Health Savings Account – Employer FAQ
Q: What is a Health Savings Account (HSA)?
A: An HSA is an individually owned savings account, similar to an IRA or 401(k) retirement plan, except that funds are used to pay for health care costs. An HSA provides consumers with a tax-efficient method of saving and paying for qualified medical expenses.
Q: What are the tax efficiencies of an HSA for members?
A: Individuals can contribute to an HSA tax-free. HSA funds can be invested and earnings are tax-free. Withdrawals for qualified medical expenses are tax-free.
Q: Can I contribute to my employees’ HSAs?
A: Yes. Contributions must be comparable among all employees participating in an HSA program, in either dollar amount or percentage of HSA-compatible plan deductible. Employer contributions can be deducted directly from taxable income if you do not offer a Section 125 cafeteria plan.
Q: What are the tax efficiencies of an HSA for employers?
A: Employer contributions are not subject to FICA or FUTA taxes.
Q: What are qualified medical expenses?
A: Qualified medical expenses include those for services typically covered under a traditional medical plan, along with other health-related services and therapies. Examples include:
- Medical and dental deductibles and co-payments.
- Routine physical exams.
- Routine gynecological exams.
- Well-baby and well-child care.
- Eye exams, eyeglasses, contact lenses, corrective LASIK eye surgery.
- Hearing aids.
- Orthodontia.
- Expenses in excess of medical, dental and vision plan limits.
- Prescription drugs (including insulin).
- Over-the-counter medications, with certain restrictions.
A complete list of qualified expenses can be found in IRS Publication 502 – Medical and Dental Expenses at www.irs.gov. Simply enter “502” in the Search Forms and Publications field.
Q: How else can HSA funds be used?
A: HSA funds can be withdrawn for any purpose. Amounts withdrawn to pay for qualified medical expenses are not taxable. Amounts withdrawn to pay for other expenses are taxable and may be subject to 10% penalty tax from the IRS. The penalty tax does not apply to amounts withdrawn if you are disabled or have reached age 65.
Q: What other features does an HSA offer?
A: The HSA belongs to the individual and is portable. The funds are not “use it or lose it.” but can rollover to the following benefit year. The individual keeps and can use existing funds if they leave or terminate employment. HSA funds can be transferred tax-free to a spouse upon death, or as taxable transfers to an estate or other beneficiary.
Q: Who is eligible for an HSA?
A: An individual can enroll in and contribute to an HSA only if he or she is enrolled in an HSA-compatible, high-deductible health plan. Also, the account owner must not be enrolled in Medicare, claimed as a dependent on another’s tax return or enrolled in another health plan that is not a high-deductible health plan. You are not eligible for an HSA after you have enrolled in Medicare. If you had an HSA before you enrolled in Medicare, you can keep it. However, you cannot continue to make contributions to an HSA after you enroll in Medicare.
Q: What is an HSA-compatible, high-deductible health plan?
A: An HSA-compatible, high-deductible health plan is one that has combined medical and pharmacy deductible of at least $1,100 (individual) and $2,200 (family). Maximum out-of-pocket expenses are $5,500 (individual) and $11,000 (family). Certain preventive benefits may be covered at 100%, not subject to the deductible. Plan requirements apply to in-network benefits; out-of-network benefits can be less generous. Plans can be insured or self-insured.
Q: How much can be contributed to an HSA?
A: Maximum annual HSA contributions for 2007 are the lesser of two amounts – the annual deductible under the HSA-compatible, high-deductible health plan or a fixed dollar amount set by the IRS (In 2007, $2,850 for individual coverage or $5,650 for family coverage). The annual maximum HSA contribution will change each January 1st based on the Consumer Price Index. There are no maximum limits on the account accumulation. If an individual is age 55 or older, he or she may be able to make an additional annual “catch-up” contribution of $800 for 2007. The “catch-up” contribution increases by $100/year until 2009.
Q: Is an HSA allowed for those small business owners who are not eligible for an HRA?
A: Yes.
The above is for general informational purposes only. For more information about the tax implications of and HSA or HSA program, please consult a professional tax advisor.
Learn more about specific insurance carrier’s HSA programs or HSA-compatible plans by contacting us at: 973.299.0022 or email us at: info@axispointeinc.com
Qualified medical expenses generally do not include premiums paid for health coverage except for:
COBRA insurance
Qualified long-term care insurance and expenses
Health insurance premiums for individuals receiving unemployment compensation
Medicare and retiree health insurance premiums, but not Medicare Supplement premiums
Exceptions include EAP plans, disease management programs, wellness programs and “limited purpose” HRAs and FSAs, AD&D, disability, vision, long-term care, workers’ compensation or limited coverages, such as those for a specific disease or illness or a fixed amount per day of hospitalization.
Figures are for 2007 and are subject to change each year.
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