Frequently Asked Questions about HSA's

What is an HSA?

An HSA is a tax-exempt trust or custodial account established for the purpose of paying medical expenses in conjunction with a high-deductible health plan. The HSA cannot stand alone -- it can only be combined with a high-deductible health insurance plan. A number of the rules that apply to HSAs are similar to rules that apply to individual retirement arrangements (IRAs).

For example, like an IRA, an HSA is established for the benefit of an individual, and is 'portable.' Thus, if the individual is an employee who later changes employers or leaves the work force, the HSA does not stay behind with the former employer, but goes with the individual. Individuals may make a one time contribution (penalty free) from an IRA, FSA or HRA.

Who is Eligible to have an HSA?

An individual is an eligible individual if such individual:

What is a 'high-deductible health plan' that makes someone eligible for an HSA?

A high deductible plan is a health plan with an annual deductible of at least $1,000 in the case of individual coverage and at least $2,000 in the case of family coverage.

Who can underwrite the high-deductible health plan?

A high-deductible health plan may be offered by a variety of entities, including insurance companies and health maintenance organizations (HMOs).

Who can provide the high-deductible health plan?

An employer or an individual may provide the high-deductible plan.

What kind of other health coverage makes an individual ineligible for an HSA?

An individual is ineligible for an HSA if the individual is covered under a health plan (whether as an individual, spouse, or dependent) that is not a high-deductible health plan (including being covered as a beneficiary under Medicare).

What other kinds of health coverage may an individual maintain without losing eligibility for an HSA?

An individual remains eligible for an HSA if, in addition to a high-deductible health plan, the individual has 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).

Are HSAs allowed under a cafeteria plan?

Yes. Section 125(d) has been amended to allow HSAs to be offered under cafeteria plans.

How does an eligible individual establish an HSA?

Beginning January 1, 2004, any eligible individual can establish an HSA with a qualified HSA trustee or custodian, in much the same way that individuals establish IRAs with qualified IRA trustees or custodians. No permission or authorization from the Internal Revenue Service (IRS) is necessary to establish an HSA.

What is a HSA trustee or custodian?

An HSA trustee or custodian is usually a bank. They will setup your HSA account just like a checking account. You should receive monthly bank statements just like any other account you have at a bank. To access the funds in your account the trustee or custodian should give you a checkbook or debit card. Most trustees or custodians will charge a setup and monthly maintenance fee. Use this link to HSABank.com to take advantage of the special discounted setup and maintenance fee's.

Who may contribute to an HSA?

Contributions to an HSA can be made by individuals, employers, or rollovers from Archer Medical Savings Accounts (MSAs).

How much may be contributed to an HSA in 2008?

The annual contribution limit is $2,900 for individuals and $5,800 for families regardless of your deductible. For example, if your family deductible is $4,000 you may still contribute $5,800 in your HSA tax free. There is no pro-rating for your HSA contributions, which means you may contribute the maximum allowed anytime during the year.

What is the tax treatment of HSA contributions?

Individual contributions are deductible whether the individual itemizes or not. Contributions constitute an adjustment to adjusted gross income -- in other words 'above-the-line'. Employer contributions are tax-free to employees.

What is the tax treatment of earnings on amounts in an HSA?

Earnings on amounts in an HSA are not taxable prior to distribution from the HSA.

When is an individual permitted to receive distributions from an HSA?

An individual is permitted to receive a distribution from an HSA at any time.

How are distributions from an HSA taxed?

Distributions from an HSA are excludable from gross income if used for medical expenses of the HSA account holder and the account holder's family, with certain exceptions, and are includible in gross income if used for any other purpose. If included in gross income, distributions generally are subject to an additional 10 percent tax. However, if distributions that are included in gross income are made after the account holder turns age 65, becomes disabled or dies, the additional 10 percent tax does not apply.

What medical expenses are eligible for tax-free distributions?

Medical expenses are defined under section 213 of the Code, but do not include expenses for insurance other than long-term care insurance, premiums for COBRA-type health care continuation coverage, or premiums for health care coverage while an individual receives unemployment compensation.

Can HSA funds be used to purchase LTC insurance?

Tax-free HSA withdrawals can be used to purchase the age-based amount of 'Qualified' Long-Term Care Insurance, but not to purchase other health insurance.