Health Savings Accounts FAQs

Who is eligible to establish an HSA?

The owner of the HSA is called the account beneficiary. Any eligible individual may establish an HSA. An eligible individual (determined on a monthly basis on the first day of each month) is an individual who:

is covered under a high deductible health plan (HDHP)
generally not covered by any health plan that is not an HDHP.
is not enrolled in Medicare, and
may not be claimed as a dependent on another person's tax return.

What are health savings accounts (HSAs)?

Health savings accounts (HSAs) are new, tax-favored consumer savings arrangements for individuals and families covered by high deductible health insurance plans (IRC Sec. 223). HSAs were created by the Medicare Prescription Drug and Modernization Act of 2003 and became available January 1, 2004.

HSAs are essentially identical in concept to Archer medical savings accounts (MSAs). HSAs allow for tax-deductible contributions and, if amounts are used for qualified medical expenses, tax-free distributions of basis and earnings. Unlike the MSA program, however, there is no limit on the total number of HSAs that may be set up, participants need not be self-employed or employed by small employers to qualify for HSAs, and there is no sunset (termination) date for the HSA program.

What is considered an HDHP?

A health plan is an HDHP if the plan satisfies both an annual deductible and out-of-pocket expense requirement. The definition of an HDHP for single and family coverage is summarized below:

Single Coverage - Annual deductible of at least $1,000 and out-of-pocket expense cap not to exceed $5,100.

Family Coverage - Annual deductible of at least $2,000 and an out-of-pocket expense cap not to exceed $10,200.

How can HSAs be established?

Any eligible individual can establish an HSA with a qualified HSA trustee or custodian. An eligible individual who is an employee may establish an HSA with or without involvement of an employer.

The IRS requires that an HSA document, or contract, be signed between the trustee/custodian and account beneficiary in order to establish an HSA.

Who may contribute to an HSA?

Any or all of the following are eligible to contribute to an HSA in a given year.

An eligible individual
An eligible individual's employer
An other person

Are there any age restrictions tied to HSA contribution eligibility?

There is not a specific age restriction on HSA contribution eligibilty. However, contributions, including catch-up contributions, cannot be made beginning with the month the eligible individual enrolls in Medicare.

Example: If Pearl enrolls in Medicare on March 1, 2005, her annual contribution limit equals her monthly limit multiplied by two.

What are the tax advantages of HSA contributions?

Contributions made by the eligible individual
HSA contributions made by an eligible individual or on behalf of an eligible individual are deductible by the eligible individual whether or not the eligible individual itemizes deductions.

Note: The individual cannot also deduct the contributions as medical expense deductions.

Employer contributions
HSA contributions made by an employer to employees' HSAs may be deducted by the employer. These contributions are excluded from the employees' gross income, are not subject to withholding for income tax, and are not subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act (RRTA).

Note: All contributions made through a cafeteria plan to an employee's HSA are treated as employer contributions. The employee cannot deduct employer contributions on his or her federal income tax return as HSA contributions or as medical expense deductions: however, this contribution amount is excluded from taxable income.

Tax-deferred earnings
Earnings on amounts in an HSA are not includible in gross income (i.e., tax-deferred) while held in the HSA.

Who could benefit from HSAs?

Below is a breakdown of how employers and employees are likely to benefit from HSAs.

Employers
By offering HSAs through their cafeteria plans and/or providing employer HSA contributions, employers potentially have much to gain.

Contributions are considered employer-provided coverage for medical expenses
Increased abitlity to attract and retain employees
Lower overall health insurance costs

Eligible individuals
Eligible individuals might benefit from participating in an HSA program in the following ways.

Ability to carry over balance
Portability of assets
Payment of medical costs with pretax dollars

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