Understanding a Health Savings Account

What is a Health Savings Account?

Otherwise known as an HSA, a health savings account can be funded with your tax-exempt dollars, by you or your employer, to help pay for eligible medical expenses not covered by an insurance plan, including the deductible, coinsurance, and even in some cases, health insurance premiums.

Who is eligible for an HSA?

Anyone who is:

•        Covered by a High Deductible Health Plan (HDHP);

•        Not covered under another medical plan that is not an HDHP;

•        Not entitled to Medicare benefits; or

•        Not eligible to be claimed on another person’s tax return.

What is a High Deductible Health Plan (HDHP)?

A High Deductible Health Plan is a plan with a minimum annual deductible and a maximum out-of-pocket limit as listed below. These minimums and maximums are determined annually by the Internal Revenue Service (IRS) and are subject to change.

(2010/2011 limits)

There are two parts to an HSA:

Part 1: Qualifying High Deductible Health Insurance Plan 

Intended to cover serious illness or injury after the deductible has been met. 

Part 2: Health Savings Account 

Pays for out-of-pocket expenses incurred before the deductible is met.

What are the steps in an HSA?

1. Employee and/or employer funds HSA account.
2. Employee seeks medical services.
3. Medical services are paid by HDHP, subject to deductible and coinsurance. Usually a debit card is used to pay services below deductible.
4. Employee may seek reimbursement from HSA account for amounts paid toward deductible and coinsurance.
5. Deductible and out-of-pocket maximum fulfilled.
   

Preventive care usually to be covered at 100%*

*Subject to plan design; check Summary Plan Description.

When do I use my HSA?

After visiting a physician, facility or pharmacy, your medical claim will be submitted to your HDHP for payment. Your HSA dollars can be used to pay your out-of-pocket expenses (deductibles and coinsurance) billed by the physician, facility or pharmacy, or you can choose to save your HSA dollars for a future medical expense.

What is a deductible?

It is a set dollar amount determined by your plan that you must pay out-of-pocket or from your HSA account, before insurance coverage for medical expenses can begin.

How much can I contribute to an HSA?

As noted by federal law, the annual contribution limits are:

-   $3,050 for 2010/2011 for individual coverage or $6,150 for family coverage.

Individuals age 55 or older may be eligible to make a catch-up contribution of $1,000.

What is the difference between an HSA and Flexible Spending Account (FSA)?

•        An HSA can roll over unused funds from year to year.

•        An FSA cannot roll over unused funds from year to year.

Can I contribute to both an HSA and an FSA in the same year?

Only if you have a “limited FSA” is this permissible. A limited FSA only allows reimbursement of expenses that are not eligible for payment under the HDHP or HSA. For example, an employer may establish a limited FSA to allow employees to contribute pre-tax dollars to an account which only reimburses expenses for dental services. Please ask  if a limited FSA is available to you.

If you are covered under an FSA plan that includes a grace period, you are eligible to establish an HSA in the following year if your FSA had a zero balance at the end of the plan year or if you transfer your unused balance into the HSA at the end of the FSA plan year.

What if I enroll in an HSA in the middle of the year?

If you enroll in an HSA mid-year, you are allowed to make a full year’s contribution, provided that you remain covered by the HSA for at least the 12-month period following that year. 

Why should I elect an HSA?

1.  Cost Savings

-   Tax benefits

o   HSA contributions are excluded from federal income tax

o   Interest earnings are tax-deferred

o   Withdrawals for eligible expenses are exempt from federal income tax

-   Reduction in medical plan contribution

-   Unused money is held in an interest-bearing savings or investment account

Note: Many states have not passed legislation to provide favorable state tax treatment for HSAs. Therefore, amounts contributed to HSAs and interest earned on HSA accounts may be included on the employee’s W-2 for state income tax purposes.

2.  Long-Term Financial Benefits

-   Save for future medical expenses

-   Funds roll over from year to year

-   This is your account – you take it with you

3.  Choice

-   You control and manage your health care expenses.

-   You choose when to use your HSA dollars to pay your health care expenses.

-   You choose when to save your HSA dollars and pay health care expenses out-of-pocket.  

If you would like additional information, please feel free to contact me at 208.371.1412 or on the contact page.