
Dental Treatment Prescription Medications
Drug Addiction Treatment Stop Smoking Programs
Eyeglasses Telephone or TV Equipment To Assist Hearing Impaired
Hospital Services Transportation Expenses Relative to Healthcare
Lab Fees Vasectomy
Laser Eye Surgery Weight Loss Programs To Treat An Existing Disease
Long-Term Care (certain limits apply) Wheelchairs
Non-prescription Medications X-Rays
This is not a complete list
Examples of Non-Qualified Medical
Athletic or Health Club Memberships
Cosmetics, Hygiene Products, and Similar Items
Cosmetic Surgery and Procedures (Unless for Deformity)
Electrolysis or Hair Removal
Funeral, Cremation or Burial Expenses
Illegal Operations and Treatments
How will an HSA work
in a Cafeteria Plan?
Unused contributions to the HSA are not forfeited at the end of
the plan year, instead they rollover from year to year (even if
offered under a Cafeteria Plan).
In addition, the contributions are not lost when an employee
moves from one employer to another. In another change from
FSAs, contributions are not subject to the Uniform Coverage
Distributions can be made only for the amount in the HSA at the
time of the request for reimbursement. HSAs will be subject to a
set of non-discrimination rules, as yet not defined clearly. And
although further guidance may come, it appears that a third
party need not review expenses. Self-substantiation may be
allowed under HSAs. “Between taxpayer, God and the IRS”
Can HSAs and FSAs
Interact With Each Other?
Per Revenue Ruling 2004-45 issued on May 11, 2004,
FSAs can operate with an HSA; however, the FSA
a ‘Post Deductible’ FSA which provides reimbursements
after the minimum annual deductible has been satisfied;
a ‘Limited Purpose’ FSA which restricts reimbursement to
certain permitted benefits such as vision, dental or
preventive care benefits.
Advantages of HSAs Disadvantages of HSAs
An HSA is the only account which An HSAs funds must be set aside in a
employees can fund on a pre-tax basis trust and cannot be forfeited, resulting in
through a cafeteria plan and have a direct expense to the employer.
unused funds carryover to future years.
The fact that making or receiving tax-
An HSA is also the only account that free HSA contributions means the
can pay amounts for non-qualified employee cannot have any health
medical purposes, though the coverage other than the high deductible
distributions are taxed. plan may initially present challenges.
Some employees might be reluctant to
HSAs have the potential to forego other health coverage to be able to
materially reduce employer health care participate in the HSA.
costs by building employee
consumerism into plan offerings. Employers considering whether to
provide retiree coverage through HSAs
HSAs favorably transfer more might find it difficult for some employees
control and power to employees to accumulate significant funds.
encouraging better health care planning
and decision making. IRS Revenue Ruling 2004-45 places
administrative and communication
HSAs may be a potential vehicle for challenges on operating FSAs alongside
providing retiree medical coverage. HSAs.
HSA/HRA Health Savings Account Health Reimbursement Arrangement
Comparison Chart (HSA) (HRA)
Any size group
Availability Individuals and any size group (not available to partners in a partnership,
shareholders who own more than 2% stock in a
Sub S corp and members of an LLC)
The lesser of deductible or $2,600 for singles Maximum reimbursement determined by
Maximum Contributions and $5,150 for families employer
(amount increased annually based on CPI)
Additional contributions allowed for age 55 NOT APPLICABLE
Additional Contribution Allowance and older ($500 in 2004)
Eligible Contributions Individuals, employers and/or employees Employers ONLY
Tax-Deductibility – Employer Contributions are tax-deductible Reimbursements are tax-deductible
Contributions may be either pre-tax, if No employee tax-deduction (employer
Tax-Deductibility – Employees offered, through a cafeteria plan or tax- sponsored)
deductible (no need to itemize)
Fund or Account Ownership Employee Employer
Portable Yes No
Yes Employer determines if allowed and can set
Rollover of Funds caps
Funding Required Yes No Pre-funding necessary
High deductible plan required as defined by No plan restrictions
Plan Type HSA laws; no copay plans
Deductible: Singles/Families – 2004 $1,000/$2,000 minimum No Limits
Up to $5,000/up to $10,000
Out-of-Pocket Maximum: Singles/Families – 2004
(includes ded. but not out-of-network costs) No Limits
Rx Copay Allowed No Yes
Administration Insurance company, TPA or bank Self-administered, insurance company or TPA
Taxable and subject to 10% penalty (no Reimbursements only for qualified eligible
Withdrawals for non-qualified medical expenses
penalty for over 65) expenses; employer determines whether to pay
after age 65
HSA deductibles and out-of-pocket maximums are subject to annual cost of living adjustments.
Ok. So now you are an expert
Key Issues to consider:
Retiree medical: You may want to consider how HSAs can serve
as a retiree medical funding vehicle.
Vendor Selection: You will need to select an appropriate vendor
if you decide to sponsor an HSA. The vendor landscape is rapidly
changing as the market reacts to the availability of these new
Communications: You will want to effectively communicate any
changes that you make to your active or retiree plans to take
advantage of these newly available accounts, as well as accurately
describing the rules that apply to them. Because HSAs have been
the focus of recent press coverage, employees – including senior
executives – may approach you in the near term with questions
about their feasibility. 18
Ok. So now you are an expert
on HSAs. (Continued)
Redefining the employer’s roles: Employers are redefining their
role from health care purchaser to health care financer (e.g.,
defined contribution approach or exit strategy) and may now have
a more logical path to this end via the use of HSAs.
Timing: While HSAs are available under the tax rules in 2004,
you should consider how soon you could realistically offer HSAs.
Most employers will need time to consider how HSAs might fit
within their overall health plan and retiree medical strategies,
make design decisions, gauge employee interest, implement
decisions, and develop communication materials. All HSAs are
prohibited from accepting rollover funds from flexible spending
accounts or health reimbursement arrangements, making mid-
year transitions less appealing.