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What Are HSAs? (HSAs) help you save money on healthcare. For an individual, HSAs are an inexpensive way to insure yourself and your family – and enjoy tax benefits for almost every dollar you commit to the plan.
Health Savings Accounts Who Needs to Know About HSAs? • Employees of small and medium businesses Whether you need it once a day, once a month, or once a year, you cannot escape it: you need health care. That means you need to pay for it. And, if you are like the vast majority of Americans, that means you are spending a lot more money on it than you were even three or four years ago. HSAs may be a viable solution for you.
An HSA is: • A way to save money on healthcare. Sooner or later you will have to spend money on healthcare, but an HSA might help you spend less. • A tax saver. Not only does an HSA let you cover your medical costs tax-free, but also your contributions to the account may nudge you into a lower tax bracket — so you could save on your tax bill, not just your healthcare costs. • A way to pay for healthcare your traditional insurance might not cover. You can use an HSA to pay tax-free for acupuncture, visits to the chiropractor, fertility treatments, therapy, and laser eye surgery — just to name a few. • Portable. HSAs can travel with you from job to job. You always have a right to 100% of the money in your account. • A source of investment income. HSAs are designed so that you can always withdraw money when you need it, but the money you do not withdraw has the potential to grow and accumulate interest and dividends tax-free. • An improved retirement account. HSAs function much like 401(k)s or IRAs, but with an important difference. When you put money in a typical retirement account, it’s there to stay — you could forfeit as much as a third of it in tax penalties if you withdraw it before reaching retirement age. With an HSA, when you use the money for medical expenses, your withdrawals are tax-free. HSAs do not replace your current retirement accounts, but they can be a major supplement to your retirement savings. • Money in your pocket. To participate in an HSA, you must be enrolled in a qualified high-deductible health plan (HDHP). HDHPs typically have the lowest premiums of all health plans. If you are currently enrolled in a Health Maintenance Organization (HMO) or a Preferred Provider Organization (PPO) plan, and you switch to an HDHP, you could save one-third to one-half of your cost for coverage right off the bat. (Some HMOs and PPOs are offering HSA eligible plans.)
The HSA program has two parts: • A high-deductible health plan (which usually costs less than other health plans), and • A tax-advantaged, portable savings account for payment of current medical expenses, which builds like a Medical IRA. Compared to full-coverage health insurance, the premium payments for high-deductible health plans can be substantially less, up to half the price. So it is no surprise that young, single, and relatively healthy workers prefer high-deductible plans when the money for premiums comes out of their pockets (for the self-employed) or is taken out of a paycheck (through a high-deductible health plan offered as a job benefit by an employer). High-deductible health plans are sometimes called "hit-by-a-truck-insurance.” Good plans pay for both catastrophic and routine medical care once the insured person has paid out-of-pocket for the first $1,050 or $2,100 worth of medical fees. And in the unlikely event that the insured person does get hit by a truck, or needs that trip to the emergency room, a few days hospitalization (hundreds of dollars per day), or surgery (thousands of dollars), the high-deductible health plan will cover all the costs. Under the HSA program, • Individuals must have an annual deductible of at least $1,050. Yearly contributions to HSAs are limited: * Amounts listed in this Guide are for 2006; they are indexed annually for inflation.
You qualify if you are: • Under the age of 65, Self-employed or those employed by others can participate. Spouses or dependents covered by other insurance may not be able to participate, but you may still be able to use your HSA to pay for their qualifying medical expenses tax-free.
• HSAs are not available to persons who are both eligible for and enrolled in Medicare. Most Americans qualify for Medicare at age 65. However, if an individual continues to work past that age, remains enrolled in a high-deductible health plan and does not apply for Medicare benefits he or she may qualify to contribute to an HSA. • If you are claimed as a dependent on someone else’s tax forms — regardless of whether that someone is a spouse, a domestic partner, or a parent — you cannot open your own HSA. Children under working age cannot open their own HSAs with money given by their parents. Children who work but are claimed as dependents on their parents’ tax return cannot open their own HSAs. Similarly, a non-working spouse or any other relative who is claimed as a dependent on another person’s tax return cannot open his or her own HSA. • Individuals and families covered under traditional, full-coverage insurance plans (including Health Maintenance Organizations, Preferred Provider Organizations, Point-of-Service plans, Medicare and Medicaid) that do not meet the deductible minimum are not eligible for HSAs.
Clearly, those who would prefer or already have a high deductible on their health insurance policy are poised to get the most benefit from this new program. For the self-employed and those who do not have any insurance policy at all, a low-cost, high deductible plan that qualifies for an HSA is a good starting point. Medical expenses are low for most of us. Seventy-three percent of the U.S. population spends $500 or less on medical expenses per year, according to American Health Value; and most people will not spend all of their HSA funds in any given year. What is not spent is yours to keep and earn interest. The worksheet that follows will show how much you could save by using an HSA. Often, current medical plan costs are much greater than you might think when all co-pay commitments are added. Most HSA-eligible plans do not require co-insurance once the deductible has been met. Total up what you paid last year (A) and the maximum of what you might expect to pay this year (B). Subtract (B) from (A). If the result (C) is less than (A), Congratulations! You have just demonstrated how to save money on healthcare using the HSA program. For a few, your (C) result may be more than (A). But remember, this is a worst-case scenario. It assumes you are going to have a serious medical need this year, but odds are that you will not. Even if you do reach your deductible, you will be covered by your lower cost, high-deductible policy. After you reach your out-of-pocket maximum, you will not spend another dime on covered services for the rest of the year.
A. Cost of premiums and out-of-pocket expenses last year (fees up to deductibles, co-pays, uncovered expenses and medication) TOTAL (A) B. Estimated total for high-deductible insurance premiums this year plus the total deductible under the insurance policy for this year TOTAL (B) C. Subtract (B) from (A) to get estimated cost savings for the new plan this year TOTAL (C) Selecting An HSA Custodian If your employer offers an HSA through a specific vendor, they will lead you through this process. If not, you can set-up an HSA with an Account Custodian, such as a bank. You should look for the following features in an HSA Account: • Easy deposits – in person, by mail, by electronic transfer or through an automatic payroll deposit mechanism. • Easy withdrawal with a checkbook, debit card or withdrawal slip. Copyright © 2005 Information Strategies, Inc. Page 6 • An attractive daily compound interest rate on your deposits. • Reasonable charges for administrating the account. • Ability to check balances. • A yearly printed statement of all deposits and debits to satisfy your IRS reporting requirements. • FDIC insurance. Opening an HSA Opening up an HSA is not much different from opening a regular checking account. You will get paperwork to fill out, including: • Application Form: You fill out this form with your name, address and Social Security number. • Beneficiary Form: Because an HSA is an inheritable asset, you will be asked to designate an heir or beneficiary in the event of your death. In all cases, remember that your high-deductible health plan must be in place before you are allowed to open an HSA. HSA Contributions Contributions to an HSA can be made by you, your employer (but is not obligated to do so), and/or a third party. Contributions can be made through regular payroll deductions, lump sum and/or sporadically. Monies may be put into the HSA until April 15th following the tax year. Yearly contributions to HSAs are limited. Use the following HSA Contribution Calculator to figure your maximum contribution. HSA Contribution Calculator A Notes: If this number is greater than $5,450 and you have a family policy, write in only $5,450. Amounts listed are for 2005; they are indexed annually. B monthly pro-rated amount: (A) / 12. Determine how many months your policy is in force, in the tax year: (1-12). Multiple the number from (B) by the number from (C). The total represents C D the maximum amount you may contribute this year: (B) x (C)For HSAs, a policy is considered “in force” by the IRS on the first day of the Notes: month that you received coverage through the policy. For example, if you signed a policy agreement on July 24th, the policy is retroactively “in force” as of July 1. Special Rules For Those Over 55 To allow older taxpayers to “catch up,” the current law allows HSA participants to stretch their contribution limit by an additional $600 in 2005. This means that if you are over 55 and have a $1,000 deductible, your legal contribution might be $1,600 for the tax year. Under current law, the “catch-up” amount will increase $100 per year (the catch-up amount will be $700 in 2006) until it reaches an additional $1,000 per tax year by 2009 and thereafter. These additional © Information Strategies, Inc. Page 7 All are copyrighted by ISI amounts must also be prorated, in the same way any other contribution would be, if you participate in the HSA program for only part of the year. Penalties On Excess Contributions Current law mandates a penalty if you or your employer contribute in excess of your limit for the tax year. You will be penalized with a 6% excise tax on the entire amount that is over the limit. The IRS will also treat amounts in excess as income. The tax responsibility will be yours, even if your employer made that excess contribution. The 6% penalty tax will be waived if a distribution of the excess (including its earnings) is made to the account holder in a timely manner. The easiest way to do this is to write an HSA check to yourself, in the amount of the excess, before December 31 of the relevant tax year. The earnings on the excess will be taxable on distribution. If you can prove the check to yourself is a reimbursement for out-of-pocket qualified medical expenses in the second year, you may not have to pay any tax on that amount. Naturally, you will need receipts to back this up. Avoid A Tax Penalty It is up to you to monitor your HSA contributions and make sure they do not exceed your legal limit. Use the Contribution Calculator (see page 8) and make sure you know what your limit is. Then pay attention. A monthly “number-check,” at the same time you balance your checkbook, should be enough — it will take only an additional minute or two. What About Rollovers From Other Accounts? If you had a Medical Savings Account (the ancestor of the HSA which was available only to the self-employed), you can roll over accumulated funds from that account into your HSA without paying a tax or penalty. Rollovers do not count towards your contribution limit, but you do not get an additional deduction for them in the current tax year. An HSA may accept only one rollover per year. Under current law, rollovers from an IRA, HRA, FSA, or other health reimbursement plans from an employer are not allowed without a penalty. For example, you cannot empty your IRA and put the money directly into your HSA. Some Tax Rules On HSA Funds HSA money must be used for qualified medical expenses to remain tax-free. You can make tax-free withdrawals from your HSA to pay for these expenses as soon as • Your account is activated, and • You have an opening balance. However, you may choose to pay for qualifying medical expenses with funds outside the HSA account for a couple reasons: • You do not have enough money in the account to pay for a medical procedure. In that case, you may use other funds and take the deduction later as long as you have supporting documents to show the tax authorities. You may prefer to leave the funds in the HSA and continue to earn dividends and profits that are not taxable until you retire or use later for qualifying expenses. What Can An HSA Pay For? HSAs do not replace a normal or typical health insurance plan. They are designed as a supplement to a high-deductible health insurance policy. By themselves, HSAs are savings © Information Strategies, Inc. Page 8 All are copyrighted by ISI vehicles — not insurance policies — so they do not restrict your access to coverage or your choice of insurance providers. Because an HSA is tied to a high-deductible health insurance policy, you will “pay as you go” for medical care using your tax-free HSA dollars until you spend up to the deductible. Once you meet the deductible, the health insurance policy pays for most of your medical expenses for the rest of the year. You can spend your HSA dollars on qualified medical expenses for yourself, or anyone you claim as a spouse or dependent on your personal income tax — even if that person is not covered by your high-deductible insurance plan. In general, HSA withdrawals for qualifying medical expenses are excluded from your gross income — that is, they are not taxed. However, only distributions provable as qualifying medical expenses will be tax-free. If you pay for procedures that do not qualify, the monies used are considered to be “income” for your tax year and will be subject to both federal and state income taxes, as well as an additional penalty tax of 10% of the amount that was spent. The IRS definition of “qualifying medical expenses” is broad, and you can use your HSA to pay for many things your health insurance will not cover, such as contact lenses, chiropractic care, physical therapy and nursing services. However, regulations do change. You can always find the most up-to-date list of qualifying expenses online, in Publication 502 on the IRS website (www.irs.gov) or on HSAfinder.com under “Qualifying Medical Expenses”. These are just a few examples: • Self-pay for COBRA healthcare continuation when you leave a job • Long-term care (medical expenses and insurance up to allowable limits) • Medicare Part A or Part B and Medicare HMO insurance premiums • Dental or Vision care insurance premiums • Medical doctors • Dental and Optical care • Dentures • Eyeglasses • Contact lenses • Eye surgery • Nursing services • Emergency care • Physical therapy • Chiropractic care • Psychoanalysis • Acupuncture • Christian Science practitioners • Treatments not often covered by health insurance: • Alcoholism or drug addiction treatment • Fertility enhancement • Birth control prescriptions • Prescribed weight-loss or stop-smoking programs • Special schools and homes for the mentally retarded • Medical equipment, appliances and other personal items: • Artificial limbs and prosthetics • Braille books and magazines © Information Strategies, Inc. Page 9 All are copyrighted by ISI • Crutches and wheelchairs • Hearing aids • Guide dogs and other helper animals • Costs that may be incurred when seeking treatment • Trips and travel exclusively for the purpose of a treatment • Meals and lodging associated with such trips • Qualifying treatment-related expenses: • Telephone or television modifications for disability • Legal fees related to treatments • Medical conferences (must be related to a condition) What Expenses Do NOT Qualify? These expenses are just a sampling of expenses you cannot pay for with your HSA. (If you do pay for these with a withdrawal from your HSA, you will either have to reimburse the account by April 14th of the year following the tax year or pay income tax — plus a 10% penalty tax — on the withdrawal amount.) • Cosmetic surgery (unless the surgery is related to a medical condition, as in the case of a birth defect or a mastectomy) • Teeth whitening • Maternity clothes • Diaper services • Health club dues • Electrolysis for hair removal • Hair transplants • Household help or babysitting • Marijuana for glaucoma (or other controlled substances) • Nonprescription drugs and medicines (over-the-counter drugs can be qualifying expenses, but you must have a doctor’s written recommendation) • Food supplements not prescribed by a doctor (e.g., Ensure ™) • Over-the-counter vitamins or diet drinks (e.g., SlimFast ™) • Swimming lessons • Weight-loss programs not prescribed • Funeral expenses How Do You Pay Medical Bills From An HSA? Using an HSA is similar to using any checking account. Typically, you will have a checkbook with about 30 checks and 20 deposit tickets. HSA checks are available in smaller packages and can cost anywhere from $8 to $25. Some account custodians offer debit cards or withdrawal slips as well. Besides checks or debit cards, other ways to pay include certain types of credit cards issued by the account custodian and stored-value cards in specific dollar amounts. Stored-value cards for HSAs are similar to store gift cards or phone cards. The starting balance is debited every time the card is used, until the amount is used up. These are only available in select institutions. As a practical matter, the amount of money you spend depends on the balance in your account. Although your deposits in the first few years may be small, your accumulated savings can provide a cushion of tax-free dollars over time. What If Money From The HSA Is Needed For Something Else? In the event of severe financial difficulties, money saved in an HSA account may be immediately withdrawn to meet a crisis. All you have to do is write yourself a check. You will have to report this distribution as potentially taxable income, as you would if you “cashed out” your IRA or Keogh. But you do not have to withdraw the entire amount, just what is really needed for this important, non-medical need. Remember, though, that the amount you withdraw for non-medical expenses loses value as soon as you withdraw it — you will be taxed at our regular tax rate plus a 10% penalty. Plus, whatever is left in the account will accumulate less interest for the future. Unless you are facing a true financial crisis, such as a foreclosure or eviction, you are probably better off leaving the money in your account. Tracking HSA Spending Your HSA custodian is required to report all distributions from your HSA account to the IRS. You get a copy of the report from your custodian vendor at the end of the year. It is up to you to tell the IRS how much of the distribution total was for qualifying medical expenses, and what part of the total does not qualify. You must include any unqualified amount in your taxable income for the year (when you file your income taxes). The qualified amount is noted on a special form. You do not have to file your medical receipts with the IRS, though you should save them, along with copies of your tax forms, in case of an audit. What To Do At Tax Time You do not have to itemize your HSA contributions to get the tax write-off for medical expenses. It comes right off the top and gets deducted from your gross income. On your personal income tax return, the amount of your HSA contribution should ideally equal the limit of your allowable deduction under your insurance plan. To make up any difference, the law allows you to contribute to your HSA as late as April 15 of the year after the current tax year. Use the Contribution Calculator (see page 8) to determine the maximum amount you can contribute and still get the tax advantage. Amounts over this maximum may incur tax penalties. All eligible contributions into an individual or family HSA are exempt from personal income tax. It doesn’t matter whether or not you spend all the money in the HSA in that tax year. Rules For Reporting Premium Costs And HSA Contributions Contributions into an HSA can be made either by an individual or by an employer. If you make the contribution, the amount is deductible from your total income in the section for “Adjustments to Gross Income” of Form 1040. A rundown of your contributions and disbursements may be noted on a separate schedule (Form 8889) to be attached to the 1040. If your employer contributes to your HSA, the amount is excludable from your wages, and noted on your W-2 paperwork. Check to be sure that your wages minus your employer’s contribution is correct on your W-2. If your employer paid for all of your health insurance premiums Can I Retire On Funds From My HSA? To retire comfortably, you will probably need more income than an HSA alone can provide. For most Americans, that income will probably come from a combination of sources: Social Security, employer-sponsored pension plans, and personal savings in accounts like 401(k)s and IRAs. Your HSA can be a part of that — even a big part. But HSAs aren’t designed to be your primary retirement savings vehicle. Use a 401(k), SEP, IRA, or Keogh plan to provide for your retirement income. Use an HSA to give that income a hefty supplement. After you reach age 65, you can use your accumulated HSA funds (which can include interest or dividends from stock funds, bonds, or other high-yield instruments) for other things besides healthcare. After retirement, money you withdraw and use for non-qualifying expenses is taxed at the normal rate for investment income. However, money you use for qualifying expenses later in life — such as nursing home costs — can still be withdrawn entirely tax-free. Death Benefits The money saved in an HSA is considered an “inheritable asset” subject to estate tax. Taxes may be paid by your heirs or assigns in the year the funds are released from your estate at the same rate as other inherited, previously untaxed income. Under the current law, the entire amount may pass to a surviving spouse without estate tax. A Short Guide to Health Savings Accounts
Potential Savings With HSAs Who Is Best Suited For An HSA Account? Who Will Not Qualify? Who Qualifies For An HSA? What Are Some Of The Parameters Of HSAs? What’s In It For You? |
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