Health Savings Accounts or HSA Plans for Individuals and Employee Groups
HSA Accounts or HSA plans allow
you to save money to pay for future medical expenses on an income
tax-free basis. Any individual, who has an approved High Deductible
Health Plan (HDHP) and who is not covered under another disqualifying
health plan, can participate in an HSA. An employer can also offer
Health Savings Accounts to his employees and both the employer and
employees are allowed to contribute funds to the HSA. If offered in
conjunction with a qualified Flexible Spending Account (FSA) commonly
referred to as a cafeteria plan, savings in FICA and FUTA taxes as well
as income taxes can be achieved.
An Insurance Policy and a Special Savings Account
An Health Savings Account is really a
combination of a health insurance policy meeting minimum US Treasury
policy design requirements called a High Deductible Health Plan (HDHP)
and a separate custodial savings account for future medical expenses
called a Health Savings Account (HSA). Congress created the HSA as a way
to cover your future medical expenses, and it is subject to IRS
regulations and guidelines. A health insurance company or an insurance
plan usually provides the qualified health insurance policy. A licensed
HSA administrator and financial services company, such as a bank,
usually acts as the custodian and administers the savings account
portion of the HSA.
The Health Insurance Plan Must Meet Certain Design Requirements
A qualified HSA plan usually has a single deductible called an Aggregate Deductible
that applies to all medical expenses covered by the insurance policy
whether you are insuring yourself or an entire family. This deductible
must be satisfied each year before the insurance company pays on any
medical claims. The single deductible for an individual must be a
minimum of $1,350 and can be any deductible up to the maximum
out-of-pocket limit of $6,750 (if the plan pays at the 100% level after
the deductible) and the single deductible for a family must be at least
$2,700 up to the maximum out-of-pocket limit of $13,500 (if the plan
pays at the 100% level after the deductible) for the year 2019.
Preventive care is provided without having to meet the deductible first.
The limits on maximum out-of-pocket expenses include both the
deductible and any shared expenses you are obligated for. These limits
are subject to annual cost-of-living adjustments determined by the IRS,
which will cause these values to change over time. You can exceed the
out-of-pocket limits if you go outside the provider network on a
preferred provider plan. The plan still qualifies.
Some plans are available with a separate individual deductible called an Embedded Deductible.
Once a family member meets his or her embedded deductible, that members
further claims will be paid by the insurance company in accordance with
the policy. Claims for other family members are applied to the family
or aggregate deductible which must be met before their claims are also
paid.
Yearly Savings Allowed in HSA Accounts Based on Annual Limit and Age
You can save up to the maximum
contribution limit of $3,500 for an individual HSA health plan and
$7,000 for a family HSA health plan regardless of the HDHP deductible
for 2019. These limits are also subject to annual cost-of-living
adjustments. Amounts are no longer pro-rated if you start the plan
mid-year. You can now make the full year's contribution even if you
start as late as December 1st. Individuals age 55 to age 65 can
contribute an additional $1,000. If both husband and wife are over 55,
each can contribute the additional amount to an HSA. An HSA account is
an individual account. With a family HSA health plan, both a husband and
wife can set up separate HSA accounts, or one spouse can set up a
single HSA account usually coupled with a beneficiary designation to the
other spouse. Dependent children do not qualify to set up their own
HSA. Other family members can contribute funds to an HSA account;
however the owner of the account is the only one who can take a tax
deduction for those funds. Total contributions cannot exceed the annual
limit.
Other Types of Supplemental Coverage Are Permitted Along with HSA Accounts
You can have a policy covering a
specific disease such as cancer, one providing a fixed payment for
hospital coverage such as a daily benefit, or you can have one that
provides supplemental accident, disability, dental, vision or long-term
care benefits.
Use of HSA Funds to Pay Medical Expenses
Funds in an HSA account can be used to
pay both medical expenses incurred in meeting the deductible and any
required shared expenses you are responsible for each year tax-free.
These funds can also be used to cover qualified medical expenses not
covered by the health insurance plan such as vision and dental expenses.
Funds in an HSA can be used for any family member's eligible medical
expenses even though HSA accounts are individual accounts. See IRC
Section §213 - Medical, dental, etc., expenses or
IRS Publication 502 "Medical and Dental Expenses" for IRS rules on allowable expenses. You can no longer use funds to purchase over the counter medications.
Two Different Definitions of a Dependent
The Patient Protection and
Affordable Care Act of 2010 (the new healthcare law) considers dependent
children up to age 26 as dependents, but does not define the word
child.
The IRS defines a qualifying child dependent as follows:
- Daughter, son, stepchild, sibling or stepsibling (or any descendent of these)
- Has same principal place of abode for more than one-half of taxable year
- AND not yet age 19 (not yet age 24 if student)
- OR permanently and totally disabled
If you add a dependent child to
your HSA qualified health plan that is over the age of 19 who is not
attending school or over age 25 whether in school or not, you cannot use
HSA funds to pay for their medical expenses. In these situations, the
dependent child would not be considered a family member for purposes of
using HSA funds to pay for medical expenses. Medical expenses would
have to be paid from taxable funds outside the HSA
Savings Account Money Belongs to You and Can Be Accumulated
You own the HSA funds in your
account. If you have an HSA as part of an employer sponsored health
plan, you still own the funds, including any employer contributions, and
can take them with you when you leave or retire. You can carry unused
funds over from year to year until retirement, if you wish. Like an IRA,
investment earnings accrue tax-free. If you withdraw funds prior to age
65 for non-medical expenses, you will be subject to a 20% income tax
penalty in addition to any other income taxes you may owe on the
accumulated funds. The 20% penalty is waived in the case of death or
disability.
After age 65 you can continue to
use the funds tax-free for medical expenses, long-term care expenses,
Medicare Part B premiums, premiums on Medicare Advantage plans (not
Medicare Supplements), Prescription Drug plans, long-term care premiums
or you can withdraw the funds for other purposes subject to normal
income taxes without a penalty. There are no requirements o start
withdrawing funds at age 70 1/2 like required for an IRA.
Other Important Health Savings Accounts Contribution Considerations
If you also have an MSA Plan you
total contribution to both plans cannot exceed the contribution limits
discussed above for an HSA. Contributions are tax-deductible for the
individual even if he does not itemize deductions on his tax return.
Employer contributions are made on a pre-tax basis.
Transfer of Ownership to Spouse on the Death of An Individual
HSA ownership may transfer to an individual's spouse, upon death, on a tax-free basis.
Special One-Time Rollover Provisions
You are allowed a one-time rollover from
a Health Reimbursement Arrangement (HRA) and Flexible Spending Account
(FSA) into your HSA. You are also allowed a one-time rollover from an
Individual Retirement Account (IRA) into your HSA.