Complete Guide to Rules Regarding Health Savings Accounts

A Health Savings Account (HSA) is a unique, individual-owned, account.  Tax-deductible contributions are made to the account and the funds from the account are then used to pay for current and future medical expenses.  These "HSA" accounts are used in combination with a “High Deductible Health Plan,” or "HDHP."

This article will discuss eligibility, contributions, tax implications, and IRA transfers or rollovers.

First, what are eligibility requirements for an HSA?

• First and foremost, an individual must be covered by a High-Deductible Health Insurance plan.
• The individual may not be covered by other health insurance besides the high-deductible health insurance plan.  
  
• The individual may not be enrolled in Medicare.
• The person cannot be claimed as a dependent on someone else’s Federal tax return.
• An HSA account-owner may not be a child.
• Spouses can establish and manage their own HSAs, if meeting all other requirements.

An individual may still be eligible for an HSA, even though he or she may have any of the following health benefits:

• An individual may have a specific disease or illness insurance.
• An individual may have accident insurance.
• An individual may have disability insurance and still be eligible for an HSA.
• An individual may have dental insurance and still be eligible for an HSA.
• An individual may own a vision care policy and still be eligible for an HSA.
• Also, long-term care insurance is allowed while having a health savings account.
• Employee Assistance Programs are allowed while owning an HSA.
• An individual may be part of a disease management or wellness program, as long as the program does not offer major benefits in terms of treatment or care.
• Drug discount cards are permitted without ruining the eligibility of an HSA.
• You will be eligible for an HSA and still be eligible for VA Benefits unless you have received veteran’s health benefits within the most recent three months.
• Unlike IRA’s, there are no income limitations on who may contribute to an HSA.
• Also, unlike IRA’s, there is no requirement of having earned income to make HSA contributions.

As stated above, to own and to make contributions to an HSA, a high-deductible Health Care plan must be owned in conjunction with the actual health savings account. 

But, what is a high-deductible health care plan that makes on eligible for an HSA?  

Simply stated, a high-deductible health care plan in this context is a health insurance plan with a deductible of at least $1,200 (individual-only coverage), or $2,400 for family coverage.  These numbers are 2011 numbers and will be indexed every year for inflation for years 2012 and forward.

Annual out-of-pocket expenses, including deductibles and co-pays on the health plan, cannot exceed $5,950 (self-only coverage) $11,900 (family coverage). These amounts are also set for 2011 and are indexed annually for inflation as well.

High Deductible Health Insurance Premiums may have the following:

• Coverage from dollar one for preventive care.
• Allowable higher out-of-pocket for non-network services.
• All covered benefits must apply to the plan deductible, including prescription drugs.
• For prescription drugs, if the high-deductible health care plan provides a prescription drug benefit, prescription drug costs must be subject to the same annual deductible or the individual may not contribute to the health savings account.
  

What about employer contributions to a health savings account?

Contributions to HSA can be made by the individual or the employer, or both.  If made by the employer, the contributions are not taxable to the employee.  Essentially this means that the individual will not pay taxes on the contributions made by the employer on the employee's behalf.

If made by the individual, it is an “above-the-line” deduction on the individual’s Federal 1040 tax form.  Above the line essentially means that the contributions are not subject to the 7.5% medical threshold on Schedule A.

HSA contributions may be made by others besides and behalf of the individual and deducted by the individual on his or her tax return.  Click on the following for complete information on HSA Employer Contributions.

HSA’s and IRA Rollovers.

Beginning in 2007, individuals began to have the option of making an annual, one-time transfer from their IRA to an HSA, subject to the HSA contribution limits applicable for the year of the transfer.  Click on the following for complete information on IRA to HSA rollovers.

The IRS allows for many types of HSA distributions, while remaining non-taxed.  Remember, these distributions are not taxable as long as they are used for these purposes listed.  This list changes from year to year, so be sure to consult your tax advisor if necessary.  Here is the current list of allowable non-taxable HSA distributions.

Alternatively, the IRS has specifically excluded many expenses.  These expenses will not be allowed favorable tax status as distributions from a health savings account.  Here is the list of disallowed HSA distributions.

What is the maximum annual HSA Contribution?

For 2011, the maximum amount that can be contributed (and deducted) to an HSA from all sources is:

• $3,050 (self-only coverage)
• $6,150 (family coverage)

These amounts will be annually indexed for years 2011 and thereafter.

For individuals age 55 and older, additional “catch-up” contributions to HSA allowed.  For 2010 and after, that amount is $1,000.  This age is different than the IRA catch-up age, which is 50.

Can I Contribute to an HSA while being enrolled in Medicare? 

The short answer is no.  You may not make contributions to an HSA while being enrolled in Medicare.

Can I start my HSA in the middle of the year?

Beginning in 2007, a full year’s contribution (plus the catch-up, if applicable) may be made to an HSA for someone who first becomes eligible during that year, even if they start in December.  If someone contributes a full year’s contribution but is eligible only part of the year, however, they will be subject to taxes and penalties if they don’t remain eligible for 12 months after the year in which they first become eligible.

What happens if I contribute too much to my HSA?

Contributions to the HSA in excess of the contribution limits must be withdrawn by the individual or be subject to an excise tax. A pro-rata portion of earnings must be withdrawn also.  In this case, the owner would pay income tax on the withdrawn amount, but there would be no 10% penalty
    
If the HSA maximum contribution limit was not reached for the year, any other withdrawal for the year (that is not for qualified medical expenses) will not be considered “excess HSA contributions” and that withdrawal will be subject to both income tax and the 10% penalty.

Employee contributions can be made by a salary reduction arrangement through a cafeteria plan (section 125 plans).  Elections to make contributions through a cafeteria plan can change on a month-by-month basis.

Remember that contributions to the HSA through a cafeteria plan are “pre-tax” and not subject to individual or employment taxes.

An employer may automatically make cafeteria plan contributions on individuals’ behalf unless the individual affirmatively (you would want this in writing) elects not to have such contributions made.

 

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