Health Savings Accounts
Health Savings Accounts (HSA) are a tax advantaged way to pay for health care expenses. Enacted as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and revised by the Tax Relief and Health Care Act of 2006, HSAs permit individuals who are actively enrolled in a qualified High Deductible Health Plan (HDHP) to deposit money tax-free into an HSA. Tax-free withdrawals can made from the account for qualified medical expenses.
Qualified High Deductible Health Plan
A Qualified HDHP is a health plan that has a minimum deductible level for 2008 of $1,100 for an individual and $2,200 for a family. All expenses, including prescription medications, must be subject to the deductible. Preventive care services are not subject to the deductible. In addition, coverage for accidents, disability, dental care, vision care, and long-term care is not subject to the deductible. A qualified HDHP must also have a maximum out-of-pocket limit that does not exceed $5,600 for an individual and $11,200 for a family.
Contributions to an HSA
Contributions to an HSA are tax-free and anyone including your employer can contribute to an HSA.
- Contributions made by the participant directly into their HSA are eligible for an above the line deduction when they file their tax return
- Contributions made through an employer's cafeteria plan (pre-tax payroll deduction) are not subject to any taxes including FICA and Medicare taxes
- Trustee-to-trustee transfers from an Individual Retirement Account (IRA) to an HSA are not includible in gross income or considered for employment tax purposes. In addition, no penalty applies and the amount transferred is not deductible. However, such a transfer requires a participant to remain HSA eligible (i.e., enrolled in a qualified HDHP) for 12 months following the transfer or the transferred amount will be subject to tax and a 10% penalty.
- Rollovers from a Health Care Flexible Spending Account (HCFSA) or Healthcare Reimbursement Account (HRA) are not includible in gross income or considered for employment tax purposes and the amount transferred is not deductible. However, such a transfer requires a participant to remain HSA eligible (i.e., enrolled in a qualified HDHP) for 12 months following the rollover or the rollover amount will be subject to tax and a 10% penalty.
Any earnings (interest) from the HSA are also tax-free.
HSA Withdrawals
HSA distributions are tax-free if they are used to pay for qualified medical expenses, such as:
- Amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease,
- Prescription drugs,
- Qualified long-term care services and long-term care insurance,
- Continuation coverage required by Federal law (i.e., COBRA),
- Health insurance for the unemployed,
- Medicare expenses (but not Medigap), and
- Retiree health expenses for individuals age 65 and older (Note: retiree health plans would not have to meet the $1,100/$2,200 minimum deductible requirements.)
Distributions made for any other purpose are subject to income tax and a 10% penalty. The 10% penalty is waived in the case of death or disability. The 10% penalty is also waived for distributions made by individuals age 65 and older.
Treatment at Death
Upon death, HSA ownership may transfer to the spouse on a tax-free basis.
View additional questions:
- What is a Health Savings Account (HSA)?
- How do employees qualify to open an HSA?
- When can contributions be made to an HSA?
- Can employer's still offer their regular Health Care Flexible Spending Account (HCFSA) Plan to HSA participants?
- Do employers have to amend the Cafeteria Plan to allow for pre-tax contributions to the HSA?
- How much can be contributed to an HSA?
- Can money be rolled over from an employee's Health Flexible Spending Account (HCFSA) or Healthcare Reimbursement Account (HRA) into an HSA?
- Can a participant transfer money from his or her Individual Retirement Account (IRA) into an HSA?
- Who can contribute to an HSA?
- What can the participant use the HSA money for?
- How are withdrawals from an HSA treated if they are not used for qualified medical expenses?
- Are contributions to and distributions from an HSA reported to the IRS?