Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs)

R. Bruce McCommonsHarford County, MD TrC

12/4/[email protected]

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mailto:[email protected]

Health Savings Accounts (HSA)...

An HSA is...

• A tax-exempt trust or custodial account...

• Set up with a qualified HSA trustee...

• To pay or reimburse certain medical expenses

HSAs are individually owned—there is no such thing asa joint HSA...

HINT: Think IRA

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Benefits of an HSA...

• The taxpayer can claim a tax deduction for contributions they or someone other than their employer make to the HSA (i.e., Form 1040, line 25) even if they do not itemize on their tax return...

• Contributions made to the taxpayer’s HSA by their employer are excluded from the taxpayer’s gross income...

• Contributions remain in the owner’s account from year to year until used up...

• Interest or other earnings generated by the HSA are tax free...

• Distributions used to pay qualified expenses are tax free...

• An HSA is “portable...”

Setting up an HSA does not require permission from the IRS, but certain eligibility requirements must be met 3


To set up or contribute to an HSA, an individual must meet ALL of the following requirements...

• Be covered by a high deductible health plan (HDHP) on the first day of any month of the year...

• Have no other health coverage except for allowable “other health coverage,” i.e.,

• Not be claimed as a dependent on someone else’s tax return...

• Not be covered by Medicare

Liability insurance...

Fixed per day hospitalization expenses...

Long term care... Prescription drugs as long as the plan does not provide benefits until the minimum annual deductible of the HDHP has been met...

Insurance against specific disease/illness...

Accident, Disability, Dental, Vision...

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A high deductible health plan (HDHP) is health coverage with...

• A higher annual deductible than typical health plans, and a...

• A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses...

• Out-of-pocket expenses include co-payments, but not insurance premiums...

• An HDHP can cover certain types of preventive care without a deductible, or with a deductible lower than the annual deductible...

• The high deductible requirements do not apply to dental or vision coverage

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HDHP Deductible Limits for 2013...

Self-Only Family

Minimum Annual Deductible

Maximum Annual Deductible andOther Out-of-Pocket Expenses

Type of Coverage

$1,250

$6,250

$2,500

$12,500

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HSA Contribution Limits for 2013 (includes taxpayer, third party*,and employer contributions)...

Self-Only Family

Annual Contribution Limit

Catch-up Contribution (55 or older)

Type of Coverage

$3,250

$1,000

$6,450

$1,000

* Anyone can contribute to the taxpayer’s HSA

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Health Savings Accounts...

Contribution Rule Limits...

• If an eligible individual on the first day of every month in the calendar year, the full contribution amount is allowed...

• If not an eligible individual for the entire year, or they changed their coverage during the year, the contribution limit is the greater of the amount allowed under one of the following rules... Last-month rule—if enrolled in an HDHP on 1 December,

the taxpayer is considered eligible for the entire year and can deduct the maximum plus any catch-up provisions (however, they must remain eligible from 1 December of the current year until 31 December of the following year, i.e., the “testing period”)...

Sum of the monthly contributions rule—if only eligible in some months of the year not including December, is calculated by multiplying the maximum annual contribution (e.g., $3,250 for a self-only policy held by a taxpayer under the age of 55) by the number of months eligible and dividing the result by 12 8

Health Savings Accounts, Form 8889, Part, Distributions...

Example: Tom has a self-only HSA ($3,250 annual limit) and turns 55on 1 September which makes him eligible for a $1,000 catch-up; hisannual limitation using the “Sum of the monthly contributions” rule iscalculated using the worksheet at the bottom of the Form 8889, Page 1...

TaxWise will total, divide by 12, and send the result to the 8889, line 3...

Enter the allowedannual limit for

each eligible month

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Important HSA-related forms...

• Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information—used to report TOTAL, i.e., taxpayer, employer, and third party, contributions to the taxpayer’s HSA for the tax year...

• Form 1099-SA, Distributions from an HSA, Archer MSA, or Medicare Advantage MSA—used to report TOTAL distributions from the taxpayer’s HSA regardless of whether they were used to pay “qualified medical expenses...”

• Form 8889, Health Savings Accounts, used to... Report HSA contributions (employee, third party, and employer)... Figure the taxpayer’s HSA deduction.. Report HSA distributions... Figure taxable distributions and penalties

• W-2, Wage and Tax Statement—used to report employer contributions to an employee’s HSA; included in Block 12 as a code “W...”

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3 Total HSA or Archer MSA contributions made In 2012 for 2013

2 Total contributions made In 2013

1 Employee or self-employed person’s Archer MSA contributions made in 2011 and 2012 for 2013

X

Tom T Smith

123 Main Street

Bel Air, MD 21014-1234

T Rowe Price123 Elm StreetOwings Mills, MD 21276-1234

3,050.00

Health Savings Accounts, Form 5498-SA...

$2,050 from the taxpayer,$1,000 from the employer

Box 2 shows total contributions to the taxpayer’s HSA and includesany qualified distributions (trustee to trustee transfers) from their IRAto fund the HSA...

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3 Total HSA or Archer MSA contributions made In 2012 for 2013

2 Total contributions made In 2013

1 Employee or self-employed person’s Archer MSA contributions made in 2011 and 2012 for 2013

X

Tom T Smith

123 Main Street

Bel Air, MD 21014-1234


3,050.00

3250

2050

Total contributions to an HSA are reported annually on form 5498-SA...


The Box 2 amount lessemployercontributionsis entered onForm 8889,line 2

Be careful—mustsubtract employer

contributions

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2013

$1,000.00Tom T Smith123 Main StreetBel Air, MD 21014-1234

$25,000.00

$25,000.00

$25,000.00

$2,500.00

$1,050.00

$363.00

W

Health Savings Accounts, Form W-2...

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Employer contributions to an employee’s HSA are reported on the W-2as a Code “W” in Box 12, and entered on the TW W-2 input form...

When TW “sees” a Code Win Box 12 of the W-2 inputform, it opens a Form 8889in the Forms Tree, and theamount entered in Box 12flows to the 8889, line 9

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Health Savings Accounts, Form 8889, Part 1, Contributions...

Enter employeeand third partycontributions from theForm 5498-SA...

Employercontributions from TW W-2Input form,Block 12...

HSA deductionto 1040, line 25

Limitation...

Complete line 6...

Select coverage...

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Complete lines1, 2, and 6...

And the HSAdeductioncalculated online 13 will flowback to the1040, line 25

Link to theForm 8889from the 1040, line 25...

If there were no employer contributions, i.e., only the taxpayer and/or a third party made contributions to an HSA...

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Suppose Tomdidn’t understandthe rules andcontributed toomuch to his HSAe.g., $3,050...

He would thenhave an excesscontribution onwhich he wouldhave to pay apenalty...

However, if hewithdrew the excess by April 15, 2014, hecould avoid thepenalty

To get rid of the penalty,override and set to -0-

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X

Tom T Smith

123 Main Street

Bel Air, MD 21014-1234


1

1,350.00

Health Savings Accounts, Form 1099-SA, Distributions...

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13

X

Tom T Smith

123 Main Street

Bel Air, MD 21014-1234


1

1,350.00

Distributions from an HSA are reported on form 1099-SA, Box 1...

Normaldistribution

and onthe 8889,Part II, line 14a

Health Savings Accounts, Form 8889, Part II, Distributions...

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Enter the total distributions received from Form(s) 1099-SA online 14a..

Enter the total unreimbursed qualified medical expenses on line 15...

If line 15 is equal to or greater than line 14a, there are no tax consequences

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Line 21 will show the taxable distribution,

If line 15 is less than line 14a, the difference is taxable, and the amountin line 16, Taxable HSA distributions, will flow to the 1040, line 21, Otherincome...”


and the Type of Other incomewill indicate “HSA” if no other sources have already been reported…

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Additionally, if the taxpayer is alive, under 65, and not disabled, thereis an additional 20% tax which is calculated on line 17b, and flows tothe 1040, line 59, Other taxes...


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If the taxpayer is deceased, 65 or older, or disabled, check the box on line 17a, and the additional tax will disappear...


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Health Savings Accounts, Part III, Income and Additional Tax...

There are consequences when the taxpayer fails to maintain HDHPcoverage during the testing period...

Part III is used to figure penalties under various circumstances...

However, Part III is out of scope for the TCE program

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Qualified medical expenses...

• Qualified medical expenses are pretty much the same as if doing a Schedule A—exception is that over the counter medicines are also deductible but, beginning with TY 2011, only with a doctor’s prescription (this change does not apply to insulin)...

• If a taxpayer is considered eligible for the entire year under the “Last Month Rule,” then only those expenses incurred after the actual establishment of the HSA are qualified expenses...

• Insurance premiums are not considered qualified medical expenses unless paid to purchase...

Long term care insurance...

Health care continuation coverage, e.g., COBRA...

Health care coverage while receiving unemployment compensation...

Medicare if the taxpayer was 65 or older25

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Health Savings Accounts (HSAs)

Documents

health coverage

taxpayers hsa

hsa contribution limits

health savings accounts

hdhp deductible limits

qualified hsa trustee

high deductible requirements

typical health plans