What is an HSA?

Health Savings Accounts (HSAs) were created by Public Law 108-173, the "Medicare Prescription Drug, Improvement and Modernization Act of 2003," signed into law by President Bush on December 8, 2003. Health Savings Accounts change the way millions meet their health care needs because they are designed to help individuals save for qualified medical and retiree health expenses on a tax-advantaged basis.

Any adult who is covered by a high-deductible health plan (and has no other first-dollar coverage) may establish an HSA. Tax-advantaged contributions can be made in three ways:

The individual or family can make tax deductible contributions to the HSA even if they do not itemize deductions;

The individual?s employer can make contributions that are not taxed to either the employer or the employee; and,

Employers sponsoring cafeteria plans can allow employees to contribute untaxed salary through salary reduction.

To encourage saving for health expenses after retirement, individuals age 55 and older are allowed to make additional catch-up contributions to their HSAs. Once an individual enrolls in Medicare they are no longer eligible to contribute to their HSA.

Amounts contributed to an HSA belong to the account holder and are completely portable. Funds in the account can grow tax-free through investment earnings, just like an IRA.

Funds distributed from the HSA are not taxed if they are used to pay qualified medical expenses. Unlike amounts in Flexible Spending Arrangements that are forfeited if not used by the end of the year, unused funds remain available for use in later years.

For more information about HSAs, continue reading below for answers to Frequently Asked Questions or contact your Account Executive or Account Manger at BIS Benefits.

Frequently Asked HSA Questions (FAQs)

What is a Health Savings Account (?HSA?)?

A Health Savings Account allows individuals to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax free basis.

How can I get a Health Savings Account?

Consumers can sign up for HSAs with providers, which will generally be insurance companies and banks. Employers are likely to set up plans for employees, as well, in which case the employer will generally be arranging the HSA for the employee. If your metro Atlanta employer does not currently offer an HSA you may contact BIS Benefits. We will be happy to answer any questions you may have regarding the possibility of assisting your employer in arranging an HSA for you and your fellow employees.

Who is eligible for a Health Savings Account?

To be eligible for a Health Savings Account, an individual must be covered by a High Deductible Health Plan (HDHP), must not be covered by other health insurance (does not apply to specific injury insurance and accident, disability, dental care, vision care, long-term care), is not eligible for Medicare, and can?t be claimed as a dependent on someone else?s tax return.

What Is a ?High Deductible Health Plan? (HDHP)?

A HDHP is a health insurance plan with minimum deductible of $1,050 (self-only coverage) or $2,100 (family coverage). The annual out-of-pocket (including deductibles and co-pays) cannot exceed $5,000 (self-only coverage) or $10,000 (family coverage). HDHPs can have first dollar coverage (no deductible) for preventive care and higher out-of-pocket (copays & coinsurance) for non-network services.

Who can contribute to a Health Savings Account?

Contributions to HSAs can be made by either the employer or the individual, or both. If contributions are made by the individual, it is an ?above-the-line? deduction. If contributions are made by the employer, it is not taxable to the employee (excluded from income). Contributions can also be made by others on behalf of an eligible individual and deducted by the individual. All contributions are aggregated.

Do Health Savings Account funds roll over year after year and get invested?

Yes, the money invested in a Health Savings Account rolls over year after year.

Who has control over the money invested in a Health Savings Account?

In most cases the individual will have control over the assets. However, we know that some employers are exploring the idea of having control over the investments.

What happens to the money in a Health Savings Account after you hit age 65?

Once you hit 65, the amounts can be used for health expenses and to pay certain insurance premiums like Medicare Part A & B, Medicare HMO and the employee's share of retiree medical insurance premiums. It cannot be used to purchase a Medigap policy. It can also be used for any other expenses. If used for medical expenses, the amounts come out of the account tax free. If used for other expenses, the amount received will be taxable.

Can you roll the money in a Health Savings Account over into an IRA?

You cannot roll the HSA funds over into an IRA. They will stay in the HSA or be rolled into another HSA.

What can distributions from the HSA be used for?

The amounts can be distributed for either qualified medical or other expenses. If the amount distributed is used for qualified medical expenses, then the distribution is tax free. If the amount distributed is used for other than qualified medical expenses, the amount distributed will be taxed and, for individuals who are not disabled or over age 65, subject to a 10% tax penalty.

Are dental and vision care qualified medical expenses under a Health Savings Account?

Yes, as long as these are deductible under the current rules. For example, cosmetic procedures, like cosmetic dentistry, are generally not deductible and would not be considered qualified medical expenses.

Can anyone make catch-up contributions to a Health Savings Account?

Individuals 55 and older who are covered by an HDHP can make additional catch-up contributions. They may make contributions anticipating medical expenses that will not be covered under Medicare -- such as a portion of prescription drug costs or Medicare Part A & B premiums.

For individuals age 55 and older, additional ?catch-up? contributions to HSA allowed:

2006 - $700

2007 - $800

2008 - $900

2009 and after - $1,000

Contributions must stop once an individual is eligible for Medicare. If both spouses are eligible individuals, both may make catch-up contributions.

2006 HEALTH SAVINGS ACCOUNTS LIMITS

Maximum contribution levels for Health Savings Accounts (HSAs) and out-of-pocket spending limits for high deductible Health Plans (HDHPs) that must be used in conjunction with HSAs. These amounts have been indexed for cost-of-living adjustments for 2006 and are included in Revenue Procedure 2005-70, which announces changes in several indexed amounts for purposes of the federal income tax.

The new levels are as follows:

New Annual Contribution Levels for HSAs:

For 2006, the maximum annual HSA contribution for an eligible individual with self-only coverage is $2,700. (Note: for any individual, the maximum contribution is the lesser of the indexed amount or the deductible of the HDHP.)

For family coverage the maximum HSA contribution is $5,450.

Catch up contribution for individual who are 55 or older is increased by statute to $700 for 2006.

Both the HSA contribution and catch up contribution apply pro rate based on the number of months of the year a taxpayer is an eligible individual.

New Amounts for Out-of-Pocket Spending on HSA-Compatible HDHPs:

The maximum annual out-of-pocket amounts for HDHP self-coverage increase to $5,250 and the maximum annual out-of-pocket amount for HDHP family coverage is twice that, $10,500.

Minimum Deductible Amounts for HSA-Compatible HDHPs:

For 2006, the minimum deductible for HDHPs increases to $1,050 for self-only coverage and $2,100 for family coverage.

Note that a fiscal year HDHP that satisfies the requirements for an HSA-compatible HDHP on the first day of its fiscal year may apply that deductible for the entire fiscal year.