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Health Savings Accounts, HSA Health Insurance with HSA Connect Questions and Answers
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Questions and Answers Health Savings Account Q&A
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Health Savings Accounts (HSAs) - Q&A

What is a Health Savings Account?

Who is eligible to establish an HSA?

What is a High Deductible Health Plan?

What happens if the HSA funds are used for non-qualified expenses?

What's Covered?

How does an eligible individual establish an HSA?

Who may contribute to an HSA?

How much may be contributed to an HSA in calendar year 2014?

What are the annual catch-up contributions?

What is the tax treatment of an eligible individual's HSA contributions?

Is there a deadline for contributions to an HSA for a taxable year?

If both spouses have coverage under separate HSA-compatible health plans, how is the contribution limit determined?

What happens to your HSA upon your death?

Can I use the funds in my HSA even if I am no longer enrolled in an HSA-compatible health plan?


What is a Health Savings Account?

Health Savings Accounts or HSAs became available on January 1, 2004 as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. HSAs provide a tax advantaged savings tool, similar to an IRA or a 401k, which can be used toward one's medical expenses. The basic components of HSAs are as follows:

  • HSAs allow individuals who have a qualified medical insurance plan, known as High Deductible Health Plans, to place a certain amount of money into a tax advantaged savings account.
  • Individuals can contribute up to the maximum allowable amount to their HSA each year.
  • At any time, individuals can draw money out of their HSA to pay for qualified medical expenses.
  • The money that remains in the HSA at the end of the year simply rolls-over and can be increased with the following year's contribution.
  • At age 65 and older individuals can draw money out of their HSA for any reason with no tax penalty.
  • The total amount of money placed in health savings accounts (HSAs) each year, regardless of what has been withdrawn for qualified medical expenses, can be deducted "off the top" from the account holder's federal income taxes.

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Who is eligible to establish an HSA?

An individual is allowed to fund a Health Savings Account (HSA), provided they have met the following criteria:

  • Must be covered by an HSA-compatible, high deductible health plan (HDHP).
  • Cannot have additional health insurance coverage that does not meet the requirements of an HDHP.
  • Cannot be listed as a dependent on another person's tax return.
  • Cannot be entitled to benefits under Medicare.

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What are High Deductible Health Plans?

A high deductible health plan (HDHP) is a health insurance plan that meets certain requirements in three key benefit areas - deductible, out-of-pocket maximum, and first-dollar coverage. These requirements are as follows:

  • Deductible: A minimum annual deductible of $1,250 for individual (self-only) coverage or $2,500 for family (more than one individual) coverage.
  • Out-of-Pocket Maximum: The annual out-of-pocket maximum for "In-Network" expenses cannot exceed $6,350 for individual coverage or $12,700 for family coverage. This refers to the amount of money an insured would have to pay before the insurance carrier would pay for 100% of any additional medical expenses incurred in that same year. It includes deductibles, co-payments and co-insurance expenses. It does not include premium payments.
  • First dollar coverage can only be available for preventive care, such as an annual physical. Other than preventive care, the insured must satisfy their deductible before any co-payment or co-insurance benefits can go into effect.

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What happens if the HSA funds are used for non-qualified expenses?

Prior to age 65, money withdrawn from an HSA for any use other than qualified medical expenses will be taxed at the individual's ordinary income tax rate and receive an additional 10% tax penalty. After the individual has turned 65 years of age the 10% tax penalty no longer applies.

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What's Covered?

Money placed into an HSA can be withdrawn for the payment of qualified medical expenses without incurring any taxes. Qualified medical expenses include those typically covered by a standard health insurance plan, as well as expenses not typically covered under one's health insurance, such as orthodontia, dental, and vision expenses. For a comprehensive list of qualified medical expenses view the Internal Revenue Service's Publication 502.

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How does an eligible individual establish an HSA?

There are a number of HSA administrators or custodians that offer a variety of products and services, including debit cards, investment accounts, and bill payment. Once an individual has enrolled in an HSA-compatible health insurance plan they can open their HSA with any one of these administrators. While HSAConnect neither endorses nor recommends any specific financial institutions, we do provide a partial list of Health Savings Account Administrators as a service to our clients.

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Who may contribute to a health savings account?

Contributions to an individual's HSA may be made by that same individual, a family member, the individual's employer, a third party (not a family member and not the individual's employer) or any combination of these. However, the total amount contributed to an HSA from all sources cannot exceed the maximum contribution limit.

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How much may be contributed to an HSA in calendar year 2014?

For individuals and families (two or more) enrolled in a qualified high deductible health plan (HDHP), the maximum allowable contribution to an HSA for tax year 2014 is as follows:

  • Individual Coverage: $3,300
  • Family Coverage: $6,550

It is as simple as that. The only stipulation is that the tax payer must be enrolled in the qualified high deductible health plan (HDHP) through the end of the year. And, they must remain in the HDHP for at least 12 months.

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What are the annual catch-up contributions?

For eligible individuals ages 55 and older the annual catch-up contributions are as follows:

Year
2009 and beyond
Catch-up Contribution
$ 1000

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What is the tax treatment of an eligible individual's HSA contributions?

For federal income taxes, an eligible individual may deduct "off the top" from their adjusted gross income the total amount that individual contributed to their HSA for that calendar year. This tax savings is allowed regardless of whether or not the individual itemizes their deductions. However, medical expense deductions under Section 213 cannot also be deducted.

To ensure compliance, please consult a qualified tax advisor.

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Is there a deadline for contributions to an HSA for a taxable year?

Like an IRA, contributions for a calendar year may be made at any time following the beginning of that calendar year and prior to the deadline for taxes for that year. For those who file their taxes annually, this deadline is generally April 15th of the following year.

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If both spouses have coverage under separate HSA-compatible health plans, how is the contribution limit determined?

In a situation where each spouse has individual or family coverage under separate HSA-compatible high deductible health plans, the combined contribution for each cannot exceed $6,550.

However, if in this scenario one or both spouses are 55 or older, the additional catch-up contribution may be made on behalf of each eligible spouse.

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What happens to your HSA upon your death?

Upon your death funds from your HSA will be distributed to the beneficiary or beneficiaries you designated with the HSA administrator. If you fail to designate a beneficiary the assets will be distributed to your estate.

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Can I use the funds in my HSA even if I am no longer enrolled in an HSA-compatible health plan?

Yes, provided the funds are used exclusively for qualified medical expenses as defined by the Internal Revenue Service, the distributions will not be taxed.

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David Stern  
Financial Planner  


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