Who is eligible?
They are available to anyone covered by a qualified high-deductible health plan. Individuals cannot be covered by any other health plan (including a flexible spending account) and cannot be covered under Medicare. There are no income limits on HSAs (you don’t have to be working or have earned income.)
What type of “qualified high-deductible health plan” is needed?
To be eligible to make HSA contributions, an individual needs to be covered by a qualified high-deductible health plan as follows for 2007:
- Minimum deductible of $1,100 for individuals and $2,200 for family coverage;
- Total out-of-pocket costs to the insured cannot exceed $5,500 for an individual and $11,000 for a family, including both the deductible and copayments;
- Any Rx coverage must be included in the deductible; no stand-alone Rx cards are permitted.
- Plans are allowed to offer first-dollar coverage for preventive care and still qualify.
What is the maximum HSA contribution amount?
For 2007, the maximum allowable contribution to an HSA is $2,850 for individual coverage and $5,650 for family coverage. Taxpayers are allowed full-year contributions for part-year coverage. However, they must maintain a qualified high deductible health plan for a full year beginning in the month the HSA begins or pay a tax on the contribution plus 10% penalty.
Who owns the account?
The individual or the employee owns the account.
Who funds the account?
Both the employee and/or the employer are permitted to make contributions. If the employer contributes to the employee’s account, the contribution must be the same for all employees within each tier of coverage (single/family), but can vary based on employment status (part-time/full-time).
What is the tax treatment for contributions?
If contributions are made by the employee, it can be done by pre-tax payroll deduction, if the employer has a cafeteria plan in place. Employees can also make post-tax contributions and then make an “above the line” tax deduction on their 1040 form. Either option enables the employee to avoid paying taxes on their contributions.
If contributions are made by the employer, it is not taxable income to the employee (excluded from income), and the employer receives a tax deduction as a routine business expense.
Can the employer control the HSA funds?
No, the employer cannot control the HSA funds, even if they have made contributions to the account.
What constitutes preventive care?
Generally, a high-deductible health plan cannot provide benefits before the deductible is satisfied, but there is an exception for preventive care benefits. Benefits such as annual physicals, immunizations and screening services are preventive care for purposes of HSAs, as well as routine prenatal and well-child care, tobacco cessation programs and obesity weight-loss programs.
How can the HSA funds be used?
HSA distributions are tax free for qualified medical expenses as defined by §213(d) of the IRC. The funds can also be used to pay premiums for long-term care insurance, COBRA continuation, and health insurance while receiving unemployment compensation. Qualified expenses also include prescription drugs, qualified long-term care services, Medicare expenses (but not Medigap premiums), and retiree health expenses for individuals age 65 and older.
Can funds be used for non-medical expenses?
Funds used for non-medical purposes are included in gross income and therefore taxed, as well as subject to a 10% penalty. The only exception allowed is non-medical distributions for those individuals age 65 and over or who are disabled or deceased. Those distributions are included as taxable income but are not subject to the 10% penalty.
Are some types of health coverage permitted?
Specialty insurance including accident, disability, dental, vision and long-term care plans are all permitted alongside of HSA plans. Eligible individuals may also contribute to an HSA while covered by the following types of employer-provided plans:
- Limited purpose FSAs/HRAs that restrict reimbursements to certain permitted benefits such as vision, dental or preventive care;
- Suspended HRAs where the employee has elected to forgo health reimbursements for the covered period;
- Post-deductible FSAs/HRAs that only provide reimbursements after the minimum annual deductible has been satisfied and;
- Retirement HRAs that only provide reimbursements after an employee retires.
An employee is allowed a one-time rollover from an HRA or FSA as long as it is before 01/01/2012. Also allowed is one-time transfer from an IRA to an HSA. Rollovers cannot exceed the HSA contribution limit or excess contribution rules apply.
Does interest accrue?
Interest can be accrued tax free in qualified HSAs, depending on the bank or trustee holding the HSA funds.
Is the account portable?
Yes. Individuals own their HSA and take it when leaving employment, but the rollover must be completed within 60 days.
Is there a “catch-up” contribution provision for older workers?
Catch-up contributions for individuals who are 55 or older are increased by statute — for 2007 it is $800.
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