UMB Healthcare Services HSA FAQ Resource Library

Transcription

1 UMB Healthcare Services HSA FAQ Resource Library This FAQ document gives you easy answers to your clients most common Health Savings Account (HSA) questions. Simply click the question below and it will take you to the answer. You can easily copy and paste answers for your own use; however, please be sure to include the complete answer, because a partial answer may change the context. Disclaimer: Neither UMB Bank n.a., nor its parent, subsidiaries, or affiliates are engaged in rendering tax or legal advice and this document is not intended as tax or legal advice. All mention of taxes is made in reference to federal tax law. States can choose to follow the federal tax-treatment guidelines for HSAs or establish their own; some states tax HSA contributions. Please check with each state s tax laws to determine the tax treatment of HSA contributions, or consult your tax adviser. Additional federal and state forms may be required. Question Index Section 1: General Overview... 8 Q1: What is a Health Savings Account (HSA)? Q2: What is an HSA-qualified High Deductible Health Plan (HDHP)? Q3: What are the advantages of an HSA? Q4: How do HSAs work? Q5: Who can serve as an HSA trustee or custodian? Q6: Is money safe in the UMB HSA? Q7: Are assets in an HSA protected from bankruptcy (any type), similar to how assets in a 401(k) or pension plan are protected? Q8: Does an employee s HSA receive interest? Q9: Why should an individual consider enrolling in the HDHP with an HSA? Q10: Does an HSA have to have money in it before it can be used to pay a provider? Q11: Does an employer need to create an HSA plan document? UMB Healthcare Services is a division of UMB Financial Corporation. UMB Reg. U.S. Pat.& Tm. Off. Funds in an HSA Deposit Account are held at UMB Bank, n.a., Member FDIC. High-Deductible Health Plans constitute insurance products, which are not offered by UMB Bank, n.a. and are not FDIC-insured.

2 Section 2: HSA Eligibility Q12: Who is eligible for an HSA? Q13: Can an individual be covered by another health plan and still be eligible for an HSA? Q14: Can an individual open an HSA and also enroll in a health care Flexible Spending Account (FSA) with his or her employer? Q15: What is a limited purpose FSA (Flexible Spending Arrangement)? Q16: How is an HSA different than an FSA? Q17: What other types of health coverage (permitted coverage) can be maintained without losing eligibility for an HSA? Q18: May a husband and wife have a joint HSA? Q19: If an HDHP medical plan covers domestic partners, are domestic partners eligible to open an HSA? Q20: If an individual has Veteran benefits, can they have an HSA? Q21: What happens to the money in an HSA if HDHP coverage is no longer maintained? Section 3: Establishing an HSA Q22: How is an HSA established or opened? Q23: How much does an HSA cost? Q24: Can an HSA accountholder title his or her account in the name of a trust? Q25: What is the extent of responsibility for an employer to communicate employees rights on the HSA at termination (or if the employer drops the HSA benefit program)? Q26: Does UMB provide statements? Q27: Does the HSA have a debit card to access funds? Q28: When asked by a merchant or directed by a point-of-sale system to choose a payment method, should debit or credit be selected? Q29: What if the card doesn t work at the point of sale or the cashier says the transaction has been declined? Q30: Can an individual request a duplicate card for other family members? Q31: What should be done if the card is lost or stolen? 2

3 Section 4: HSA Contributions Q32: How does an individual contribute to their HSA? Q33: Who may contribute to an HSA? Q34: In what form may contributions be made to an HSA? Q35: What is the dollar amount of HSA contributions allowed each year? Q36: Can individuals make their entire contribution to the HSA at the beginning of the year? Q37: Can a contribution made in December be applied to the following tax year? Q38: If an individual already has an HSA set up through a former employer, can the new employer contribute to that HSA? Q39: If an employer gives the full employer contribution early in the plan year, what happens if the employee leaves/is terminated? Q40: Can an employer take their contributions made in error out of an HSA? Q41: If an HDHP is on a plan year (starts on a date other than January 1) how does that work with HSA contribution maximums? Q42: What is meant by the IRS testing period? Q43: What does the Special Rule Last Month Rule mean? Q44: How does a spouse s health coverage impact contribution limits? Q45: How does a domestic partner s health coverage impact contribution limits? Q46: How does turning age 55 affect an HSA (catch-up contributions)? Q47: If both spouses are 55 and older, are two catch-up contributions allowed? Q48: How do contributions work if both spouses have individual HSAs? Q49: Can contributions be made if an individual is still working but enrolled in Medicare? Q50: Are employers required to make contributions to the HSAs of independent contractors, even if they are covered by the company s High Deductible Health Plan? Q51: How are contributions treated for owners and shareholders of S corps? Q52: How are contributions treated for partners in a partnership or limited liability company (LLC)? Q53: May a self-employed person contribute to an HSA on a pre-tax basis? Q54: What about an unemployed person, can they contribute to an HSA? 3

4 Q55: Can HSA contributions be made by employers the same way they can with a Health Reimbursement Account (HRA)? Reimbursing through employee statement benefits? Section 5: Cafeteria Plans, Comparability and Discrimination Issues Q56: What are the rules regarding contributions made by an individual s employer? Q57: Are HSAs allowed under a Section 125 Cafeteria Plan? Q58: Is comparability only applicable to non-section 125 Cafeteria Plans? Q59: Can an employer allow an employer to elect an HSA mid-year if offered as a new benefit under the employer s Cafeteria Plan? Q60: Can employers provide different contribution amounts to different employees in an HSA? Q61: Can an executive only HSA contribution plan for executives be offered? Q62: Can an employer, inside a Section 125 plan, do an HSA matching contribution for all employees similar to a 401(K) match, with a minimum/maximum amount so not to allow a discriminatory effect in favor of highly compensated who can afford to contribute higher amounts? Section 6: Wellness Incentive Contributions to an HSA Q63: Can an employer offer incentive dollars to an employee s HSA for participating in a health improvement program (such as smoking cessation)? Would this cause any concerns with comparability rules (since not all employees smoke)? Q64: How would an employer design wellness incentives into an HSA without violating discrimination rules? Q65: Can an employer tie health/wellness incentives to medical outcomes (i.e. meeting/exceeding specific biometric screening results)? Q66: Can an employer fund a select group of employees who choose to participate in a wellness program (i.e. a 12 week weight loss program prescribed by a physician at a local YMCA)? Section 7: HSA Rollovers and Transfers Q67: Are rollover contributions to HSAs permitted? Q68: What are the rules regarding rollovers and transfers of HSA funds? Q69: What are the rules regarding the rollover of IRA funds into an HSA? 4

5 Section 8: Distributions from an HSA Q70: When can an HSA accountholder take distributions from an HSA? Q71: What expenses are considered qualified medical expenses? Q72: When is an individual subject to the 20 percent premature distribution penalty tax? Q73: Do the HSA funds have to be used by the end of the year? Will the funds be lost if not used by the end of the year? Q74: Will the employer or UMB ask for receipts? Q75: How does the IRS know that the distributions from the HSA are used for qualified expenses if UMB or the employer is not responsible for substantiation? Q76: How long does an accountholder have to request a reimbursement for qualified medical expenses? Q77: How does the HSA track the deductible on the HDHP? Q78: Can an individual use HSA funds to pay insurance premium expenses? Q79: How does an individual get their money out of their HSA to pay for qualified medical expenses? Q80: What does it mean to establish an HSA? Q81: What if the individual had an HSA before opening a UMB HSA? What is the HSA establishment date then? Q82: If the HSA is already established but not fully funded, can future contributions be used to pay for expenses incurred after the HSA was established? Q83: Is the HSA established the same date the HDHP is effective? Q84: What if an individual has medical expenses that are more than the amount of money they have in their HSA? Q85: Is UMB, as custodian, responsible for determining whether HSA distributions are used for medical expenses? Q86: Can an individual use the money in their HSA for tax dependents even if they are not covered by the accountholder s insurance plan? Q87: Can HSA funds be used to pay for medical expenses incurred by a child under the age of 26 and covered by the accountholder s HDHP even though the child is not claimed as a dependent on the accountholder s tax return? Q88: What are the rules that apply to an HSA pursuant to a divorce decree? Q89: How is a child of divorced or separated parents treated relative to qualified medical expenses? 5

6 Q90: What are the HSA guidelines regarding disbursement from the HSA for domestic partners? Q91: What happens if an HSA distribution is made as the result of a factual mistake? Q92: What happens if an individual withdraws money from their HSA to pay a medical bill, but is later reimbursed by their insurance company for that medical expense? Section 9: HSAs and Medicare Q93: What happens when an individual become eligible for Medicare? Q94: If an individual is still employed and has health insurance through his or her employer, is it a requirement that the individual also enroll in Medicare? Q95: What happens after an individual enrolls in Medicare? Q96: What happens to the money in an HSA after the accountholder turns 65? Q97: How does enrollment in Medicare affect the individual s spouse? Q98: What happens to an individual s HSA if they become disabled? Q99: Where can an individual go for more information about HSAs and retirement? Section 10: Death of an HSA Accountholder Q100: What happens to the HSA upon an accountholder s death? Q101: What are the tax consequences of HSA distributions following the death of the accountholder? Q102: If the account beneficiary of an HSA is the surviving spouse, may the spouse make contributions to the account? Section 11: Tax Treatment of HSAs Q103: What are the tax implications for participating in an HSA? Q104: What is the tax treatment of an eligible individual s HSA contributions? Q105: What does it mean to make a post-tax contribution? What does the tax payer need to do when filing their income tax return? Q106: What does it mean to make a pre-tax contribution? What does the tax payer need to do when filing their income tax return? Q107: What does the employer need to report if they make contributions to the HSA or allow employees to make payroll contributions on a pre-tax basis? Q108: Do the tax benefits phase out at certain income levels? 6

7 Q109: Do contributions to an HSA in any way affect an individual s ability to contribute to an individual retirement account (IRA)? Q110: When is the deadline for contributions to an HSA for any particular year? Q111: What happens when HSA contributions exceed the amount that may be deducted or excluded from gross income (excess contributions)? Q112: Who is responsible for determining the amount of eligible contributions? Q113: When will UMB return excess contributions? Q114: If an employer has a qualified HDHP which an employee is eligible for but does not participate in because they receive benefits through their spouse s employer s plan, can they still take part in an HSA? Q115: What information does UMB report to the IRS? Q116: What information is provided by UMB to help accountholder tax filings? Q117: How is a rollover treated? Q118: What is the tax treatment of earnings on amounts in an HSA? Q119: If administration fees are withdrawn from the HSA, are the withdrawn amounts treated as taxable distributions to the accountholder? Q120: If administration and account maintenance fees are withdrawn from the HSA or paid by the accountholder or employer directly to UMB, does the amount withdrawn or paid for these fees increase the maximum annual HSA contribution? Q121: Are there any tax consequences to pledging the HSA as security for a loan? Q122: What happens if an accountholder receives an HSA distribution as the result of a mistake of fact due to reasonable cause? Q123: What medical expenses are eligible for tax-free distributions from an HSA? Q124: Where can an individual go for more information about the tax treatment of HSAs? Q125: Is it possible to have both an MSA and an HSA or more than one HSA? If so, how are contribution maximums affected? Q126: Can an MSA be rolled over to an HSA? How does that affect taxes and annual limits? Q127: If UMB converts an MSA to an HSA and funds are not withdrawn in the process, is this considered a rollover or a trustee-to-trustee transfer? Is the amount reported on the 5498-SA? Q128: Does UMB distinguish between employee and employer contributions for MSAs? Q129: Is UMB responsible for tracking a maximum limit on contributions to MSAs and HSAs? 7

8 Answers Section 1: General Overview Q1: What is a Health Savings Account (HSA)? An HSA is a tax-exempt trust or custodial account created for the purpose of enabling consumers to save money by paying for qualified medical expenses in connection with a High Deductible Health Plan (HDHP) with pretax dollars. An HSA helps an individual set aside money for current and future qualified health care expenses that aren t covered by their medical plan. An HSA is an individually-owned account and is portable. This means that the funds are available from year to year and belong to the account holder. This is true even if an individual changes employers or leaves the work force. There is no use it or lose it, so the HSA funds stay with the accountholder rather than reverting back to their former employer like a Flexible Spending Account (FSA) and most Health Reimbursement Accounts (HRA). UMB HSAs are custodial accounts consisting of all funds the individual and their employer contributes to the HSA, including all eligible investments the accountholder makes and all earnings on the funds. Q2: What is an HSA-qualified High Deductible Health Plan (HDHP)? An HSA-qualified HDHP is a health plan that meets the requirements as specified and published annually by the U.S. Treasury Department. 1. The plan must have a minimum annual deductible. The IRS specifies a minimum deductible for individuals with self-only coverage and individuals with family coverage (more than one covered under the HDHP). All medical and prescription expenses must be subject to the annual deductible, with the exception of preventive care which may be covered at 100 percent with no deductible. 2. The annual out-of-pocket expenses such as deductibles, co-payments and other expenses paid for by the HDHP participant may not exceed the IRS specified out-of-pocket maximums. The out-of-pocket limit does not include premiums or amounts incurred for non-covered benefits (such as amounts in excess of usual, customary and reasonable amounts, and financial penalties). Q3: What are the advantages of an HSA? The HSA offers advantages to both employers and individuals. One of the biggest benefits to both employers and individuals is the tax savings. Employer advantages: 1. Employers do not have to pay payroll taxes on employee HSA contributions, typically 7.65 percent of the amounts paid plus state unemployment taxes (where applicable). 2. Employer HSA contributions are tax deductible by the employer as an employee benefit, meaning the employer receives a business deduction as a normal business expense. Individual (Employee) advantages: 1. Triple tax advantage: a) Contributions both the employer and employee make to the HSA can be tax-free for the employee. b) Interest and investment earnings on an employee s HSA balance are not taxed. 8

9 c) Withdrawals used to pay for qualified medical expenses are not taxed. 2. The HSA allows individuals to save for current and future medical expenses, meaning the funds are held in the account year over year and are available when needed for current qualified medical expenses or future expenses. 3. The HDHP premiums are usually lower, and savings can be used to fund the HSA. Note: Neither UMB Bank, n.a., nor its parent, subsidiaries, or affiliates are engaged in rendering tax or legal advice. All mention of taxes is made in reference to federal tax law. States can choose to follow the federal tax-treatment guidelines for HSAs or establish their own; some states tax HSA contributions. Please check with each state s tax laws to determine the tax treatment of HSA contributions or consult your tax adviser. Additional federal and state forms may be required Q4: How do HSAs work? An individual who has an HSA and who is eligible to contribute to an HSA chooses how much they would like to contribute into their HSA each year, up to the annual maximum allowed by the IRS. Contributions can be made directly to UMB or through the employer by electing payroll deductions. Some employers also fund their employees HSAs. Individuals choose to pay for current eligible medical expenses with their HSA, or they pay for current expenses out of their pocket and save their HSA to pay for future medical expenses. When to use the HSA is entirely up to each HSA accountholder. Q5: Who can serve as an HSA trustee or custodian? Any bank can be an HSA trustee or custodian. In addition, any other entities already approved by the IRS to be trustees or custodians of IRAs are automatically approved to be HSA trustees or custodians. Q6: Is money safe in the UMB HSA? The money in a UMB HSA Deposit Account is FDIC insured*. Once an individual accountholder has $1,000 saved in the HSA, known as the peg balance 1, they have the opportunity to make additional investments that carry with them various levels of risk and reward similar to investing in a retirement savings plan 2. *Funds held in the HSA Deposit Account are FDIC insured to the maximum amount permitted by law. 1 A peg balance (currently $1,000) is set to determine the amount of money that moves in and out of the money market mutual fund. Funds in your HSA up to the $1,000 peg balance are a deposit in an FDIC-insured account. Funds in excess of $1,000 are an investment in a money market mutual fund that is not insured by the FDIC or any other governmental agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. 2 Investments you make through your HSA are not FDIC-insured. Securities through your self-directed HSA brokerage account are offered through UMB Financial Services, Inc., member FINRA (finra.org), SIPC (sipc.com). UMB Financial Services, Inc. is a subsidiary of UMB Bank, n.a. UMB Bank, n.a. is a wholly owned subsidiary of UMB Financial Corporation. UMB Financial Services, Inc. is not a bank and is separate from UMB Bank, n.a. and other banks. Investments in securities, whether through the Money Market Sweep Account or through the Self-directed Brokerage Account are: Not FDIC-Insured May Lose Value No Bank Guarantee 9

10 Q7: Are assets in an HSA protected from bankruptcy (any type), similar to how assets in a 401(k) or pension plan are protected? Each state establishes their own regulations for bankruptcy, and unless there is a federal exemption, the assets are subject to the laws governing the state where the accountholder resides and files for bankruptcy protection. There is no federal protection or exemption for HSA assets. Q8: Does an employee s HSA receive interest? HSAs can receive interest. Some administrators do not pay interest, but UMB does. The current annual percentage rates of interest can be obtained by an accountholder through online banking or by calling UMB Customer Service at Interest is credited to the Deposit Account at the end of each month and is compounded monthly. UMB uses the daily balance method to calculate interest. This method applies a daily periodic rate to the balance in the Deposit Account each day. Interest begins to accrue no later than the business day UMB receives credit for the deposit. Q9: Why should an individual consider enrolling in the HDHP with an HSA? If one or more of the following are true, an individual may want to consider making a change to an HDHP with an HSA: They are paying for insurance they are not using. They want an option to save for current and future medical expenses. They want to save on monthly premiums They anticipate major health expenses that would reach the out-of-pocket maximum associated with the HDHP. Q10: Does an HSA have to have money in it before it can be used to pay a provider? The HSA is a personal bank account in the accountholder s name. As such, just like a checking account, the funds must be in the account before it is available to be used to pay for any expense. Q11: Does an employer need to create an HSA plan document? The HSA is not a health plan and not subject to ERISA, so there is no benefit plan document for the HSA. However, employers that allow employees to make pre-tax payroll HSA contributions must create (or amend an existing) Section 125 Cafeteria Plan. The Section 125 plan document or amendment must state that employees are allowed to elect pre-tax payroll deductions to be contributed to their HSA and indicate how often the employee can make changes to that election. The law requires that employers allow employees to prospectively change their pre-tax HSA elections at least monthly during the plan year. UMB recommends employers review all these issues with their legal counsel. Note: The combined total of employer HSA funding and employee pre-tax HSA contributions are subject to the IRS Section 125 non-discrimination rules. When you click this link you will go to a Web site that is not controlled by or affiliated with UMB. We have provided this link for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other Web sites may not follow the same privacy policies and security procedures that UMB does so please review their policies and procedures carefully. 10

11 Section 2: HSA Eligibility Q12: Who is eligible for an HSA? An eligible individual may establish an HSA. An eligible individual means, with respect to any month, an individual who: is covered under an HDHP as of the first day of the month; is not also covered by any other health plan that is not an HDHP (with certain exceptions for certain types of permitted coverage(s), as discussed more fully below); is not entitled to Medicare benefits; and is not claimed as a dependent on another person s tax return. Q13: Can an individual be covered by another health plan and still be eligible for an HSA? Except as provided below related to permitted coverage(s) an individual is ineligible to make or receive HSA contributions if he or she is covered under another health plan (even as a spouse or dependent) that is not an HSA-qualified HDHP. Q14: Can an individual open an HSA and also enroll in a health care Flexible Spending Account (FSA) with his or her employer? Employees cannot enroll in both an HSA and a health care FSA. If the employee is married, he or she may not make contributions to an HSA while covered by their spouse s FSA. The employee can only have a limited purpose FSA, if one is offered. Eligible expenses with a limited purpose FSA include most unreimbursed dental, vision and/or hearing care expenses (including expenses for dependents), and possibly out-of-pocket medical expenses incurred after the HDHP statutory minimum deductible has been met. Q15: What is a Limited Purpose Flexible Spending Account (LPFSA)? The most common LPFSA allows an individual to set money aside on a pre-tax basis (via payroll deduction) to pay for out-of-pocket dental and vision expenses. An employee could use their HSA to pay for dental and vision expenses, but by fully funding the HSA and funding the LPFSA to pay for this year s dental and vision expenses, the employee will maximize their tax savings while preserving the HSA balance for the future. Q16: How is an HSA different than an FSA? The main difference between an FSA and an HSA is that the FSA is a spending account and the HSA is a savings account. The IRS makes that distinction because the employee is expected to spend the money they have set aside in their FSA within the plan year (plus an optional two and half month grace period) or forfeit any funds not spent. This is otherwise known as the use it or lose it rule. By contrast, the HSA rules allow an individual to save their money until they need it, even if that isn t until many years later. HSA unused or saved funds do not go away at the end of the year but remain available to the accountholder year over year. There are many other similarities and differences as outlined in this comparison chart. 11

12 Q17: What other types of health coverage (permitted coverage) can be maintained without losing eligibility for an HSA? An individual remains eligible for an HSA if, in addition to an HDHP, they have any one or more of the following permitted coverage(s): Insurance where substantially all of the coverage relates to liabilities from workers' compensation laws, torts, or ownership or use of property (such as automobile insurance). Insurance for a specified disease or illness, such as a cancer policy. Insurance that pays a fixed amount per day (or other period) of hospitalization. Coverage (whether through insurance or otherwise) for accidents, disability, dental, vision or longterm care. Coverage under an Employee Assistance Program (EAP). A discount card for health care services or products at managed care market rates. Q18: May a husband and wife have a joint HSA? The IRS specifies that HSAs must be individual accounts. Therefore, spouses cannot have a joint HSA. Each spouse who is an eligible individual who wants an HSA must open a separate HSA. However, funds from either spouse s HSA can be used to pay for the expenses of the other spouse if they both meet the eligibility guidelines. The combined annual contributions for both spouse s HSAs cannot exceed the annual family maximum. If either or both spouses are more than age 55 but not yet enrolled in Medicare, they can each contribute an additional $1,000 to their HSA. This catch-up contribution must be contributed to the individual s HSA that is 55 or older. See Section 4: HSA Contributions for more details. Q19: If an HDHP medical plan covers domestic partners, are domestic partners eligible to open an HSA? The same eligibility rules apply to a domestic partner as anyone else related to opening an HSA. If the domestic partner meets the HSA eligibility requirements, he or she would be eligible to open an HSA. Furthermore, since domestic partners are not considered spouses by the IRS, domestic partners are considered to be two unattached individuals, and each would have their own HSA contribution limit if they both have HSAs. However, domestic partners can t use their HSA to pay for their partner s health expenses, unless they claim their partner as a federal tax dependent. Individuals should seek tax guidance from a tax attorney related to tax dependency of domestic partners. Individuals who can be claimed as dependents on another person s tax return are not eligible to open their own HSA. Note: The IRS has ruled that same-sex couples who were legally married in a jurisdiction that recognizes same-sex marriages will be treated as married for all federal tax purposes, even if the couple lives in a jurisdiction that does not recognize the validity of same-sex marriages. For federal tax purposes, the terms spouse, husband and wife, husband and wife include an individual married to a person of the same sex if the individuals are lawfully married under state law, but that such terms do not include individuals who have entered into a registered domestic partnership, civil union, or similar formal relationship recognized under state law that is not denominated as a marriage under that state law. Q20: If an individual has Veteran benefits, can they have an HSA? If an individual has received any Veterans Administration (VA) health benefits in the last 90 days When you click this link you will go to a Web site that is not controlled by or affiliated with UMB. We have provided this link for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other Web sites may not follow the same privacy policies and security procedures that UMB does so please review their policies and procedures carefully. 12

13 from the VA or one of their facilities, including prescription drugs, they are not eligible to open or contribute to an HSA until the first of the month following the 90-day waiting period. If they have only received dental, vision or preventive care services from a VA facility or clinic within the past three months, they will remain eligible to open and contribute to an HSA. Q21: What happens to the money in an HSA if HDHP coverage is no longer maintained? The funds belong to the accountholder for life. Once funds are deposited into the HSA, the account can be used to pay for qualified medical expenses tax-free, even if the accountholder no longer has HDHP coverage or is no longer eligible for some other reason. The funds remain in the account automatically each year and indefinitely until used. There is no time limit on using the funds. Once HDHP coverage is discontinued and/or another type of insurance policy is maintained, the IRS no longer allows new contributions, but the funds may still be used for qualified medical expenses, tax-free or alternatively, and non-qualified medical expenses and subject to taxes and possible penalties. Section 3: Establishing an HSA Q22: How is an HSA established or opened? An HSA is established by agreeing to the UMB disclosures (written HSA custodial agreement, Terms and Conditions, and Privacy Statement) and by funding the account. The IRS allows an individual to establish an HSA on the first of the month or any day after all the eligibility requirements are met. Q23: How much does an HSA cost? An HSA has a low monthly service fee in order to maintain the account. In some cases, an employer may pay the monthly service fee on behalf of their employee; however, UMB can also deduct the fee monthly from each HSA. In addition, there are other fees that may apply depending on the services an individual selects from UMB (e.g. account investment fees, closing fees, etc.). A fee schedule will be provided with the UMB HSA Account Terms and Conditions and/or welcome letter at the time of HSA enrollment. Q24: Can an HSA accountholder title his or her account in the name of a trust? The IRS only accepts an HSA as an individual account. Therefore, an individual cannot title an HSA account in a trust that involves joint ownership. However, the accountholder may change the designation of beneficiary as the name of the trust. The accountholder must complete and sign a Beneficiary Designation Form. Q25: What is the extent of responsibility for an employer to communicate employees rights on the HSA at termination (or if the employer drops the HSA benefit program)? There are no legal responsibilities to communicate employees rights when the HDHP is dropped or the employee terminates employment. The HSA is not a benefit plan, and therefore, not subject to ERISA/COBRA or any other post employment administration. However, from an employee relations perspective, many employers choose to explain that the HSA is an individually owned trust account, owned by the accountholder, that the employer will no longer be paying the monthly administration fees associated with the HSA, and when payroll deductions/employer contributions will end. If the employer is working with a UMB partner that has integrated web features, they may also want to let them know 13

14 that they will receive information in the mail (i.e. debit card, instructions on how to access their account online) with new contact information and web functionality for UMB. Q26: Does UMB provide statements? Accountholders will receive a quarterly paper statement in the mail and are also be able to view their statements online. If preferred, individuals may choose to go paperless. UMB will send an notifying the individual accountholder when their statement is available online to view, print or save. The past 18 months of statements are always available. As a result of their selection to go paperless, they will no longer receive a paper statement in the mail as of the first statement cycle after they enroll. Read our E-Statements Frequently Asked Questions for more information. Q27: Does the HSA have a debit card to access funds? Individuals will receive an HSA debit card in the mail after completing the enrollment application. The HSA debit card can be used to pay for qualified medical expenses for the accountholder and their dependents. When using their debit card at a merchant location (other than an ATM), they will enter credit into the merchant s keypad at checkout, or let the cashier know that the purchase is a credit transaction. Funds will be automatically deducted from their HSA. Q28: When asked by a merchant or directed by a point-of-sale system to choose a payment method, should "debit" or "credit be selected? When a purchase is made using a keypad or screen, credit should be selected. If there is no keypad or screen, the card will be given to the merchant to be processed as a credit transaction. Q29: What if the card doesn't work at the point of sale or the cashier says the transaction has been declined? It may be necessary to use another form of payment. The decline may be due to the following reasons: The purchase was not considered an HSA-qualified medical expense. The HSA balance was too low to cover the transaction. Q30: Can an individual request a duplicate card for other family members? An HSA is an individually owned account in the name of the accountholder. The accountholder may authorize another person, such as a spouse, to withdraw funds from the HSA Deposit Account by any means available to the accountholder. For example, if an additional authorized cardholder is requested by the accountholder either through enrollment or by calling UMB, that person has the right to use a card to access the HSA Deposit Account and to receive information about the account. The authority of the additional authorized cardholder to use a card may only be revoked by notifying UMB Bank in writing. Q31: What should be done if the card is lost or stolen? UMB Customer Service must be contacted immediately at HSA (4472). 14

15 Section 4: HSA Contributions Q32: How does an individual contribute to their HSA? The simplest way to contribute to the HSA is through pre-tax payroll contributions, but individuals may also write a check or transfer money from their bank account to make a lump sum contribution to their HSA. If the money comes from their bank account instead of through payroll contributions, they may deduct the amount contributed on their federal taxes using IRS form 8889 since those contributions would be made with after-tax money. Q33: Who may contribute to an HSA? An HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual. Contributions, other than employer contributions or an employee s pre-tax payroll contributions, are deductible on the eligible individual's federal tax return whether or not the individual itemizes deductions or whether the accountholder or anyone else other than the employer makes the contribution. Contributions from all sources are aggregated for the purpose of applying the maximum annual contribution limit. Q34: In what form may contributions be made to an HSA? Contributions to an HSA must be made in cash. As custodian of the HSA, UMB will accept contributions by check, direct deposit from an employer or online transfer from a personal bank account. UMB will also accept rollovers or transfers of assets from an Archer Medical Savings Account (MSA), an existing HSA, or an IRA, in accordance with the requirements of the Internal Revenue Code. All contributions to an individual s HSA will initially be made to an interest-bearing HSA Deposit Account at UMB. Q35: What is the dollar amount of HSA contributions allowed each year? The maximum amount that may be contributed to an HSA for any year is is a certain amount established by the IRS for each year. The limits are dependent on whether the individual has single coverage or family coverage in their qualified HDHP. Self-only HDHP coverage (individual limit) is an HDHP covering only an eligible individual. Family HDHP coverage (family limit) is an HDHP covering an eligible individual and at least one other individual (whether or not that individual is an eligible individual). The same annual contribution limit applies regardless of whether the contributions are made by an employee, an employer or both. For 2014, the contribution maximum is $3,300 (individual) or $6,550 (family). For 2015, the contribution maximum is $3,350 (individual) or $6,650 (family). Individuals who are age 55 anytime during the calendar year are eligible for an additional catch-up contribution of $1,000. If enrolled in an HDHP January 1 through December 1 of the current tax year, consumers are allowed to make the full annual maximum HSA contribution for the year. If enrolled in an HDHP for a partial year not including December 1, accountholders are allowed to contribute the prorated amount based on the When you click this link you will go to a Web site that is not controlled by or affiliated with UMB. We have provided this link for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other Web sites may not follow the same privacy policies and security procedures that UMB does so please review their policies and procedures carefully. 15 of HSA contributions or consult your tax adviser. Additional federal and state forms may be required

16 number of months they were eligible. If enrolled in an HDHP for a partial year including December 1, accountholders are allowed to contribute the full annual maximum for the year. However, in this case if the accountholder does not remain eligible for 12 months after the end of the calendar year in which they enrolled in an HDHP, the accountholders will be subject to income tax and a 10 percent excise tax on HSA contributions for months not covered by an HDHP. Refer the IRS for up to date penalty information. The total contribution for the year can be made in one or more payments at any time up to tax-filing deadline (without extensions). However, if an individual wishes to have a contribution made between January 1 and April 15 treated as a contribution for the preceding taxable year, they can use the UMB online contribution tool or contribution coupon and check the box prior year contribution. Q36: Can individuals make their entire contribution to the HSA at the beginning of the year? Individuals can contribute their entire contribution at the beginning of the year, up to the applicable contribution limit. They might, however, have to make a corrective distribution later in the year if the individual's eligibility status changes during the year (for instance, if they become covered under another non-qualifying plan, or if their HDHP coverage ends). Q37: Can a contribution made in December be applied to the following tax year? No. Contributions can never be applied to a future tax year. Q38: If an individual already has an HSA set up through a former employer, can the new employer contribute to that HSA? Employers make all decisions related to where they will send their payroll deductions. While an individual can have more than one HSA, the employer can choose to work with one HSA custodian. The individual needs to check with their employer to understand the rules concerning payroll options. It may be necessary to open a new UMB HSA with the new employer in order to receive employer funding and to make pre-tax payroll contributions. An employee may also choose to consolidate accounts by transferring the balance from the old HSA into their UMB HSA. Once the UMB HSA is open, they then can decide how they would like to transfer the funds. They have two options: A direct transfer of the balance from another trustee to a UMB HSA; or A distribution of funds to the employee who may then rollover all or part of the HSA balance into a UMB HSA. Q39: If an employer gives the full employer contribution early in the plan year, what happens if the employee leaves/is terminated? Once an employer makes a contribution into the employee s HSA, it is legally owned by the employee, and the employee can do whatever they want with the funds. Hence, if the employee leaves, they keep the funds. In an effort to minimize this risk, some employers choose to spread their contributions out throughout the year. Since HSAs are not subject to COBRA, once an employee terminates, the employer is not responsible for any more HSA funding. When you click this link you will go to a Web site that is not controlled by or affiliated with UMB. We have provided this link for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other Web sites may not follow the same privacy policies and security procedures that UMB does so please review their policies and procedures carefully. 16

17 Q40: Can an employer take their contributions made in error out of an HSA? The IRS states that HSAs are non-forfeitable. Therefore, as the custodian, UMB requires written accountholder authorization to remove funds/contributions from their HSA. There are only two exceptions when UMB can return money directly to the employer. 1. The accountholder was never eligible for an HSA. 2. The funds put their HSA into an excess contribution scenario (more than the family maximum, plus catch-up). Q41: If an HDHP is on a plan year (starts on a date other than January 1) how does that work with HSA contribution maximums? The IRS regulates HSA plans and publishes its guidance in Publication 969. The IRS allows two methods for figuring out an accountholder s personal maximum contribution. Accountholders may use the method that results in the highest contribution. 1. Sum of Monthly Contribution Limits Method The sum of each month s prorated contribution amount (1/12 of the annual maximum based on the HDHP coverage type the accountholder had on the first of each month). For this method, as long as the accountholder is 55 by the end of the year, they may also add $83.33 (1/12 of $1,000) to each eligible month. Examples of people who should use this method include those who are not eligible on December 1 of the current year, those who don t plan to be eligible all of the following calendar year, and those who switch from family HDHP for the majority of the year to individual HDHP for the remainder of the year. 2. Full Contribution Method (also known as the Last Month Rule) Anyone eligible on December 1 can contribute the entire annual maximum based on their coverage type on December 1, plus catch-up contribution of $1,000, if the accountholder is 55 anytime during the year. This method is subject to a testing period. The only people who should use this method are those who plan to be eligible for HSA contributions all 12 months of the following calendar year. Those who do not remain eligible for the following calendar year will be subject to income taxes and a 10 percent penalty on any contributions more than the amount that could have been contributed using the Sum of Monthly Contribution Limits Method. Q42: What is meant by the IRS testing period? If an accountholder contributes based on the Last Month Rule, the IRS requires an individual to remain eligible for all of the following calendar year or pay income taxes and a 10 percent penalty on any amount contributed in the current year that is in excess of the maximum amount an individual could have contributed using the Sum of Monthly Contribution Limits Method. When you click this link you will go to a Web site that is not controlled by or affiliated with UMB. We have provided this link for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other Web sites may not follow the same privacy policies and security procedures that UMB does so please review their policies and procedures carefully. 17

18 The idea of a "testing period" is to prevent an HSA accountholder from getting more of a tax deduction for HSA contributions than they are entitled. The IRS testing period is a requirement where an individual, enrolled in an HDHP, has to remain on the HDHP until December 31 of the following year to not be "over contributed" in their HSA. Q43: What does the Special Rule Last Month Rule mean? Under the Last Month Rule, if an individual is eligible on the first day of the last month of the tax year (December 1 for most taxpayers), he or she is considered an eligible individual for the entire year. HSA accountholders may utilize the Last Month Rule to make a full HSA contribution for that year. If contributions were made to an HSA based on being an eligible individual for the entire year under the Last Month Rule, the individual must remain an eligible individual during the testing period. For the Last Month Rule, the testing period begins with the last month of the tax year and ends on the last day of the 12 th month following that month (for example, December 1 through December 31 of the following year). If that individual fails to remain an eligible individual during the testing period, other than because of death or becoming disabled, he or she will have to include in income the total contributions made to the HSA that would not have been made except for the Last Month Rule. These contributions must be counted as income in the year in which he or she failed to be an eligible individual. This amount is also subject to a 10 percent additional tax. Q44: How does a spouse's health coverage impact contribution limits? If an individual has an HSA, but their spouse has separate health coverage, the following special married couple rules may apply: If the spouse has non-qualifying family coverage that includes the individual, it makes them an ineligible individual, and they may not contribute to an HSA. If the spouse has an individual HSA-qualifying plan, the individual would have to subtract their spouse s contribution from the maximum that they could otherwise contribute. If the spouse has coverage other than an HSA-qualifying plan and the individual is not covered under that plan, there is no effect on the individual or his or her ability to contribute to their HSA. Q45: How does a domestic partner's health coverage impact contribution limits? The IRS has ruled that same-sex couples who were legally married in a jurisdiction that recognizes same-sex marriages will be treated as married for all federal tax purposes, even if the couple lives in a jurisdiction that does not recognize the validity of same-sex marriages. For federal tax purposes, the terms spouse, husband and wife, husband, and wife include an individual married to a person of the same sex if the individuals are lawfully married under state law, but that such terms do not include individuals who have entered into a registered domestic partnership, civil union, or similar formal relationship recognized under state law that is not denominated as a marriage under that state law. If the federal government does not recognize domestic partners to be a tax dependent and they are both covered under the same HDHP, the domestic partner who is covered under their partner s HDHP could open their own HSA and contribute the full amount of the IRS HSA annual family maximum (plus catch-up contribution amount if more than age 55), in addition to their partner contributing the family limit (plus applicable catch-up) to their own HSA. 18

19 Note: Neither partner may take a tax-free distribution from their HSA to pay for their domestic partner's expenses, unless the domestic partner is considered to be a tax dependent under IRS Tax code. Q46: How does turning age 55 affect an HSA (catch-up contributions)? Federal rules permit catch-up contributions to HSAs if an individual is 55 or older, allowing an increase in annual contributions up to an additional $1,000 per year. Individuals are eligible for this extra contribution if one is 55 years or older or turning 55 anytime during that year. For example: 2013 individual coverage contribution limit: $3,250 + $1,000(catch-up) = $4, family coverage contribution limit: 6,450 + $1,000(catch-up) = $7,450. If the individual s spouse is also turning 55, the spouse cannot contribute their catch-up contribution to that individual s HSA; however, if the spouse meets the eligibility requirements, they can open their own HSA and contribute catch-up contributions to that account. Q47: If both spouses are 55 and older, are two catch-up contributions allowed? Catch-up contributions are allowed if both spouses are eligible individuals and both spouses have established an HSA in their name. If only one spouse has an HSA in their name, only that spouse can make a catch-up contribution. Q48: How do contributions work if both spouses have individual HSAs? If each is enrolled in their own plan as self-only coverage, the maximum amount that can be contributed to each account is limited to the individual IRS contribution limit. If either spouse has family HDHP coverage, both spouses are treated as having family HDHP coverage, and the contribution limit is combined for both spouses and limited to the family IRS contribution limit. The contribution limit is split equally between the spouses unless there is an agreement on a different division. If each spouse has family coverage under a separate plan, the contribution limit is combined for both spouses and limited to the family IRS contribution limit. The contribution limit is split equally between the spouses unless there is an agreement on a different division. Q49: Can contributions be made if an individual is still working but enrolled in Medicare? If the individual is still working, neither their employer nor their spouse (nor anyone else) can contribute to their HSA after they enroll in any part of Medicare, including Part A. See Section 9: HSAs and Medicare. Q50: Are employers required to make contributions to the HSAs of independent contractors, even if they are covered by the company s HDHP medical plan? An employer does not have an obligation to make HSA contributions to independent contractors. This holds true regardless of whether or not the employer has a Cafeteria Plan, since by definition these individuals are not employees. It is the employer s responsibility to seek legal counsel to determine which individuals are considered independent contractors. 19

20 Q51: How are contributions treated for shareholders of S corps? Shareholders employees with more than two percent share of a Subchapter S corporation cannot make pre-tax contributions to their HSAs through the company by salary reduction. In addition, any contributions made to their HSAs by the corporation are taxable as income. However, they can make their own personal contributions to their HSAs and take the "above-the-line" deduction on their personal income taxes. Q52: How are contributions treated for partners in a partnership or limited liability company (LLC)? Partners in a partnership or LLC (treated as a partnership for federal tax purposes)cannot make pre-tax contributions to their HSAs through the partnership by salary reduction. However, they can make their own personal contributions to their HSAs and take the "above-the-line" deduction on their personal income taxes. Q53: May a self-employed person contribute to an HSA on a pre-tax basis? A self employed individual may open and contribute to an HSA with after-tax dollars and take the above-the-line deduction, but may not take the amount of their HSA contribution as a deduction for Self Employment Contribution Act (SECA) purposes. Q54: What about an unemployed person, can they contribute to an HSA? As long as the individual has coverage under an HDHP and meets the other eligibility rules, they can contribute to an HSA. The primary advantage of an HSA is that HSA contributions are deductible from income, but that income could come from a variety of sources other than employment. In other words, the money can be from their own personal savings, income from dividends, and gifts from relatives or other individuals. Q55: Can HSA contributions be made by employers the same way they can with a Health Reimbursement Account (HRA)? Reimbursing through employee statement of benefits? Employer HSA contributions must all be made directly into the individual HSA account or provide UMB directives (i.e. data file, online contribution portal) to place a certain amount of money into each employees account. Once the HSA funds are deposited into the HSA, the employer cannot direct the employee on how to use the funds. While communications and tools can be provided to make it easier for accountholders to pay for eligible expenses, the choice of whether to spend the money, save the money or invest the money is up to the accountholder. Section 5: Cafeteria Plans, Comparability and Discrimination Issues Q56: What are the rules regarding contributions made by an individual s employer? If an employer makes contributions to its employees HSAs and does not allow employees to make 20