Health Savings Account (HSA) FAQs

How does an HSA work?

What are the deductible & out-of-pocket expense limits?

What are the annual contribution limits?

What about catch-up contributions for those 55 & older?

What is the tax treatment of an HSA?

How are contributions handled if I have my spouse covered?

How is an aggregate deductible different from an embedded deductible?

What expenses qualify for reimbursement from my HSA?

Do my HSA contributions have to be made in equal amounts each month?

How do HSAs differ from Flexible Spending Accounts (FSAs)?

Can my HSA be used for dependents not covered by the health insurance?

What if I establish my HSA account at the middle or end of the calendar year?

Can I use my HSA for non-medical expenses?

What happens to my HSA upon my death?

Can I make a Rollover from an IRA into an HSA?

What type of reporting am I responsible for with the IRS?

Once I turn 65, what happens to the money in my HSA?

Are health insurance premiums eligible under my HSA?

How does an HSA work?

An HSA works in conjunction with high deductible health insurance. Your HSA money can be used to help pay the health insurance deductible and qualified medical expenses not covered by the health insurance, including dental and vision. Your HSA account earns tax-free interest and, in some plans, can be used for different types of investments such as mutual funds or money market accounts.  An HSA is typically administered by a bank as trustee or custodian. 

If your employers offers a Section 125 plan (also known as a “cafeteria plan”) that allows you to contribute to your HSA account through payroll deductions, you will avoid paying the employee share of the federal & FICA tax on the amount you contribute.  You also will reduce your tax liability and payments.

What are the deductible & out-of-pocket expense limits?

Each year new minimum deductibles and out-of-pocket HSA Limits are set to reflect the cost of living.    

What are the annual contribution limits?

Federal law limits annual contributions.  The amount allowed is subject to the HSA Limits for that year.  The new limits will be published by the Treasury Department  June 1st of the previous year.   Prior to 2007, annual contribution maximum was limited to the lesser of the HDHP deductible or the statutory contributory amount.

What about catch-up contributions for those 55 & older?

For 2009 and forward the catch-up contributions for individual 55 & over is $1,000.    If both spouses are 55 and older, each spouse is eligible to contribute to an HSA in their own name.  If only one spouse has an HSA in their name, only that spouse can make a catch-up contribution.  

What is the tax treatment of an HSA?

An HSA is generally exempt from tax (like an IRA), unless it ceases to be an HSA.   Also, if your employer makes a contribution to your HSA, the contribution is not taxable to you.    Like funds in an IRA, the money in your account grows free from federal taxes.  You do have to pay taxes if the money is withdrawn for medical expenses.

How are contributions handled if I have my spouse covered ?

Assuming that neither spouse qualifies for catch-up contributions, the following examples describe how much can be contributed under varying circumstances.

How is an aggregate deductible different from an embedded deductible?

Many HSA plans have what is referred to as an aggregate deductible, which means there is one large family deductible that must be met before anyone in the family is covered. (I.E. If a family deductible is $5,000, there must be $5,000 in claims paid out of the client's pocket before any family member is covered.)  Essentially for employees covering dependents, the entire family deductible must be satisfied by one family member or the combined (aggregate) of the entire family before any one family member can receive benefits. 

With an embedded deductible each covered family member only needs to satisfy his individual deductible, not the entire family deductible, prior to receiving plan benefits.  This is only possible if the embedded deductible is equal to at least the required HSA family deductible for that years HSA Limits.  An embedded deductible has a family deductible however, embedded within it is an individual deductible. Embedded deductibles are what people are generally used to when they have a traditional PPO health plan.

What expenses qualify for reimbursement from my HSA?

Most expenses for medical, dental and vision care will be reimbursed under your HSA with some exceptions such as cosmetic surgery and health club dues. A list of reimbursable expenses is available on the IRS Web site, www.irs.gov.

Do my HSA contributions have to be made in equal amounts each month?

No, you can contribute in a lump sum or in frequency you wish.  The deadline for contributions to an HSA is generally April 15th (without extensions) following the year for which the contributions are made.  However, your account trustee/custodian can impose minimum  deposit and balance requirements. 

How do HSAs differ from Flexible Spending Accounts?

Unlike a Flexible Spending Account, unused money in your HSA isn’t forfeited at the end of the year; it continues to grow, tax-deferred. HSA contributions are always yours to keep.

Can my HSA be used for dependents not covered by the health insurance?

Generally speaking, it can be used to pay for the unreimbursed medical expenses of your spouse or your legal dependents.  A Health Savings Account (HSA) can be used to pay for "qualified medical care expenses" of:  The insured, His or her spouse, or dependent children.   There is no requirement that these family members be covered under the plan.

What if I establish my HSA account at the middle or end of the calendar year?

Beginning 2007 an individual who enrolls mid-year in an HSA can contribute up to the full contribution limit for the year rather than just the prorated amount for the calendar year.   However, if you cease to maintain eligibility for the 12 months following enrollment, the amount over the pro-rated contribution is included as income and subject to a 10% penalty.  However, medical expenses incurred before the date the HSA is established cannot be reimbursed from the account. 

Can I use my Health Savings Account for non-medical expenses?

Yes, but you have to pay income tax and a 10% penalty for a non-medical withdrawal prior to age 65.  At age 65, you only pay income tax on the amount of the non-medical withdrawal. 

What happens to my HSA upon my death?

Upon death, the remaining balance in an HSA is included in the account holder's gross estate for estate tax purposes.  If the beneficiary of the account is a surviving spouse, the HSA belongs to the spouse and he or she can deduct the account balance in determining the account holder's taxable estate.  If the beneficiary is someone other than the spouse, the HSA ceases to exist, and the beneficiary must include the fair market value of the account in his or her gross income for tax purposes.  If no beneficiary is named, the tax is payable by the estate or the beneficiary of the estate.

Can I make a Rollover from an IRA into an HSA?

The Tax Relief and Health Care Act of 2006 (HR 6111) was designed to improve Health Savings Accounts (HSAs).   These changes are significant and could make it more attractive for plan sponsors to offer HSAs, and more attractive to plan members to choose them.  One of the provisions included in HR 6111 permits a one-time tax-free irrevocable rollover from an IRA into an HSA through a trustee to trustee transfer.  The amount of the rollover cannot exceed the annual H S A contribution limit (which varies depending on whether person has self-only or family HDHP coverage).   Important Note:  Failure to maintain eligibility for the H S A contributions for a period of 12 months following the IRA transfer would result in income tax and a 10% penalty on the transfer. 

What type of reporting am I responsible for with the IRS?

Tax reporting is required for the HSA. IRS form 8889 must be completed with your tax return each year to report total deposits and withdrawals from your account.  As the HSA account holder, you are responsible for ensuring that distributions are used for qualified medical expenses. Records of medical expenses should be maintained as evidence that distributions have been made for these purposes. Qualified medical expenses may only be reimbursed, tax-free, if the expenses are incurred after the date your HSA account was established. You are responsible for ensuring that your annual HSA contributions do not exceed IRS limits

Once I turn 65, what happens to the money in a Health Savings Account?

Once you hit 65, you can continue to use your account tax-free for out-of-pocket health expenses.  If you enroll in Medicare, you can use your account to pay Medicare premiums, deductibles, copays, and coinsurance under any part of Medicare.  If you have retiree health benefits through your former employer, you can also use your account to pay for your share of retiree medical insurance premiums.  The one expense you cannot  use your account for is to purchase a Medicare supplemental insurance policy or "Medigap" policy. 

Once you turn age 65, you can also use your account to pay for things other than medical expenses.  If used for other expenses, the amount withdrawn will be taxable as ordinary income but will not be subject to any other penalties.  Individuals under age 65 who use their accounts for non-medical expenses must pay income tax AND a 10% penalty on the amount withdrawn. 

Are health insurance premiums eligible under my HSA?

Generally, health insurance premiums are NOT "Qualifying Medical Care Expenses" except for the following:

• Qualified long-term care insurance.
• COBRA health care continuation coverage.
• Health care coverage while an individual is receiving unemployment compensation.
• In addition, for individuals over age 65, premiums for Medicare A or B, Medicare HMO, and the employee share of premium for employer-sponsored health insurance.
• Premiums for Medigap policies or Life insurance policies are NOT qualified medical expenses.