General Information about Health Savings Accounts (HSAs)
Overview
Benefits to employers and employees alike are many in response to the passing of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This legislation, in effect as of January 1, 2004, creates a new type of tax-favored account--called a health savings account (HSA). Specifically, employees and employers can deduct money they contribute to HSAs.
Eligibility / High Deductible Health Plan Minimums
The HSA can be used for employees under age 65 to pay for certain medical expenses when covered by high deductible health plans. Plans with deductibles of a minimum of $1,000 for individual and $2,000 for family are eligible. Individuals under the age of 65 are eligible to contribute to an HSA if they have a qualified health plan
Eligible Expenses
In addition to doctor's visits and medical treatment, the money can be used for prescription drugs, retiree health insurance, long-term care insurance, Cobra continuation coverage, health insurance for the unemployed, and other qualified medical expenses.
Contributions / Tax-Exemption
Employers, employees and employee family members can contribute monies to the HSA. Such contributions can be provided up to 100% of the deductible in the individual’s health plan with a maximum of $2,600 for individual policies and $5,150 for family policies.
Individuals age 55 – 65 may make additional “catch- up” contributions of up to $500 in 2004, increasing to $1,000 annually in 2009 and thereafter. A married couple can make two catch- up contributions as long as both spouses are at least 55.
For employees who are age 55 and over by the end of the year, an additional contribution is permitted. For 2004, the additional contribution is $500, and it rises by $100 increments until reaching $1,000 for 2009 and later years. No additional contributions can be made once the employee reaches age 65.
Taxes
Regardless of where the contributions come from, they are exempt from federal income taxes. More specifically, employer and salary reduction contributions are exempt from FICA and FUTA as well.
Excess contributions are subject to an annual excise tax of 6% unless withdrawn prior to the due date of the employee’s tax return and until taken as a taxable distribution or applied against a subsequent year’s funding limit. If employees do take money out of their HSAs to be used for a purpose other than health expenses, those funds would be treated as taxable income and subject to a 10 percent excise tax.
Portability
Because ownership lies with the individual, employees can transfer
their HSA when they become employed somewhere else. In addition,
an HSA may be transferred tax free to the account beneficiary’s
spouse or former spouse for reasons of divorce, divorce, a separation
instrument, or death.