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1 HSA FAQs Get the answers you re looking for 1. What is a Health Savings Account (HSA)? 2. How is using an HSA like giving myself a raise? 3. Am I eligible for an HSA? 4. What happens if I don t use all of the money in my HSA by the end of the year? 5. How does it work? 6. How much money can I put into my HSA? 7. Can I ever contribute more than the annual maximum? 8. When can I start using the money in my HSA? 9. Is the money tax-free when I withdraw? 10. Will I get paid less every pay period if I enroll in an HSA? 11. When do I choose my contribution amount and can I change it at any time? 12. What expenses are covered under my HSA? 13. Are all over-the-counter drugs covered by an HSA? 14. What about vitamins, toothpaste, soap, and shampoo? 15. Is the mileage on my car ever covered? 16. Is the HSA the same as a Healthcare Flexible Spending Account (HCFSA) or Health Reimbursement Arrangement (HRA)? 17. Do I earn interest on the money I contribute? 18. Can I invest the money in my HSA? 19. Are the interest and investment earnings on my money tax-free as well? 20. What happens to my HSA contributions if I leave or am terminated from my job? 21. Instead of enrolling in an HSA, why shouldn t I just make these deductions on my income tax? 22. Are the pre-tax dollars I set aside for my HSA expenses subject to state taxes? 23. What is a real example of savings that could be earned from utilizing an HSA? 24. Can I continue to make deposits to my HSA if I am on COBRA? 25. What happens to my HSA if I no longer participate in an eligible high deductible health plan? 26. I would like to increase my HSA account balance to help cover healthcare expenses in the future. Can I move money from my other retirement accounts?

2 1. What is a Health Savings Account (HSA)? A Health Savings Account (HSA) is a special savings account that you open through a bank that works with a qualifi ed high deductible health plan (HDHP). If you are enrolled in a qualifi ed high deductible health plan (check with your employer to fi nd out), an HSA allows you to set aside money for healthcare-related expenses, including medical, dental, and vision. As long as you are enrolled in an HDHP, you can contribute to an HSA from your paycheck before taxes (if your employer offers payroll deduction) or taken out or via tax-deductible payments made directly to your account. 2. How is using an HSA like giving myself a raise? When you contribute to an HSA, the money that you contribute is deducted from your paycheck before it s taxed (if your employer offers payroll deduction). Because the money isn t taxed and since it s money you can use on healthcare expenses you d have to pay for anyway, you end up saving. That means you ll have more in your pocket for yourself. 3. Am I eligible to contribute to an HSA? You are eligible to contribute to an HSA if you are enrolled in a qualifying high deductible health plan. If you are in a health insurance plan with a high deductible, but are unsure if you qualify, talk to your employer. Because the HSA is a tax-favored account, there are rules about who can participate. You are not eligible to contribute to an HSA if you are covered by any other health insurance plan that is not a qualifying plan. This includes a medical plan that is not a qualifi ed HDHP or a traditional Flexible Spending Account, even through your spouse s employer. An exception to this is a Limited- Purpose FSA (LFSA), which does not interfere with HSA eligibility. You are also not eligible to contribute to an HSA if you are enrolled in Medicare or if you are claimed as a dependent on another person s tax return. You must be a U.S. resident who does not reside in Puerto Rico or American Samoa. And you are not eligible to contribute if you are on active military duty or if you are a veteran who received veteran s benefi ts within the last three months. 4. What happens if I don t use all of the money in my HSA by the end of the year? Your HSA money is yours to keep. If you don t use all of the money in your account during the year, it carries over to the next year. And, if you retire or leave your employer, your account goes with you. You can even use your HSA money if you enroll in a different type of health plan, but you can no longer contribute if you are not enrolled in an HDHP. 5. How does it work? If your employer sponsors an HDHP that you participate in, you can open an HSA and make contributions. You must actively open an HSA account, through your employer or on your own. Once you have an account, you can choose how much money you d like to automatically deduct from your paycheck each pay period (if your employer offers payroll deduction), to contribute to your HSA. You can also make tax-deductible lump-sum deposits to your HSA account, as long as the combination of your payroll deductibles and direct deposits do not exceed the maximum annual deposit limit for your family status. You can use your HSA money for you or any eligible tax dependent towards things like doctor visit co-pays or other healthcare expenses, including prescriptions and over-the-counter products. Reimbursement is easy. You can use a debit card or checkbook (depending on what your bank provides) to spend your HSA money on eligible expenses.there is also no time limit on when you can reimburse yourself for an expense. You also have the option of paying for your healthcare expenses out-of-pocket, allowing you to save your HSA money for future healthcare expenses.

3 6. How much money can I put into my HSA? It s to your advantage to contribute as much as possible to your HSA. Because, if you don t spend the money this year, you can save it for the future. The maximum amount you can contribute to your account each year is determined by the government and based on your coverage status (single or family). For 2008, if you have single coverage, the maximum contribution is $2,900, where those with family coverage can contribute up to $5,800. Some employers also contribute to their employees accounts. If your employer.contributes, you can contribute the difference to reach the maximum contribution determined by the government. Family members or any other person may also make contributions into your HSA, as long as the total annual contributions do not exceed the maximum contribution limit. If your spouse also has an HSA, then both of your HSA contributions cannot exceed the maximum HSA contribution for the year. As long as you are eligible to make HSA contributions for the last month of a given taxable year, you are considered eligible for the entire year and able to contribute up to the maximum annual amount into your HSA. However, you must also remain eligible to make HSA contributions (meaning you must continue to participate in an eligible high deductible health plan) for the remainder of that month and the following 12-month period. Anyone who does not remain eligible for this period of time will be taxed on the contributions that were made in the prior year, plus a 10% excise tax. As an example, if you were a new hire that enrolled in a qualifi ed high deductible health plan as of December 1 and contributed $1,000 to an HSA account prior to the end of the year, then decided to elect a different plan as of January 1 during open enrollment, the $1,000 contribution you made would be taxed as income and an additional 10% excise tax would be charged. This action would occur when you fi le your tax return for the prior year. 7. Can I ever contribute more than the annual maximum? Yes. Catch-up contributions are allowed. If you reach age 55 through 64 in 2008, you can make an additional annual contribution of $900. This amount is currently set to increase to $1,000 in If you cannot make catch-up contributions through your employer, they can be made as tax-deductible lump-sum payments to your account. 8. When can I start using the money in my HSA? As soon as the money is in your account, you can start using it. However, you can only withdraw up to the total amount in your HSA. If you have an expense that is more than the amount in your account, you can pay for it out-of-pocket and reimburse yourself later when additional money is in your account. 9. Is the money tax-free when I withdraw? Yes. Your money is not taxed if it is withdrawn for qualifi ed healthcare expenses. View a list of potentially eligible expenses, or talk to your Human Resources department for more details. 10. Will I get paid less every pay period if I enroll in an HSA? Your gross pay will remain the same. But your net pay will be lower because a portion of it will go into your HSA. The advantage is that this money gets put into your HSA account before taxes, which lowers your taxable income. So you get the advantage of saving money on healthcare expenses by paying fewer taxes.

4 11. When do I choose my contribution amount and can I change it at any time? If you are enrolled in an employer-sponsored HSA, you probably decide how much to contribute out of each paycheck during your employer s open enrollment period each year. However, you can generally change your contribution at any time. You can also make tax-deductible lump-sum payments to your account at any time before the federal income tax return fi ling deadline. For example, in 2008, you can begin contributing on January 1, 2008, and you can contribute any time before April 15, What expenses are covered under my HSA? Most healthcare expenses, including prescription drugs, can be paid for using your HSA money. You can also use your account to pay for many other qualifi ed medical expenses that are not covered by your health insurance plan. These include expenses such as over-the-counter medications and laser eye surgery. Some typical examples of HSA-eligible expenses are: Medical and dental deductibles and co-payments Eye exams, contact lenses, and glasses Prescription drug co-payments and co-insurance Over-the-counter (OTC) products Orthodontia or other dental care Physical therapy Chiropractic care Hearing aids Smoking cessation You may use the funds in your HSA for any other purpose however, income and penalty taxes will apply to the funds you withdraw. 13. Are all over-the-counter drugs covered by an HSA? No. Only medicines and products used for medical purposes are covered (not for cosmetic purposes or general health). Some eligible OTC items include medicines or products that alleviate or treat illness for you and your dependents (like TYLENOL Extra Strength), PEPCID COMPLETE, MOTRIN IB, IMODIUM A-D, etc.). 14. What about vitamins, toothpaste, soap, and shampoo? These items are not eligible because they are cosmetic in nature, or merely benefi cial to your general health (like soap and toothpaste). 15. Is the mileage on my car ever covered? Yes. Mileage for transportation to obtain medical care, such as a doctor s visit, is covered by your HSA plan. You can even deduct mileage to and from the pharmacy to pick up prescriptions. The mileage rate is announced each tax year. For 2010, it s $.165/mile. The government announces the per mile deduction rate each November for the next year.

5 16. Is the HSA the same as a Healthcare Flexible Spending Account (FSA) or Health Reimbursement Arrangement (HRA)? An HSA is not the same as a Healthcare Flexible Spending Account (HCFSA) or Health Reimbursement Arrangement (HRA). A Healthcare FSA is a reimbursement account offered by your employer. It saves you money by letting you use pre-tax dollars to pay for items not covered by your traditional health insurance plan. And you can access your entire year s worth of contributions at the start of your employer s benefi t plan year. IRS rules state that you forfeit any remaining money in your FSA if you do not use it all before the end of your plan year, which is December 31 for most employer plans. If you are eligible to contribute to an HSA, you cannot participate in an FSA. But you may have a special FSA, called a Limited-Purpose FSA (LFSA) available to you. LFSAs can only be used to pay for out-of-pocket expenses related to vision, dental, and qualifi ed preventive medical expenses. Visit our LFSA section for more info. An HRA is a medical expense reimbursement plan, in which only your employer may make contributions on your behalf. You may not make pre-tax contributions to an HRA. An HRA may be offered together with a health plan or on a stand-alone basis. The employer dictates what expenses are eligible under an HRA. HRAs are not portable, but they can be vested and remain available after employment terminates, at the discretion of the employer plan sponsor. 17. Do I earn interest on the money I contribute? In most cases, HSAs are interest-bearing accounts. Check with your bank to fi nd out if your account pays interest. 18. Can I invest the money in my HSA? Yes. Once your account balance reaches a certain level (determined by your bank), most HSA accounts allow you to invest your money in a variety of funds, similar to a 401(k). Check with your bank to fi nd out if your account offers investment options. 19. Are the interest and investment earnings on my money tax-free as well? Yes, as long as the money is used to pay for qualifi ed healthcare expenses. 20. What happens to my HSA contributions if I leave or am terminated from my job? Your HSA account is your account regardless of your employment situation. You can use the money to pay for healthcare expenses in the future even during retirement on a pre-tax basis. And, should you die, your account goes to your designated benefi ciaries. 21. Instead of enrolling in an HSA, why shouldn t I just make these deductions on my income tax? Claiming a tax return deduction is only benefi cial for people with substantial uninsured medical expenses. According to the IRS, only medical/dental expenses that exceed 7.5 percent of your adjusted gross income and not covered by insurance can be deducted from your income taxes. Most people do not have uninsured medical expenses high enough to qualify for this deduction. For example, if your adjusted gross income is $40,000, you could only deduct those uninsured medical/dental expenses in excess of $3,000 from your income taxes.

6 22. Are the pre-tax dollars I set aside for my HSA expenses subject to state taxes? Most states don t require you to pay taxes on your HSA contributions, but there are a few that do. Check with your employer or tax advisor to fi nd out if your state follows the federal guidelines. 23. What is a real example of savings that could be earned from utilizing an HSA? Here is a real example: Annual Tax Savings FSA No FSA If your taxable income is $50,000 $50,000 Employee pre-tax contribution to FSA account $2,000 $0 Taxable income after FSA contribution $48,000 $50,000 Federal income & social security taxes $12,096 $12,749 After-tax dollars spend on eligible expenses $0 $2,000 Available after tax income $35,904 $35,251 Savings with an FSA $653 $0 Assumptions: Annual maximum HSA contribution is set by the Federal Government each year Federal tax filing status of single $2,850 in annual HSA eligible expenses HSA 1 and HSA 2 assume employer contributes $1,000 into the employee s HSA This example is intended to demonstrate typical tax savings. Actual savings will vary based on individual tax situation and account contributions. Your specifi c savings will depend on your salary, how much you contribute into the HSA, your tax bracket, how you fi le your taxes (single, married, etc), your health, etc. Generally, participants save 15%-30% on eligible items purchased using their HSA dollars. 24. Can I continue to make deposits to my HSA if I am on COBRA? You may continue to contribute to your HSA while on COBRA if you continue to participate in an HSA eligible high deductible health plan. 25. What happens to my HSA if I no longer participate in an eligible high deductible health plan? You can continue to use the money in your account to pay for eligible healthcare expenses, regardless of the type of coverage you have. However, you cannot make additional contributions to the HSA during the period you are not participating in an HSA-eligible high deductible health plan. 26. I would like to increase my HSA account balance to help cover healthcare expenses in the future. Can I move money from my other retirement accounts? Yes. You are allowed a one-time rollover from an IRA account into an HSA account. The funds that you rollover will be protected from taxation, as long as you use those funds for qualifi ed health care expenses. This is an advantage over the IRA, as those funds are taxable upon distribution.you must handle this rollover on a trustee-to-trustee basis. You are limited to the annual maximum in effect for your level of coverage (single or family) at the time you make the rollover. If you have single coverage at that time, but within the same year change to family coverage, you do have the opportunity to make a second transfer and bring the annual maximum up to the family coverage level. But you must remain eligible to make HSA contributions during the month of the transfer and over the following 12 months. Otherwise, the transfer will be treated as ordinary income and will be subject to the 10% excise tax.

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