Health Savings Accounts (HSAs)
What is an HSA?
A health savings account (HSA) is a tax-exempt trust or custodial account that a customer sets up with a qualified HSA trustee (Brazos Valley Bank) to pay or reimburse certain medical expenses they incur. The customer must be an eligible individual to qualify for a HSA. No permission or authorization from the IRS is necessary to establish a HSA.
Why are HSAs a unique product?
Under the HSA program:
- there is no limit on the number of HSAs that may be set-up,
- participants need not be self-employed or employed by small employers to be eligible,
- there is no sunset (termination) date for the HSA program,
- HSA contributions may be made by the HSA owner, an employer, or any other individual, and
- the insurance industry is responding with health insurance products that are HSA-compliant.
Maximum Contribution Amounts:
2009:
$3,000 for eligible individuals with self-only coverage
$5,950 for eligible individuals with family coverage
2008:
$2,900 for eligible individuals with self-only coverage
$5,800 for eligible individuals with family coverage
*In addition to these contribution amounts, eligible individuals who are age 55 or older may make HSA catch-up contributions up to $900 for 2008 and $1,000 for 2009.
*If a spouse is also 55 or older, a second HSA may be established and a second catchup contribution of $1,000 may be made to that account if desired.
Amounts deposited in the account grow tax free until distributed, and the HSA owner will not owe tax on any withdrawal from the account if the HSA owner, his spouse, or his dependents have incurred qualified medical expenses. Amounts withdrawn from a HSA that are not used to pay for a family’s medical expenses are subject to income tax and possibly an additional 10 percent penalty tax.
HSA Eligibility
The question of who is eligible to have a HSA is two-fold: who is eligible to contribute to and HSA and who is eligible to maintain a HSA.
Contribution Eligibility
An eligible individual is any individual who on the first day of a given month:
- is covered under a high deductible health plan (HDHP),
- is generally not covered by any health plan that is not a HDHP,
- is not enrolled in Medicare, and
- is not eligible to be claimed as a dependent on another person’s tax return.
For any month that an individual meets the criteria for an eligible individual, he may make and/or receive on his behalf a HSA contribution. This set of eligibility defines only who is eligible to contribute to HSAs.
Definition of a High Deductible Health Plan:
A health plan is a high deductible health plan (HDHP) if the plan satisfies both an annual deductible and an out-of-pocket expense requirement. The definition of a HDHP for purposes of HSA contribution eligibility depends on whether the health plan is a policy covering a single individual or a health plan with family coverage. Family coverage is defined as any coverage other than self-only coverage. Further, family coverage is a health plan covering one HSA-eligible individual and at least one other individual regardless of whether the other individual is a HSA-eligible individual and at least one other individual regardless of whether the other individual is a HSA-eligible individual.
For self-only coverage, a health plan is considered a HDHP if the annual deductible is at least $1,100 for 2007 (and for 2008) and the out-of-pocket expense cap does not exceed $5,500 for 2007 ($5,600 for 2008). A health plan with family coverage is a HDHP if the annual deductible is at least $2,200 for 2007 (and for 2008) and the out-of-pocket expense cap does not exceed $11,000 for 2007 ($11,200 for 2008). These amounts will continue to be indexed for cost-of-living adjustments (COLAs).
Eligibility to Maintain and HSA
Once contributions are deposited into HSAs, and HSA owner may continue to maintain the HSA even after he ceases to be an eligible individual for purposes of making contributions. HSAs are individual accounts that are non-forfeitable. HSA owners do not lose their HSAs because of a change in employment, the loss of HDHP coverage, coverage under a non-HDHP, enrollment in Medicare, or any other change.
HSA Owner Responsibilities:
The responsibilities of HSA owners center around two areas: contributions and distributions.
Contributions:
In the area of HSA contributions, HSA owners are responsible for the following duties.
- Ensure that he/she is eligible to contribute.
- Determine whether excess HSA contributions have been made and, if so, take steps to correct the excess.
- Report contributions to the IRS.
Distributions:
Relating to distributions, HSA owners have the following duties.
- Ascertain whether HSA distributions are tax-free, and report to the IRS accordingly.
- Determine whether the additional 10 percent penalty tax applies to distributions included in income, and report to the IRS accordingly.
NO JOINT ACCOUNTS:
Although individuals may have family coverage under a high deductible health plan, and HSA owners may take distributions to pay for spouse or dependent medical expenses, HSAs are individual accounts. Joint HSAs or family HSAs are not permitted.
Employer Responsibilities
Employers who make contributions to HSAs on behalf of their employees shall perform the following duties:
- Monitor if the employee is covered under a high deductible health plan (HDHP) sponsored by the employer and the applicable deductible amounts.
- Determine if the employee is covered under a health plan(s) that is not a HDHP (including flexible spending arrangements and health reimbursements) sponsored by the employer.
- Track the age of employees for purposes of determining eligibility for catch-up contributions. The employer may rely on the employee’s representation as to her birth date.
- Satisfy the comparability rules for employer contributions.
Fees Associated
- $5 one time set-up fee (per card on Family HSAs)
- $2 monthly service charge
2010 HSA Cost-of-Living Adjustments
Health Savings Account dollar limitations are subject to cost-of-living adjustments. In Revenue Procedure 2009-29, the IRS set forth the dollar limitations for HSAs for calendar year 2010.
The annual contribution limitation for an individual with self-only coverage under a high deductible health plan will be $3,050. For an individual with family coverage the contribution limit will be $6,150.
The minimum deductibles for a high deductible health plan will be $1,200 for self-only coverage and $2,400 for family coverage.
The maximum out-of-pocket expense limit will be $5,950 for self-only coverage and $11,900 for family coverage.
Keep in mind that these limitations are not effective until January 1, 2010.