An Introduction to Health Savings Accounts (HSAs)

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1 An Introduction to Health Savings Accounts (HSAs) This document provides some basic information about Health Savings Accounts, including: HSA eligibility HSA contributions HSA distributions How the account works Other HSA issues It is designed to familiarize you with HSAs and is not intended to provide legal advice. Please consult your legal or tax counsel to ensure that you remain in compliance with HSA rules. Please consult your HSA trustee for specific information about services and fees. What is a Health Savings Account (HSA)? An HSA is a tax-advantaged fund you can set up to help pay for medical expenses or invest for future health care needs. In an HSA plan, you pay for all your covered expenses, except certain preventive expenses, until you reach your deductible. With most HSA plans, the cost of your prescription drugs applies toward your deductible. You can choose an HSA HMO or HSA PPO plan without setting up an HSA. HSA Eligibility If I enroll in a Best Buy HSA HMO 5000 or Best Buy HSA PPO 5000, am I automatically eligible to open and contribute to an HSA? No. You must meet IRS eligibility requirements to open and contribute to an HSA. The criteria (expanded on below) include the following: You must be enrolled in an HSA-qualified plan You can t have any disqualifying coverage You can t be someone else s tax dependent 1

2 If I m enrolled in Medicare, can I still open an HSA? No. If you are enrolled in any Part of Medicare, you can t open, or contribute to, an HSA. Typically individuals enroll in Part A (hospital insurance) when they re first eligible at age 65 (though enrollment is not mandatory). In that case, the individual wouldn t be HSA-eligible. If your spouse is enrolled in Medicare, that enrollment does not disqualify you, since Medicare issues individual policies only, and you cannot receive benefits through your spouse s Medicare policy. If you re enrolled in Medicare, but your spouse isn t, your spouse may be HSA-eligible. (Read further for additional eligibility information.) If so, you can remain the health plan subscriber, your spouse can open an HSA if your spouse is eligible, and you and your spouse can make contributions to your spouse s HSA. If I m enrolled in MaineCare (Medicaid), can I still open an HSA? No. However, as with Medicare above, your family members can be enrolled in MaineCare without affecting your HSA eligibility, since MaineCare issues only individual policies. If you re enrolled in MaineCare, but your spouse isn t, your spouse may be HSA-eligible. (Read further for additional eligibility information.) If so, you can remain the health plan subscriber, your spouse can open an HSA if your spouse is eligible and you and your spouse can make contributions to your spouse s HSA. If a family member (spouse, child) is enrolled in my medical plan and also enrolled in Medicare or MaineCare, can I still have an HSA? Yes, assuming that you meet all other eligibility criteria. Since Medicare and MaineCare issue only individual policies, you can t receive benefits through a family member s policy. If my spouse or I have a traditional Health Flexible Spending Account (FSA) at work, can I still have an HSA? No. IRS rules are very specific. If you re covered by a traditional Health FSA, you cannot open or contribute to an HSA. Even if your spouse has single medical insurance, a Health FSA automatically covers an employee, his or her spouse and dependent children. You can enroll in an HSA-qualified health plan, but you can t become HSA-eligible until the end of your spouse s Health FSA plan year. (Note: Your spouse cannot end Health FSA coverage prematurely by spending the entire balance or claiming a qualifying event. ) 2

3 If I access non-preventive care through a Department of Veterans Services (VA) facility, can I remain HSA-eligible? When you receive non-preventive care through a VA facility, you lose your eligibility for three full months after the month of service. Where can I learn more about HSA eligibility rules? The IRS issues IRS Publication 969 annually. This document (which you can access through an online search engine) provides comprehensive information about HSAs, including eligibility. HSA Contributions What is the tax treatment of my HSA contributions? Your contributions are deductible on your personal income tax return. You will need to file Form 1040 (not the simpler Form 1040A or Form 1040EZ). How much can I contribute to my HSA? The 2015 statutory maximum annual contributions, set annually by the IRS and adjusted for inflation, are: $3,350 for self-only coverage $6,650 for family coverage $1,000 additional catch-up contribution if you are age 55 or older at any point in 2015 How much can I contribute if I m the only person on my policy who s HSA-eligible? If you cover at least one other person on your insurance policy, you can make a family contribution even if that other person isn t HSA-eligible. Statutory contribution limits are based on the size of the contract, not how many people on the contract are HSA-eligible. My spouse is age 55 or older. Can he/she also contribute $1,000? Yes, if your spouse is HSA-eligible, he or she can make a catch-up contribution. Your spouse must open his or her own HSA, as current rules do not allow a spouse to make catch-up contributions into your HSA. If my spouse and I are both HSA-eligible, can each of us open HSAs and each contribute $6,650? No. The statutory maximum annual contribution for a family contract is $6,650 in If you and your spouse both have HSAs, you can split that total contribution between the two HSAs as you wish. If either of you is age 55 or older, you can put an additional $1,000 catch-up contribution into your respective HSAs as well. 3

4 How much can I contribute if I become HSA-eligible mid-year? You can take one of two approaches: Pro-rate your contribution based on the number of months that you were HSA-eligible on the first day of the month. In other words, if you enroll effective Nov. 1, you can contribute two-twelfths of your maximum contribution for your contract type (and two-twelfths of your catch-up contribution, if you re age 55 or older). Contribute up to the statutory maximum for your contract type and remain HSA-eligible through Dec. 31 of the following calendar year. This approach allows you to build your HSA balances and reduce your taxable income. The downside is that if you lose your eligibility before the end of the following year, any contribution in excess of the pro-rated amount is included in your taxable income. In addition, you pay a 10% penalty. How much can I contribute if I lose my HSA eligibility mid-year? You must pro-rate your contribution, based on the number of months that you were HSA-eligible (determined by the number of months during which you were HSA-eligible on the first day of the month). If you ve already exceeded that contribution level, you can withdraw excess funds (and any gains associated with those funds) without taxes due or penalties if you make the withdrawal before you file your personal income tax return. What s my deadline for contributing to my HSA? You must make all contributions by the earlier of (1) the date that you file your personal income tax return or (2) the due date, without extensions, for your personal income tax return. Generally, you must contribute by April 15 of the following year. Can I roll over funds from a retirement account into my HSA? Yes. You can make a one-time rollover from an IRA (and only an IRA) into your HSA. The rollover counts against your annual contribution limits. You must remain HSA-eligible for a full 12 months after you make the rollover. Otherwise, the rollover amount is included in your taxable income and you re assessed an additional 10% tax as a penalty. See IRS Notice for more information. If I reach a certain account balance, will I be prohibited from making additional contributions? No. You can contribute up to your annual maximum (the statutory maximum annual contribution for your contract type, less any pro-ration based on your not being eligible all 12 months, if applicable) regardless of your account balance. 4

5 Where can I learn more about HSA contribution rules? The IRS issues IRS Publication 969 annually. This document (which you can access through a search engine) provides comprehensive information about HSAs, including contributions. HSA Distributions Whose expenses can I reimburse from my HSA? You can reimburse your own, your spouse s and your tax dependents eligible expenses tax-free. Do these individuals have to be covered on my medical insurance policy for me to reimburse their eligible expenses tax-free? No. The list of individuals whose expenses you can reimburse tax-free from your HSA is not related to whom you cover on your insurance contract. Do these individuals have to be HSA-eligible themselves for me to reimburse their eligible expenses tax-free? No. Their relationship to you not whether they themselves are HSA-eligible determines whether distributions from your HSA for their eligible expenses are tax-free. Can I reimburse my domestic partner s eligible expenses tax-free from my HSA? No, you cannot reimburse your domestic partner s eligible expenses, even if your domestic partner remains covered on your health plan. Your domestic partner, if otherwise HSA-eligible, can open his or her own HSA. Your partner, you or anyone else can contribute. Your partner deducts all contributions on his or her personal income tax return. Can I reimburse my child s expenses tax-free if the child no longer qualifies as my tax dependent? No, you cannot reimburse your child s expenses, even if your child remains covered on your health plan. Your child, if otherwise HSA-eligible, can open his or her own HSA. Your child, you or anyone else can contribute. Your child deducts all contributions on his or her personal income tax return. How far back can I go in reimbursing expenses tax-free? You can reimburse any eligible expense tax-free as long the date as you incurred that expense (date of service) is on or after the day that you initially funded your HSA. That is, you can t use your HSA funds on expenses paid out prior to funding your HSA. 5

6 What expenses are eligible for tax-free distributions? Eligible expenses include services that diagnose or treat an injury, illness or condition. Common examples include: All medical plan cost-sharing (deductibles, copayments and coinsurance) Services in excess of the plan limits (additional outpatient therapy and chiropractic care, for example) Certain services excluded by the health plan (including hearing aids, orthotics and some complementary medicine) Dental services, including orthodontia, major services and fillings (but excluding teeth whitening and similar cosmetic services) Vision hardware, including prescription glasses and sunglasses, contact lenses and solution, and vision correction surgery Over-the-counter equipment and supplies (and over-the-counter drugs and medicine, but only with a valid prescription) Insulin and related diabetic supplies Medicare Part B and Part D insurance Medicare Part C (Medicare Advantage) premiums Certain Medicare supplement plans Long-term care insurance premiums (subject to IRS limits based on age) Where can I find a list of eligible expenses? The IRS issues IRS Publication 502 annually. This document (which you can access through an online search engine) provides comprehensive information about expenses that are and are not eligible, as well as which family members expenses can be reimbursed tax-free. Note: This document outlines the expenses eligible for the income tax deduction for medical expenses. The list is nearly identical to expenses eligible for reimbursement through an HSA. One notable exception is that medical premiums are not eligible for tax-free reimbursement through the HSA unless you re collecting unemployment benefits, continuing coverage through COBRA or buying traditional Medicare or certain Medicare supplement plans. Can I make distributions for expenses that aren t on the eligible list? 6

7 Yes. Distributions for non-eligible expenses are included in your taxable income. In addition, unless you re age 65 or disabled, you pay an additional 20% tax as a penalty. Do I face a reimbursement deadline? No. As long as you incurred the expense after you became HSA-eligible and after you made an initial deposit into your HSA, you can reimburse that eligible expense at any time in the future the following month or decades later. Do I need to submit paperwork to my HSA trustee (financial institution) to substantiate distributions? No. Your trustee won t ask you to prove that a distribution is for eligible expenses, since you can make withdrawals for any expenses (subject to income taxes and penalties for non-eligible expenses). You report activity to the IRS on your personal income tax return. Be sure to keep receipts in case the IRS audits your personal income tax return. How the Account Works What is an HSA trustee and what services does it provide? Your HSA trustee is a financial institution that will provide very similar services to the support that your bank or credit union offers for your checking account. Your trustee will account for all contributions to and distributions from the account. It will provide you with online access to your account and monthly statements (electronic or paper). Your trustee will provide some level of telephone customer service. What guidance does my HSA trustee provide? Trustees typically provide specific information about how their accounts work and general information about HSA eligibility, contributions and distributions. They don t provide legal or investment advice. 7

8 Will my HSA trustee help me with compliance? No. Your HSA trustee may provide you with some general information and direct you to certain online resources, but your trustee does not monitor whether you re HSA-eligible for a particular month, because your eligibility is dependent on a number of factors that your trustee doesn t know. calculate whether or not you re over contributing to your HSA, since you trustee doesn t know for which months you re actually entitled to make a contribution or whether you have self-only or family coverage. determine whether a distribution is for an eligible or non-eligible expense, since you re permitted to make distributions for expenses that are eligible (no tax implications) or non-eligible (included in taxable income and potential penalties). Does my HSA earn interest? Yes. Your HSA offers an FDIC-insured account that pays interest. Check with your HSA trustee to see your current interest rate. Can I invest HSA balances? Yes. Your HSA trustee will offer you investment options usually two to four dozen mutual funds. You determine whether and when you invest. Your investments are subject to market risk (so that your balances can increase or decrease with the performance of your underlying investments). Your trustee may set a minimum cash balance before you can begin to invest. How do I contribute to my HSA? Your HSA trustee will provide instructions for making personal contributions. Trustees generally accept electronic transfers, direct deposits and checks. How do I make distributions from my account? Your options will depend on what means your HSA trustee offers. Most give you a debit card. Some issue paper checks. Most have an online billpay option so that you can direct payment to your provider. 8

9 Other HSA Issues What happens to my HSA if I die? An HSA is a trust. You name a beneficiary to whom your assets pass. If you name your spouse, your spouse assumes ownership of the HSA and enjoys the same tax benefits that you did when you were alive. If the beneficiary is anyone else, your HSA is liquidated and the beneficiary receives the net proceeds (potentially subject to income tax) without the tax advantages or restrictions of an HSA. What happens to my HSA if I drop coverage? If you re no longer covered by an HSA-qualified plan (or no longer meet any other eligibility criterion), you can t make additional contributions for the months that you re not eligible. You maintain your HSA, though, and can carry your balance for future expenses (such as in retirement) or spend you balances on eligible expenses tax-free. What happens to my HSA if I have access to employer-based insurance in the future? If your employer offers an HSA-qualified plan, you can maintain your HSA, roll your balances into an HSA offered by your employer s chosen trustee or maintain multiple HSAs. If your new coverage isn t HSA-qualified, you can t make additional contributions to your HSA, but you can continue to make taxfree distributions for eligible expenses for the rest of your life. Does an HSA impact my future Medicare coverage? Maybe. If you don t enroll in Medicare Part B or Part D when you re first eligible, you must maintain Medicare-creditable coverage between the time that you turn 65 and when you ultimately enroll in Part B or Part D or both. Medicare-creditable coverage means that your insurance leaves the typical member with no more out-of-pocket expenses for services as Medicare itself. HSA-qualified plans with high deductibles ($3,000 or more for self-only coverage or $6,000 or more for family coverage) often fail to meet Medicare creditable coverage standards for prescription drug coverage. If you re enrolled in such a plan and you don t enroll in Medicare Part D at age 65, you ll pay an additional premium when you eventually enroll in Part D. The additional premium is 1% of the national base beneficiary premium ($33.15 in 2015, or an additional 33 cents for each month of non-creditable coverage a figure expected to rise in future years) for every month after you turned 65 that you didn t enroll in Part D. For example, if you delay enrollment for 24 months and are covered during that period by a plan that doesn t offer Medicare creditable coverage, you d pay an additional $8 premium (33 cents per month for 24 months of non-creditable coverage) Part D premium every month for the rest of your life 9

10 Is there a limit to balances that I can carry in my HSA? No. What are my responsibilities with respect to tax reporting? You will file Form 8889 with your personal income tax return. In this document, you indicate your total HSA contributions for the year and break out distributions between those for eligible expenses and noneligible expenses. The non-eligible expenses are included in your taxable income, and you re assessed an additional 20% penalty. Your HSA trustee sends you two forms to assist you in tracking your HSA activity: Form 1099-SA (sent by Jan. 31) reflects total distributions from your HSA. Your trustee doesn t attempt to determine whether the distributions are for eligible expenses. Form 5498-SA (sent by May 31, since you can contribute until April 15) reflects total contributions to the account during the prior tax (calendar) year and the current market value of the account. You won t receive this form in time to complete your income tax return, so you ll rely on your online account with your HSA trustee or your trustee s customer service representatives to provide you with an accurate contribution figure. 10