Health Savings Accounts or HSA Plans for Individuals and Employee Groups

HSA Accounts or HSA plans allow you to save money to pay for future medical expenses on an income tax-free basis. Any individual, who has an approved High Deductible Health Plan (HDHP) and who is not covered under another disqualifying health plan, can participate in an HSA. An employer can also offer Health Savings Accounts to his employees and both the employer and employees are allowed to contribute funds to the HSA. If offered in conjunction with a qualified Flexible Spending Account (FSA) commonly referred to as a cafeteria plan, savings in FICA and FUTA taxes as well as income taxes can be achieved.

An Insurance Policy and a Special Savings Account

An Health Savings Account is really a combination of a health insurance policy meeting minimum US Treasury policy design requirements called a High Deductible Health Plan (HDHP) and a separate custodial savings account for future medical expenses called a Health Savings Account (HSA). Congress created the HSA as a way to cover your future medical expenses, and it is subject to IRS regulations and guidelines. A health insurance company or an insurance plan usually provides the qualified health insurance policy. A licensed HSA administrator and financial services company, such as a bank, usually acts as the custodian and administers the savings account portion of the HSA.

The Health Insurance Plan Must Meet Certain Design Requirements

A qualified HSA plan usually has a single deductible that applies to all medical expenses covered by the insurance policy whether you are insuring yourself or an entire family. Some plans may be available with separate individual deductibles. This deductible must be satisfied each year before the insurance company pays on any medical claims. The single deductible for an individual must be a minimum of $1,100 and can be any deductible up to the maximum out-of-pocket limit of $5,600 (if the plan pays at the 100% level after the deductible) and the single deductible for a family must be at least $2,200 up to the maximum out-of-pocket limit of $11,200 (if the plan pays at the 100% level after the deductible) for the year 2008. Preventive care can be provided without having to meet the deductible first. The limits on maximum out-of-pocket expenses include both the deductible and any shared expenses you are obligated for. These limits are subject to annual cost-of-living adjustments determined by the IRS, which will cause these values to change over time. You can exceed the out-of-pocket limits if you go outside the provider network on a preferred provider plan. The plan still qualifies.

Yearly Savings Allowed in HSA Accounts Based on Annual Limit and Age

You can save up to the maximum contribution limit of $2,900 for an individual HSA and $5,800 for a family HSA regardless of the HDHP deductible for 2008. These limits are also subject to annual cost-of-living adjustments. Amounts are no longer pro-rated if you start the plan mid-year. You can now make the full year's contribution even if you start as late as December. Individuals age 55 to age 65 can contribute an additional $900 over the above limits in 2008 and the additional amount allowed increases by $100 each year until it reaches $1,000 in 2009. If both husband and wife are over 55, each can contribute the additional amount to an HSA. An HSA account is an individual account. With a family HSA, both a husband and wife can set up separate accounts, or one spouse can set up an account usually coupled with a beneficiary designation to the other spouse.

Other Types of Supplemental Coverage Are Permitted Along with HSA Accounts

You can have a policy covering a specific disease such as cancer, one providing a fixed payment for hospital coverage such as a daily benefit, or you can have one that provides supplemental accident, disability, dental, vision or long-term care benefits.

Use of HSA Funds to Pay Medical Expenses

Funds in an HSA account can be used to pay both medical expenses incurred in meeting the deductible and any required shared expenses you are responsible for each year tax-free. These funds can also be used to cover qualified medical expenses not covered by the health insurance plan such as vision and dental expenses. Funds in an HSA can be used for any family member's eligible medical expenses even though HSA accounts are individual accounts. See IRC Section §213 - Medical, dental, etc., expenses or IRS Publication 502 "Medical and Dental Expenses" for IRS rules on allowable expenses.

Savings Account Money Belongs to You and Can Be Accumulated

You own the HSA funds in your account. If you have an HSA as part of an employer sponsored health plan, you still own the funds, including any employer contributions, and can take them with you when you leave or retire. You can carry unused funds over from year to year until retirement, if you wish. Like an IRA, investment earnings accrue tax-free. If you withdraw funds prior to age 65 for non-medical expenses, you will be subject to a 10% income tax penalty in addition to any other income taxes you may owe on the accumulated funds. The 10% penalty is waived in the case of death or disability.

After age 65 you can continue to use the funds tax-free for medical expenses, long-term care expenses, Medicare Part B premiums, premiums on Medicare Advantage plans (not Medicare Supplements), Prescription Drug plans, long-term care premiums or you can withdraw the funds for other purposes subject to normal income taxes without a penalty. There are no requirements o start withdrawing funds at age 70 1/2 like required for an IRA.

Other Important Health Savings Accounts Contribution Considerations

If you also have an MSA Plan you total contribution to both plans cannot exceed the contribution limits discussed above for an HSA. Contributions are tax-deductible for the individual even if he does not itemize deductions on his tax return. Employer contributions are made on a pre-tax basis.

Transfer of Ownership to Spouse on the Death of An Individual

HSA ownership may transfer to an individual's spouse, upon death, on a tax-free basis.

Special One-Time Rollover Provisions

You are allowed a one-time rollover from a Health Reimbursement Arrangement (HRA) and Flexible Spending Account (FSA) into your HSA. You are also allowed a one-time rollover from an Individual Retirement Account (IRA) into your HSA.