Presented by Strategic Business Services Source: US Department of The Treasury All About HSAs.

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Strategic Business ServicesStrategic Business Services

Source: US Department of The Treasury

All About All About HSAsHSAs

All About All About HSAsHSAs

HSA OverviewHSA Overview A A Health Savings AccountHealth Savings Account (HSA) is a (HSA) is a

special account owned by an special account owned by an individual used to pay for current and individual used to pay for current and future medical expenses.future medical expenses.

HSAs are used in conjunction with a HSAs are used in conjunction with a High-Deductible Health PlanHigh-Deductible Health Plan (HDHP). (HDHP).

Insurance that does not cover first dollar Insurance that does not cover first dollar medical expenses (except for preventive medical expenses (except for preventive care)care)

Can be an HMO, PPO or indemnity plan, as Can be an HMO, PPO or indemnity plan, as long as it meets the requirementslong as it meets the requirements

HSA OverviewHSA Overview

HSAs were created in HSAs were created in Medicare legislation Medicare legislation signed into law by signed into law by President Bush on President Bush on December 8, 2003December 8, 2003

HSAs were modeled HSAs were modeled after Archer MSAsafter Archer MSAs

Who is Eligible for an Who is Eligible for an HSA?HSA?

Any individual that:Any individual that: Is covered by an HDHPIs covered by an HDHP Is Is notnot covered by other health insurance covered by other health insurance Is not enrolled in MedicareIs not enrolled in Medicare Cannot be claimed as a dependent on Cannot be claimed as a dependent on

someone else’s tax returnsomeone else’s tax return Children cannot establish their own HSAsChildren cannot establish their own HSAs Spouses can establish their own HSAs, if eligibleSpouses can establish their own HSAs, if eligible

No income limits on who may contribute to No income limits on who may contribute to an HSAan HSA

No requirement of having earned income No requirement of having earned income to contribute to an HSAto contribute to an HSA


What other health coverage is allowed for What other health coverage is allowed for you to still be eligible for an HSA?you to still be eligible for an HSA? Specific disease or illness insurance and Specific disease or illness insurance and

accident, disability, dental care, vision care accident, disability, dental care, vision care and long-term care insuranceand long-term care insurance

Employee Assistance Programs, disease Employee Assistance Programs, disease management programs or wellness programsmanagement programs or wellness programs

These programs must not provide significant benefits These programs must not provide significant benefits in the nature of medical care or treatmentin the nature of medical care or treatment

Drug discount cardsDrug discount cards Eligibility for VA BenefitsEligibility for VA Benefits

Unless you have actually received VA health benefits Unless you have actually received VA health benefits in the last 3 monthsin the last 3 months


Examples of “first dollar” medical Examples of “first dollar” medical benefits that make someone benefits that make someone ineligible for an HSA:ineligible for an HSA: MedicareMedicare Tricare CoverageTricare Coverage Flexible Spending ArrangementsFlexible Spending Arrangements Health Reimbursement ArrangementsHealth Reimbursement Arrangements

There are permitted HSA/HRA/FSA There are permitted HSA/HRA/FSA combinationscombinations


Permitted HSA/HRA/FSA combinations:Permitted HSA/HRA/FSA combinations: ““Limited purpose”Limited purpose” FSAs or HRAs that restrict FSAs or HRAs that restrict

reimbursements to certain permitted benefits reimbursements to certain permitted benefits such as vision, dental or preventive care such as vision, dental or preventive care benefitsbenefits

““Post-deductible”Post-deductible” FSAs or HRAs that only FSAs or HRAs that only provide reimbursement after the minimum provide reimbursement after the minimum annual deductible has been satisfied under the annual deductible has been satisfied under the HDHPHDHP

““Retirement”Retirement” HRAs that only provide HRAs that only provide reimbursement after an employee retiresreimbursement after an employee retires

““Suspended”Suspended” HRAs where the employee has HRAs where the employee has elected to forgo health reimbursements for the elected to forgo health reimbursements for the coverage periodcoverage period

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

Health insurance plan with minimum Health insurance plan with minimum deductible for 2010/2011 of:deductible for 2010/2011 of: $1,200 $1,200 $2,400$2,400 These amounts are indexed annually for These amounts are indexed annually for

inflationinflation

Annual out-of-pocket (including deductibles Annual out-of-pocket (including deductibles and copays) cannot exceed:and copays) cannot exceed: $5,950 for 2010/2011$5,950 for 2010/2011 $11,900 for 2010/2011$11,900 for 2010/2011 These amounts are indexed annually for These amounts are indexed annually for

inflationinflation


Reasonable benefit designs not counted Reasonable benefit designs not counted toward the out-of-pocket maximum toward the out-of-pocket maximum include:include: Lifetime limits on benefitsLifetime limits on benefits Limits to usual, customary and reasonable Limits to usual, customary and reasonable

(UCR) amounts(UCR) amounts Limits on specific benefitsLimits on specific benefits

Maximum number of days or visits coveredMaximum number of days or visits covered Maximum dollar reimbursementsMaximum dollar reimbursements

Pre-certification requirementsPre-certification requirements


HDHPs can have:HDHPs can have: First dollar coverage (no deductible) First dollar coverage (no deductible)

for preventive care (copays allowed)for preventive care (copays allowed) Higher out-of-pocket (copays & Higher out-of-pocket (copays &

coinsurance) for non-network servicescoinsurance) for non-network services All covered benefits must apply to All covered benefits must apply to

the plan deductible, including the plan deductible, including prescription drugsprescription drugs

What is a High-Deductible What is a High-Deductible Health Plan (HDHP)?Health Plan (HDHP)?

Prescription DrugsPrescription Drugs

■ If the HDHP provides a If the HDHP provides a prescription drug prescription drug benefit, prescription benefit, prescription drug expenses must be drug expenses must be subject to the annual subject to the annual deductible or the deductible or the individual individual may notmay not contribute to an HSA.contribute to an HSA.


Preventive CarePreventive Care Preventive care generally does not include Preventive care generally does not include

any service or benefit intended to treat an any service or benefit intended to treat an existing illness, injury or condition.existing illness, injury or condition.

Certain drugs and medications can be Certain drugs and medications can be considered preventive care.considered preventive care. Drugs taken by a person who has developed Drugs taken by a person who has developed

risk factors for a disease that has not yet risk factors for a disease that has not yet manifested itself, or to prevent reoccurrence of manifested itself, or to prevent reoccurrence of a diseasea disease

ExampleExample: Cholesterol-lowering medication for : Cholesterol-lowering medication for those with high cholesterolthose with high cholesterol


Preventive CarePreventive Care Safe harbor list of preventive care that HDHP Safe harbor list of preventive care that HDHP

can provide as first-dollar coverage before can provide as first-dollar coverage before minimum deductible is satisfied:minimum deductible is satisfied: Periodic health evaluations (e.g., annual physicals)Periodic health evaluations (e.g., annual physicals) Screening services (e.g., mammograms)Screening services (e.g., mammograms) Routine pre-natal and well-child careRoutine pre-natal and well-child care Child and adult immunizationsChild and adult immunizations Tobacco cessation programsTobacco cessation programs Obesity weight loss programsObesity weight loss programs

Can apply copays to preventive care servicesCan apply copays to preventive care services

HSA Contribution RulesHSA Contribution Rules Contributions to HSA can be made by the Contributions to HSA can be made by the

employer or the individual, or both.employer or the individual, or both. If made by the employer, it is not taxable to If made by the employer, it is not taxable to

the employee (excluded from income and the employee (excluded from income and wages)wages)

If made by the individual, it is an “above-the-If made by the individual, it is an “above-the-line” deductionline” deduction

Can be made by others on behalf of individual Can be made by others on behalf of individual and deducted by the individualand deducted by the individual

Individuals can make a one-time transfer from Individuals can make a one-time transfer from their IRA to an HSA, subject to the contribution their IRA to an HSA, subject to the contribution limits applicable for the year of the transferlimits applicable for the year of the transfer

HSA Contribution RulesHSA Contribution Rules

The maximum amount that can be The maximum amount that can be contributed to an HSA from all contributed to an HSA from all sources is:sources is: $3,050 (self-only coverage) for $3,050 (self-only coverage) for

2010/20112010/2011 $6,150 (family coverage) for 2010/2011$6,150 (family coverage) for 2010/2011

These amounts are indexed annually.These amounts are indexed annually.


For individuals ages 55+, For individuals ages 55+, additional “catch-up” additional “catch-up” contributions to their HSA contributions to their HSA

are allowedare allowedAmount: $1,000Amount: $1,000

Contributions must stop Contributions must stop once an individual is once an individual is enrolled in any type of enrolled in any type of Medicare.Medicare.


A full year’s contribution (plus the catch-A full year’s contribution (plus the catch-up, if applicable) may be made to an HSA up, if applicable) may be made to an HSA when an individual first becomes eligible when an individual first becomes eligible during that year, even if they start in during that year, even if they start in December.December.

However, if someone contributes a full However, if someone contributes a full year’s contribution but is eligible only part year’s contribution but is eligible only part of the year, they will be subject to taxes of the year, they will be subject to taxes and penalties if they don’t remain eligible and penalties if they don’t remain eligible for 12 months after the date in which they for 12 months after the date in which they first become eligible.first become eligible.

HSA Contribution RulesHSA Contribution Rules Contributions to the HSA in excess of the Contributions to the HSA in excess of the

contribution limits must be withdrawn by the contribution limits must be withdrawn by the individual or be subject to an excise tax.individual or be subject to an excise tax. A pro-rata portion of earnings must be withdrawn A pro-rata portion of earnings must be withdrawn

alsoalso Must pay income tax on the withdrawn amount, but Must pay income tax on the withdrawn amount, but

no 10% penaltyno 10% penalty

If the HSA maximum contribution limit was If the HSA maximum contribution limit was not reached for the year, any other not reached for the year, any other withdrawal for the year (besides for qualified withdrawal for the year (besides for qualified medical expenses) will not be considered medical expenses) will not be considered “excess HSA contributions” and that “excess HSA contributions” and that withdrawal will be subject to both income tax withdrawal will be subject to both income tax and a 10% penalty.and a 10% penalty.

HSA Contribution Rules: HSA Contribution Rules: EmployeeEmployee Contributions Contributions

Can be made by a salary reduction Can be made by a salary reduction arrangement through a cafeteria plan arrangement through a cafeteria plan (section 125 plan)(section 125 plan) Elections to make contributions through a Elections to make contributions through a

cafeteria plan can change on a month-by-cafeteria plan can change on a month-by-month basis (unlike salary reduction month basis (unlike salary reduction contributions to an FSA)contributions to an FSA)

Remember that contributions to the HSA Remember that contributions to the HSA through a cafeteria plan are “pretax” and not through a cafeteria plan are “pretax” and not subject to individual or employment taxessubject to individual or employment taxes

Employer can automatically make cafeteria Employer can automatically make cafeteria plan contributions on individuals’ behalf unless plan contributions on individuals’ behalf unless the individual affirmatively elects not to have the individual affirmatively elects not to have such contributions made (“negative elections”)such contributions made (“negative elections”)

HSA Contribution Rules:HSA Contribution Rules:EmployerEmployer Contributions Contributions

Are always excluded from employees’ income Are always excluded from employees’ income (pretax)(pretax)

Must be “comparable” for all employees Must be “comparable” for all employees participating in the HSAparticipating in the HSA If not comparable, there will be an excise tax equal If not comparable, there will be an excise tax equal

to 35% of the amount the employer contributed to to 35% of the amount the employer contributed to employees’ HSAsemployees’ HSAs

The self-employed, partners and S-Corporation The self-employed, partners and S-Corporation shareholders are generally not considered shareholders are generally not considered employees and cannot receive an employer employees and cannot receive an employer contributioncontribution They can make deductible contributions to the HSA They can make deductible contributions to the HSA

on their ownon their own


Comparable contributions are contributions to all Comparable contributions are contributions to all HSAs of an employer:HSAs of an employer:

Which are the same amount, orWhich are the same amount, or Which are the same percentage of the annual deductibleWhich are the same percentage of the annual deductible

May count only employees who are “eligible May count only employees who are “eligible individuals” covered by the employer under the individuals” covered by the employer under the HDHP and who have the “same category of HDHP and who have the “same category of coverage” (e.g., self-only or family) coverage” (e.g., self-only or family)

No other classifications of employees are permittedNo other classifications of employees are permitted Part-time employees can be tested separatelyPart-time employees can be tested separately

““Part-time” means customarily employed fewer than 30 Part-time” means customarily employed fewer than 30 hours per weekhours per week

Employers may contribute more on behalf of non-Employers may contribute more on behalf of non-highly compensated employeeshighly compensated employees

Comparability rules do not apply to collectively bargained employees.Comparability rules do not apply to collectively bargained employees.

HSA Contribution Rules:HSA Contribution Rules:Employer Employer ContributionsContributions

Employer matching contributions to the HSA Employer matching contributions to the HSA through a cafeteria plan are not subject to the through a cafeteria plan are not subject to the comparability rulescomparability rules But cafeteria plan nondiscrimination rules applyBut cafeteria plan nondiscrimination rules apply

Contributions cannot be greater for higher-paid employees Contributions cannot be greater for higher-paid employees than they are for lower-paid employeesthan they are for lower-paid employees

Contributions that favor lower-paid employees are OKContributions that favor lower-paid employees are OK Employer contributions to an HSA based on an Employer contributions to an HSA based on an

employee’s participation in health assessments, employee’s participation in health assessments, a disease management program or a wellness a disease management program or a wellness program do not have to satisfy the comparability program do not have to satisfy the comparability rules if the employees are allowed to contribute rules if the employees are allowed to contribute to the HSA through a cafeteria planto the HSA through a cafeteria plan Cafeteria plan nondiscrimination rules do applyCafeteria plan nondiscrimination rules do apply


Violations of the Comparability RulesViolations of the Comparability Rules Extra contributions to an HSA on Extra contributions to an HSA on

account of employees who meet a account of employees who meet a specified age or qualify for the specified age or qualify for the catch-up contributionscatch-up contributions

Contributions based on length of Contributions based on length of serviceservice

HSA DistributionsHSA Distributions

Distribution is tax-free if taken for Distribution is tax-free if taken for “qualified medical expenses”.“qualified medical expenses”.

Qualified medical expense must be Qualified medical expense must be incurred on or after the HSA was incurred on or after the HSA was established.established. If HDHP coverage is effective on first day of the If HDHP coverage is effective on first day of the

month, HSA can be established as early as first month, HSA can be established as early as first day of same monthday of same month

If HDHP coverage is effective any day other If HDHP coverage is effective any day other than first day of the month, HSA cannot be than first day of the month, HSA cannot be established until first day of following monthestablished until first day of following month


Tax-free distributions can Tax-free distributions can be taken for qualified be taken for qualified medical expenses of:medical expenses of: Person covered by the high Person covered by the high

deductibledeductible Spouse of the individual Spouse of the individual

(even if not covered by the (even if not covered by the HDHP)HDHP)

Any dependent of the Any dependent of the individual (even if not individual (even if not covered by the HDHP)covered by the HDHP)


If distribution is not used for qualified If distribution is not used for qualified medical expensesmedical expenses Amount of distribution is included in Amount of distribution is included in

incomeincome

andand 10% additional tax except when taken 10% additional tax except when taken

after:after: Individual dies or becomes disabledIndividual dies or becomes disabled Individual is age 65Individual is age 65

HSA DistributionsHSA Distributions ““Qualified medical expenses” do not include Qualified medical expenses” do not include

other health insurance (including premiums other health insurance (including premiums for dental or vision care)for dental or vision care)

Exceptions:Exceptions: COBRA continuation coverageCOBRA continuation coverage Any health plan coverage while receiving Any health plan coverage while receiving

unemployment compensationunemployment compensation For individuals enrolled in Medicare:For individuals enrolled in Medicare:

Medicare premiums and out-of-pocket expenses (Part A, Medicare premiums and out-of-pocket expenses (Part A, Part B, Medicare HMOs, prescription drug coverage)Part B, Medicare HMOs, prescription drug coverage)

Employee share of premiums for employer-based coverageEmployee share of premiums for employer-based coverage Cannot pay Medigap premiumsCannot pay Medigap premiums

Qualified long-term care insurance premiumsQualified long-term care insurance premiums


Should the HSA account holder keep Should the HSA account holder keep receipts? receipts? YES!YES! May need to prove to IRS that distributions May need to prove to IRS that distributions

from HSA were for medical expenses and from HSA were for medical expenses and not otherwise reimbursednot otherwise reimbursed

May be required by insurance company to May be required by insurance company to prove that HDHP deductible was metprove that HDHP deductible was met

Not all medical expenses paid out of the Not all medical expenses paid out of the HSA have to be charged against the HSA have to be charged against the deductible (e.g. dental care, vision care)deductible (e.g. dental care, vision care)


HSA distributions can be used to reimburse prior HSA distributions can be used to reimburse prior years’ expenses as long as they were incurred years’ expenses as long as they were incurred on or after the date the HSA was established.on or after the date the HSA was established. No time limit on when distribution must occurNo time limit on when distribution must occur Individual must keep records sufficient to Individual must keep records sufficient to prove that:prove that:

The expenses were incurredThe expenses were incurred They were not paid for or reimbursed by another They were not paid for or reimbursed by another

source or taken as an itemized deductionsource or taken as an itemized deduction


Mistaken HSA distributions can be Mistaken HSA distributions can be returned to the HSA.returned to the HSA. Clear and convincing evidence must be Clear and convincing evidence must be

shown that the distribution was a shown that the distribution was a mistake of factmistake of fact

* Must be repaid by * Must be repaid by April 15April 15 of of the year following the year the year following the year in which the individual knew in which the individual knew or should have known the or should have known the distribution was a mistakedistribution was a mistake

Treatment of HSAs Upon Treatment of HSAs Upon DeathDeath

If the spouse is the beneficiary, the spouse If the spouse is the beneficiary, the spouse inheriting the HSA is treated as the ownerinheriting the HSA is treated as the owner

To the extent the spouse is not the To the extent the spouse is not the beneficiary:beneficiary: The account will no longer be treated as an The account will no longer be treated as an

HSA upon death of the individualHSA upon death of the individual The account will become taxable to the The account will become taxable to the

decedent in the decedent’s final tax return if decedent in the decedent’s final tax return if the estate is the beneficiary; otherwise, it will the estate is the beneficiary; otherwise, it will be taxable to the recipientbe taxable to the recipient

Taxable amount will be reduced by any qualified medical Taxable amount will be reduced by any qualified medical expenses incurred by the deceased individual before death expenses incurred by the deceased individual before death and paid by the recipient of the HSAand paid by the recipient of the HSA

The taxable amount will also be reduced by the amount of The taxable amount will also be reduced by the amount of estate tax paid due to inclusion of the HSA into the estate tax paid due to inclusion of the HSA into the deceased individual’s estatedeceased individual’s estate

HSA AccountsHSA Accounts

Accounts are owned by the individual (not Accounts are owned by the individual (not an employer). The individual decides:an employer). The individual decides: Whether he or she should contributeWhether he or she should contribute How much to use for medical expensesHow much to use for medical expenses Which medical expenses to pay from the Which medical expenses to pay from the

accountaccount Whether to pay for medical expenses from the Whether to pay for medical expenses from the

account or save the account for future useaccount or save the account for future use Which company will hold the accountWhich company will hold the account What type of investments to grow accountWhat type of investments to grow account


Employer cannot restrictEmployer cannot restrict What distributions from an HSA are What distributions from an HSA are

used forused for RolloversRollovers

HSA Custodian or Trustee can put HSA Custodian or Trustee can put reasonable limits on accessing the reasonable limits on accessing the money in the accountmoney in the account Frequency of distributionsFrequency of distributions Size of the distributionsSize of the distributions


Who can be an HSA Trustee or Custodian?Who can be an HSA Trustee or Custodian? Banks, credit unionsBanks, credit unions Insurance companiesInsurance companies Entities already approved by the IRS to be an Entities already approved by the IRS to be an

IRA or Archer MSA trustee or custodianIRA or Archer MSA trustee or custodian Other entities can apply to the IRS to be Other entities can apply to the IRS to be

approved as a non-bank trustee or custodianapproved as a non-bank trustee or custodian IRS has provided model HSA Trustee and IRS has provided model HSA Trustee and

Custodian Forms.Custodian Forms.


Trustee or custodian feesTrustee or custodian fees Can be paid from the assets in the HSA Can be paid from the assets in the HSA

account without being subject to tax or account without being subject to tax or penaltypenalty

Can be directly paid by the beneficiary Can be directly paid by the beneficiary without being counted toward the HSA without being counted toward the HSA contribution limitscontribution limits


HSA trustee must report all distributions HSA trustee must report all distributions annually to the individual annually to the individual (Form 1099 (Form 1099 SA).SA). Trustee not required to determine whether Trustee not required to determine whether

distributions are used for medical purposes; distributions are used for medical purposes; the individual does that.the individual does that.

Individual will report on annual tax return Individual will report on annual tax return amount of distribution used for qualified amount of distribution used for qualified medical expenses.medical expenses.

Account holders must file Account holders must file Form 8889Form 8889 as as part of their annual tax return. part of their annual tax return.

HSA AccountsHSA Accounts No “use it or lose it” rules like Flexible Spending No “use it or lose it” rules like Flexible Spending

Arrangements (FSAs)Arrangements (FSAs) All amounts in the HSA are fully vestedAll amounts in the HSA are fully vested Unspent balances in accounts remain in the account until Unspent balances in accounts remain in the account until

spent and carry over year-to-yearspent and carry over year-to-year Encourages account holders to spend their funds more Encourages account holders to spend their funds more

wisely on their medical carewisely on their medical care Encourages account holders to shop around for the best Encourages account holders to shop around for the best

value for their health care dollarsvalue for their health care dollars

Accounts can grow through investment earnings, Accounts can grow through investment earnings, just like an IRAjust like an IRA Same investment options and investment limitations as Same investment options and investment limitations as

IRAsIRAs Same restrictions on self-dealing as with IRAsSame restrictions on self-dealing as with IRAs

HSA AccountsHSA Accounts Rollovers from Archer MSAs and other HSAs Rollovers from Archer MSAs and other HSAs

permittedpermitted Only one rollover per year is permittedOnly one rollover per year is permitted The rollover to new HSA must be completed within 60 The rollover to new HSA must be completed within 60

daysdays These restrictions follow the IRA rollover rulesThese restrictions follow the IRA rollover rules

Direct trustee-to-trustee transfers of HSA amounts Direct trustee-to-trustee transfers of HSA amounts are not subject to the rollover restrictionsare not subject to the rollover restrictions Thus, multiple trustee-to-trustee transfers are allowed in a Thus, multiple trustee-to-trustee transfers are allowed in a

single yearsingle year Both trustees must agree to do the transfer and they are Both trustees must agree to do the transfer and they are

not required to do sonot required to do so Direct rollovers from 401(k), 403(b) and 457 plans Direct rollovers from 401(k), 403(b) and 457 plans

are not permittedare not permitted

Impact of Health Care Impact of Health Care ReformReform

The health care reform legislation The health care reform legislation makes the following changes to HSA makes the following changes to HSA rules, both effective beginning in rules, both effective beginning in 2011:2011: Over-the-counter drugs will no longer be Over-the-counter drugs will no longer be

considered “qualified medical expenses” considered “qualified medical expenses” for purposes of HSA distributions for purposes of HSA distributions (except insulin)(except insulin)

The tax penalty for distributions that are The tax penalty for distributions that are not qualified medical expenses will not qualified medical expenses will increase from 10% to 20%increase from 10% to 20%

Thanks for your Thanks for your attention!attention!

More questions? Contact your broker More questions? Contact your broker at Strategic Business Services.at Strategic Business Services.

For more information, visit the U.S. Department of The Treasury website: www.treas.gov/offices/public-affairs/hsa/

Presented by Strategic Business Services Source: US Department of The Treasury All About HSAs.

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