Health Savings Account FAQs
What is an HSA?
A health savings account (HSA) is a tax-favored savings account created for the purpose of paying medical expenses.
- Tax-deductible
Contributions to the HSA are 100% deductible (up to the legal limit) — just like an IRA.
- Tax-free
Withdrawals to pay qualified medical expenses are never taxed.
- Tax-deferred
Interest earnings accumulate tax-deferred, and if used to pay qualified medical expenses, are tax-free.
- HSA money is yours to keep
Unlike a Flexible Spending Account, unused money in your HSA isn’t forfeited at the end of the year; it continues to grow, tax-deferred.
What are the limits for a 2007 health plan?
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Minimum
Deductible
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Maximum
Out-of-Pocket
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Single
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$1,100
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$5,500
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Family
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$2,200
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$11,000
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What are the limits for a 2008 health plan?
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Minimum
Deductible
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Maximum
Out-of-Pocket
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Contribution Limit
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55+ Contribution
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Single
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$1,100
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$5,600
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$2,900
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$900
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Family
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$2,200
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$11,200
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$5,800
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$900
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Why high deductible health insurance?
- Typically you can save half on premiums.
How does an HSA plan work?
An HSA works in conjunction with high deductible health insurance.
Your HSA money can be used to help pay the health insurance deductible and qualified medical expenses not covered by the health insurance, including dental and vision.
Any funds you withdraw for non-qualified medical expenses will be taxed at your income tax rate plus 10% tax penalty.
If you meet the deductible with covered expenses, the health insurance pays remaining covered expenses in accordance with the terms and conditions of your particular plan.
Who can have an HSA?
The individual must be:
1) Covered by high deductible health insurance;
2) Not covered under other health insurance;
3) Not enrolled in Medicare; and
4) Not another person's dependent.
Exceptions. Other health insurance does not include coverage for the following: accidents, dental care, disability, long-term care, and vision care. Workers’ compensation, specified disease, and fixed indemnity coverage is also permitted.
What are the tax deductible contribution limits?
The law. Federal law states that annual contribution limits are $2,850 for singles/$5,650 for families for 2007 and $2,900 for singles/$5,800 for families for 2008.
Excess Contributions. If contributions exceed the amount you can legally deduct/exclude from your taxes, the excess is taxed as ordinary income and subject to a 6 percent excise tax.
Avoiding Penalties. You can avoid the additional tax by withdrawing the excess and interest on it before your tax filing deadline.
Are there HSA management fees?
As you shop for an HSA, don’t forget to check the fine print on the savings account. Management fees are common in the financial industry, and they may include:
- One time set up fee.
- Monthly maintenance fee.
- Debit card fee.
- Printed check fee.
- Overdraft fee.
Do HSAs work with Physician and Provider Networks?
Yes. These networks are very often part of the health insurance plan, and they provide discounts on health care. The discounts apply to all care — even prior to meeting the health insurance deductible. So, your HSAs savings goes further.
Can my HSA be used for dependents not covered by the health insurance?
Generally, yes. Qualified medical expenses include unreimbursed medical expenses of the account holder, his or her spouse, or dependents.
What about nonmedical withdrawals?
Nonmedical withdrawals from your health savings account are taxable income and subject to a 10% tax penalty.
Exception. This tax penalty does not apply if the withdrawal is made after the date you:
1) Attain age 65;
2) Become totally and permanently disabled; or
3) Die.
Can my HSA be used to pay premiums?
No, this would be a nonmedical withdrawal, subject to taxes and penalty.
Exceptions. No penalty or taxes will apply if the money is withdrawn to pay premiums for:
1) Qualified long-term care insurance; or
2) Health insurance while you are receiving federal or state unemployment compensation; or
3) Continuation of coverage plans, like COBRA, required under any federal law; or
4) Health insurance after you turn 65, but not Medicare supplement insurance.
What are the tax benefits?
There are three major tax advantages to your HSA.
1) Cash contributions to an HSA are 100% deductible from your federal gross income.
2) Interest earnings accumulate tax-deferred.
3) Withdrawals from an HSA for “qualified medical expenses” are free from federal income tax.
What is a qualified medical expense?*
A qualified medical expense is one for medical care as defined by Internal Revenue Code Section 213(d). The expenses must be primarily to alleviate or prevent a physical or mental defect or illness, including dental and vision. Most expenses for medical care will fall under IRC Section 213(d).
However, some expenses do not qualify.
A few examples are:
• Surgery for purely cosmetic reasons
• Health club dues
• Illegal operations or treatment
• Maternity clothes
• Toothpaste, toiletries, and cosmetics
HSA money cannot generally be used for insurance premiums. See this page for exceptions.
*See IRS Publications 502 (“Medical and Dental Expenses”) and 969 (“Health Savings Accounts and Other Tax-Favored Health Plans”) for more information.
Are lump-sum deposits permitted?
Under the law, yes, but make sure your financial institution accepts lump-sum deposits. You may also be required to continue minimum monthly deposits. Lump-sum deposits may not exceed the maximum annual contribution limit.
Are there adjustments for inflation?
Yes, the tax law requires an annual Cost of Living Adjustment (COLA) based on changes in the Consumer Price Index. This calculation, rounded to the nearest $50 increment, affects deductible limits, maximum out-of-pocket amounts, and the maximum annual HSA contribution limits.
Health insurance deductibles may change by the COLA each year.
Can I have an HSA and an IRA?
Yes, having an HSA in no way restricts your ability to have an IRA.
Can HSA money be rolled into an IRA?
No, it can only be rolled over into another qualified HSA without incurring tax consequences.
Must distributions begin at age 701/2?
While the law is silent on this point at the present time, we would expect the IRS to treat this like an IRA. Therefore, the answer will probably be “yes.”
What happens to my HSA when I die?
Your HSA will be treated as your surviving spouse’s HSA, but only if your spouse is the named beneficiary. If there is no surviving spouse or your spouse is not the beneficiary, then the savings account will cease to be an HSA and will be included in the federal gross income of your estate or named beneficiary.
When can I start to use the funds in my HSA?
Once your account is open, a deposit has been made to your account and funds are available, you can start using your HSA. You are 100 percent vested as soon as the funds are deposited and you have total control over the funds.
What expenses are qualified for reimbursement from my HSA?
You are eligible to receive tax-free reimbursement for qualified health expenses not covered by your insurance as defined by Section 213(d) of the Tax Code. A list of these expenses is available on the IRS Web Site, www.irs.gov. HSA distributions used for any purpose other than the qualified medical expenses listed will be taxable, and the appropriate tax rules will apply.
What about “catch up” contributions for those 55 and older?
Individuals aged 55 and over may contribute an additional $800 above the maximum for tax year 2007 or $900 above the maximum for tax year 2008.
Is it true that individuals 65 or older can take out funds from their HSAs for any reason without a penalty?
If an individual is age 65 or older, regardless of whether the individual has been enrolled in Medicare, there is no penalty to withdraw funds from the HSA. As always, normal income taxes will apply if the distribution is not used for unreimbursed medical expenses (expenses not covered by the medical plan).
