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What is a Health Savings Account (HSA)?

A Health Savings Account is a tax exempt account with a financial institution in which you accumulate savings to pay for medical expenses. Contributions are TAX DEDUCTIBLE and income earned on funds in the HSA are 100% TAX FREE. An HSA allows you to enjoy tax reductions while having affordable premiums and decreasing your out-of-pocket expenses without risking your insurance protection.

HSA Benefits:

  1. Contributions are 100% tax deductible

  2. Interest or other earnings on the assets are tax free, money grows tax deferred

  3. Money saved can be used for qualified medical expenses (for a list of the qualified expenses go to page 4 of the IRS Publication 502) tax free for life

  4. HSA funds can also be used to pay COBRA or other medical insurance premiums during periods of unemployment or temporary layoff

  5. Contributions remain in your HSA until you use them. At age 65, unused HSA money can be withdrawn for non-medical reasons without penalty (similar to an IRA, ordinary income tax will be charged on the money withdrawn for non-medical reasons)

Why were HSAa created?

HSAs were created in response to the rising cost of health care, and the great number of individuals and families with no health care insurance of any kind. The intent of Congress in passing this legislation was to provide a financial incentive for employers (inducing the self-employed) to purchase health insurance.

HSAs will allow employees to retain contributions made on their behalf in the event they change employment. And, unlike cafeteria plans that also provide benefits to pay for non-covered medical expenses, HSA assets cannot be lost if not used within a one-year period, as assets in a cafeteria plan are.

Who can receive the benefits of an HSA?

Individuals may establish an HSA as well as employees of a business, but only if the employer has purchased a high-deductible health insurance plan for the employee. Contributions to the HSA account may be made by both the employer on behalf of their employees and by the employees themselves. Employer contributions are tax deductible, and exclude from an employee's income. Employee contributions are tax deductible.

How do HSAs work?

One key element of HSAs is the requirement that a high-deductible health insurance plan be in place to cover the individual or family that would benefit under an HSA. Such a policy provides important health care benefits, but with a relatively modest premium. For tax year 2016 a high deductible plan is defined as one having a minimum annual deductible amount of $1,300 for an individual, and $2,600 for a family, and having an out-of-pocket expense maximum of $6,550 for individual coverage, and $13,100 for family coverage.

What may HSA savings be used for?

Amounts that have accumulated in an HSA are intended to be withdrawn and used for actual medical expenses (for a list of the qualified expenses go to page 4 of the IRS Publication 502). If amounts contained in an HSA are not needed for medical purposes, however, they may be withdrawn penalty-free for other uses after the individual reaches age 65, or if death or disability occur. 

Otherwise, a 10 percent penalty applies. All non-medical distributions are included in ordinary income for tax purposes. In addition, HSA savings can - like IRA assets -be rolled over to another HSA once every 12 months, but may not be combined with IRA assets.

How much can be contributed to an HSA?

Individuals may contribute the maximum amount as determined by the IRS even if the individualís deductible is less.  The maximum for 2016 is $3,350 for individuals; this amount can be contributed to your HSA account regardless of when plan coverage began.  Example: if an individualís HDHP coverage began in December, he may still contribute $3,350 for that year (rather than the prorated 1/12 of the $3,350 as in prior regulations).

Families may contribute the maximum amount as determined by the IRS even if the familyís deductible is less.  The maximum for 2016 is $6,750 for families; this amount can be contributed to your HSA account regardless of when plan coverage began.  Example: if a familyís HDHP coverage began in December, they may still contribute $6,750 for that year (rather than the prorated 1/12 of the $6,650 as in prior regulations).

In addition to the maximum contribution amount, catch-up contributions may be made by or on behalf of individuals age 55 or older and younger than 65.  The catch-up provision for 2016 is $1,000

When is the cut-off for opening an HSA account and making contributions?

April 15th is the last day that you can open an HSA for the previous tax year.  You must have had a qualified High-Deductible Health Plan (HDHP) in that tax year to open an account. 

Who must receive a contribution?

If an employer contributes on behalf of any employee, a contribution must be made on behalf of all employees having comparable health insurance coverage. A substantial penalty applies if the employer should discriminate by not providing comparable (in amount or percentage) contributions for other employees. There are however, exceptions for part-time employees.

Who receives a decendent's unused HSA assets?

Like an IRA, the assets in an HSA become the property of a named beneficiary upon the accountholder's death, or go to their estate if no beneficiary is name. A spouse beneficiary can treat such assets as their own HSA, while a non-spouse must include them as ordinary income for taxation purposes.

Do HSAs require reporting?

Yes, HSA contributions made by an employer must be reported on an employee's tax return, and reported by the employer to the IRS. (A financial organization through which an employer has set up an HSA must also provide reports to the IRS.)

Note:  This is a general summary.  For a more detailed explanation, please refer to IRS Publication 969.



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