Health Savings Account (HSA) FAQs

GENERAL QUESTIONS
How does a HSA work?
What is a HDHP?
What are the deductible & out-of-pocket expense limits?
How is an aggregate deductible different from an embedded deductible?
Does the HDHP policy have to be in my name to open an HSA?
I do not have health insurance, can I get an HSA?
I am on Medicare, can I have an HSA?
How do HSAs differ from Flexible Spending Accounts (FSAs)?
Can my HSA be used for dependents not covered by the health insurance?
What type of reporting am I responsible for with the IRS?
Who is responsible for maintaining the records of all expenses, deposits, etc?

QUESTIONS ON REIMBURSEMENTS
What expenses qualify for reimbursement from my HSA?
Once I turn 65, what happens to the money in my HSA?
Are health insurance premiums eligible under my HSA?
What happens to my HSA if I no longer have a HDHP?
What happens to the money in my HSA when I turn age 65?
Can I use my HSA for eligible expenses before my HSA is setup?
What is the tax treatment of an HSA?
How do I take the HSA tax deduction?
Can I use my HSA for non-medical expenses?
Can I borrow against the money in my HSA?
What happens to my HSA upon my death?

QUESTIONS ON CONTRIBUTIONS
What are the annual contribution limits?
What about catch-up contributions for those 55 & older?
Do my HSA contributions have to be made in equal amounts each month?
Can I roll the money in my HSA into my IRA?
Can I participate in both a Medical FSA and a HSA?
Who has control over the money in an HSA?
What if I establish my HSA account at the middle or end of the calendar year?
Can I make a Rollover from an IRA into an HSA?

How does a HSA work?
A HSA works in conjunction with high deductible health insurance. Your HSA money can be used to help pay the health insurance deductible and qualified medical expenses not covered by the health insurance, including dental, and vision. Your HSA account earns tax-free interest and, in some plans, can be used for different types of investments such as mutual funds or money market accounts. A HSA is typically administered by a bank as trustee or custodian.

If your employers offers a Section 125 plan (also known as a “cafeteria plan”) that allows you to contribute to your HSA account through payroll deductions, you will avoid paying the employee share of the federal & FICA tax on the amount you contribute.  When you make your own HSA contributions direct to your custodian account (as opposed to using your employer’s salary reduction arrangement), you make the contributions with after-tax money, and then deduct your contributions on your tax return.

What are the deductible & out-of-pocket expense limits?
Each year new minimum deductibles and out-of-pocket HSA Limits are set to reflect the cost of living.

What Is a “High Deductible Health Plan” (HDHP)?
A high deductible health plan (HDHP) is a health insurance plan sometimes referred to as a “catastrophic” health insurance plan as it contains certain requirements with respect to deductibles and out-of-pocket expenses. The deductibles are generally higher than a standard health insurance plan, and your expenses are generally not covered until the annual deductible is reached, except for expenses defined as preventative care. A HDHP generally costs less than what traditional health care coverage costs, so the money that you save on insurance can therefore be put into the Health Savings Account.

The HDHP does not offer co-pays for prescription drugs or office visits prior to satisfying the annual deductible as these expenses are subject to the annual deductible. Additionally, coverage by any other health plan is not permitted by the individual who has the HDHP. Some exceptions to this rule include accident, disability, dental, vision, long-term care, or specified disease insurance (cancer). You must be covered by an HDHP if you want to open an HSA.

What are the annual contribution limits?
Federal law limits annual contributions. The amount allowed is subject to the HSA Annual Limit for that year. The new limits will be published by the Treasury Department June 1st of the previous year. Contributions in excess of the annual limit may be withdrawn by the tax filing deadline without penalty (a pro-rata share of earnings on the excess amount must also be withdrawn). Excess contributions remaining in the account after the tax filing deadline must be withdrawn and are subject to a 6% excise tax.

What about catch-up contributions for those 55 & older?
For 2009 and forward the catch-up contributions for individual 55 & over is $1,000. If both spouses are 55 and older, each spouse is eligible to contribute to an HSA in their own name. If only one spouse has an HSA in their name, only that spouse can make a catch-up contribution.

What is the tax treatment of an HSA?
An HSA is generally exempt from tax (like an IRA), unless it ceases to be an HSA. Also, if your employer makes a contribution to your HSA, the contribution is not taxable to you. Any earnings on the HSA funds resulting from interest or investment accrue tax-free within the HSA account. This allows account balances to grow faster and enhances the savings aspect of the accounts. Like funds in an IRA, the money in your account grows free from federal taxes. You do have to pay taxes if the money is withdrawn for qualified medical expenses. Furthermore, any earnings on your account will be tax free as long as you use them to pay qualified medical expenses.

How is an aggregate deductible different from an embedded deductible?
Some HSA plans have what is referred to as an aggregate deductible, which means there is one large family deductible that must be met before anyone in the family is covered. (I.E. If a family deductible is $5,000, there must be $5,000 in claims paid out of the client’s pocket before any family member is covered.)  Essentially for employees covering dependents, the entire family deductible must be satisfied by one family member or the combined (aggregate) of the entire family before any one family member can receive benefits.

With an embedded deductible each covered family member only needs to satisfy his individual deductible, not the entire family deductible, prior to receiving plan benefits.  This is only possible if the embedded deductible is equal to at least the required HSA family deductible for that years HSA Limits.  An embedded deductible has a family deductible however, embedded within it is an individual deductible. Embedded deductibles are what people are generally used to when they have a traditional PPO health plan.

What expenses qualify for reimbursement from my HSA?
Most expenses for medical, dental and vision care will be reimbursed under your HSA with some exceptions such as cosmetic surgery and health club dues. A partial list of reimbursable expenses is available in IRS Pub 502, at www.irs.gov.  To be an expense for medical care, the expense has to be primarily for the prevention or alleviation of a physical or mental defect or illness.  Medical expenses incurred before the date the HSA is established cannot be reimbursed from the account, regardless of when you enrolled in the HDHP.  The CARES Act expanded the list of eligible expenses by including popular over-the-counter and menstrual products which you can now purchase with your HSA retroactively to 1/1/2020.

Do my HSA contributions have to be made in equal amounts each month?
No, you can contribute in a lump sum or in any frequency you wish. The deadline for contributions to an HSA is generally April 15th (without extensions) following the year for which the contributions are made. However, your account trustee/custodian can impose minimum  deposit and balance requirements.

How do HSAs differ from Flexible Spending Accounts?
Unlike a Flexible Spending Account, unused money in your HSA is not forfeited at the end of the year; it continues to grow, tax-deferred. HSA contributions are always yours to keep.

Can my HSA be used for dependents not covered by the health insurance?
Generally speaking, it can be used to pay for the unreimbursed medical expenses of your spouse or your legal dependents. A Health Savings Account (HSA) can be used to pay for “qualified medical care expenses” of:  The insured, His or her spouse, or dependent children. There is no requirement that these family members be covered under the plan.

What if I establish my HSA account at the middle or end of the calendar year?
Beginning 2007 an individual who enrolls mid-year in an HSA can contribute up to the full contribution limit for the year rather than just the prorated amount for the calendar year. This change in the law was intended to help people fully fund their HSA accounts. To take advantage of this rule, the individual’s HDHP coverage must take effect any time after January 1 but no later than December 1. Normally, less than full-year HDHP coverage would require the individual to pro-rate their HSA contribution for the year based on the number of months they had HDHP coverage. However, to avoid having to pay back any of the “extra” contribution amount, the individual must remain covered by an HDHP through December 31 of the following calendar year.

If the individual does not remain covered by HDHP during this “testing period,” the extra amount (i.e., the difference between the amount actually contributed and the pro-rated amount that would have been allowed) must be included in the individual’s income and will be subject to the penalty. For any year that you drop or lose your HSA-qualified coverage before the end of the year, you will not be able to make the full contribution to your HSA. You will need to pro-rate your contribution for that year. Count only those months for which you had HSA-qualified coverage on the first day of the month.

Can I use my Health Savings Account for non-medical expenses?
Yes, but you have to pay income tax and a penalty for a non-medical withdrawal prior to age 65.  At age 65, you only pay income tax on the amount of the non-medical withdrawal. Beginning 2011, if you withdraw funds for non-medical reasons, your penalty will 20%.

Who has control over the money invested in a Health Savings Account?
The account holder controls all decisions over how the money is invested. You can also choose not to invest your funds. The same types of investments permitted for IRAs are allowed for HSAs, including stocks, bonds, mutual funds, and certificates of deposit.

Can I borrow against the money in my HSA?
No. You may not borrow against it or pledge the funds in it. For more information on prohibited activities, see Section 4975 of the Internal Revenue Code.

What happens to my HSA upon my death?
Upon death, the remaining balance in an HSA is included in the account holder’s gross estate for estate tax purposes. If the beneficiary of the account is a surviving spouse, the HSA belongs to the spouse and he or she can deduct the account balance in determining the account holder’s taxable estate. If the beneficiary is someone other than the spouse, the HSA ceases to exist, and the beneficiary must include the fair market value of the account in his or her gross income for tax purposes. If no beneficiary is named, the tax is payable by the estate or the beneficiary of the estate.

Can I make a Rollover from an IRA into an HSA?
You are allowed to make a one-time tax-free irrevocable rollover of funds from an Individual Retirement Account (IRA) to your HSA. This funding distribution can only be made from a traditional IRA or a Roth IRA and must be a direct transfer from the IRA to the HSA. This type of rollover is not taxable as income or subject to any penalties for early withdrawal from the IRA. The transfer is limited to the maximum HSA contribution for the year in which the transfer is completed, and the amount contributed is not allowed as a deduction on personal income taxes like normal HSA contributions. Internal Revenue Code section 408(d)(9) provides, in general, that a qualified HSA funding distribution from an individual’s IRA to that individual’s HSA is not included in gross income. While allowed from a IRA, the IRS does not appear to allow a similar transfer option from a 401K (IRS 5329). Important Note:  Failure to maintain eligibility for the  H S A contributions for a period of 12 months following the IRA transfer would result in income tax and a penalty on the transfer.

How do I take the HSA tax deduction?
For the individual who will write-off their HSA contributions from their annual tax return, tax-free means you avoid paying federal income tax. You are still responsible for paying the 7.65% FICA taxes for Medicare and Social Security taxes.

For the HSA participant fortunate enough to have an employer with a Section 125 Plan modified to allow HSA pretax payroll deductions, tax-free means the participant avoids federal income tax and FICA taxes which include Medicare and Social Security taxes. The standard Section 125 plan document should be modified to allow the employee to pretax their HSA savings portion through convenient employee payroll deductions.

What type of reporting am I responsible for with the IRS?
Tax reporting is required for the HSA. IRS form 8889 must be completed with your tax return each year to report total deposits and withdrawals from your account.  As the HSA account holder, you are responsible for ensuring that distributions are used for qualified medical expenses. Records of medical expenses should be maintained as evidence that distributions have been made for these purposes. Qualified medical expenses may only be reimbursed, tax-free, if the expenses are incurred after the date your HSA account was established. You are responsible for ensuring that your annual HSA contributions do not exceed IRS limits.

Once I turn 65, what happens to the money in a Health Savings Account?
Once you turn age 65, you can also use your account to pay for things other than medical expenses.  If used for other expenses, the amount withdrawn will be taxable as ordinary income but will not be subject to any other penalties.  Individuals under age 65 who use their accounts for non-medical expenses must pay income tax AND the penalty on the amount withdrawn.

Once you turn 65 and enroll in Medicare, you can no longer fund your HSA, but you can continue to use your account tax-free for out-of-pocket health expenses. You can also use your account to pay Medicare premiums, deductibles, copays, and coinsurance under any part of Medicare.  If you have retiree health benefits through your former employer, you can also use your account to pay for your share of retiree medical insurance premiums.  The one expense you cannot  use your account for is to purchase a Medicare supplemental insurance policy or “Medigap” policy.

Are health insurance premiums eligible under my HSA?
Generally, health insurance premiums are NOT “Qualifying Medical Care Expenses” except for the following:

• Tax Qualified long-term care insurance.
• COBRA health care continuation coverage.
• Health care coverage while an individual is receiving unemployment compensation.
• In addition, for individuals over age 65, premiums for Medicare A or B, Medicare HMO, and the employee share of premium for employer-sponsored health insurance.
• Premiums for Medigap policies or Life insurance policies are NOT qualified medical expenses.

What happens to my HSA if I no longer have HDHP coverage. Can I still use the money that is already in the HSA for medical expenses tax-free?
Once funds are deposited into the HSA, the account can be used to pay for qualified medical expenses tax-free, even if you no longer have HDHP coverage. The funds in your account roll over automatically each year and remain indefinitely until used. There is no time limit on using the funds.  You are no longer eligible to contribute to an HSA for months that you are not an eligible individual because you are not covered by an HDHP. If you have coverage by an HDHP for less than a year, the annual maximum contribution is reduced; if you made a contribution to your HSA for the year based on a full year’s coverage by the HDHP, you will need to withdraw some of the contribution to avoid the tax on excess HSA contributions.

What happens to the money in a Health Savings Account after you turn age 65?
You can continue to use your account tax-free for out-of-pocket health expenses.  When you enroll in Medicare, you can use your account to pay Medicare premiums, deductibles, copays, and coinsurance under any part of Medicare.  If you have retiree health benefits through your former employer, you can also use your account to pay for your share of retiree medical insurance premiums.  The one expense you cannot use your account for is to purchase a Medicare supplemental insurance or “Medigap” policy.

Once you turn age 65, you can also use your account to pay for things other than medical expenses. If used for other expenses, the amount withdrawn will be taxable as income but will not be subject to any other penalties. Individuals under age 65 who use their accounts for non-medical expenses must pay income tax and the penalty on the amount withdrawn.

Can I use my HSA to pay for medical expenses incurred before I set up my account?
No. You can only reimburse yourself for qualified expenses incurred after you have set up your HSA, not as of the date your enrolled in the HDHP. Therefore, it is recommended you establish your account as soon as possible after enrolling in a HDHP.

Who will be the “bookkeeper” for my HSA?
It is your responsibility to keep track of your deposits and expenditures and keep all of your receipts.

Can I roll the money in a Health Savings Account over into an IRA?
You cannot roll the HSA funds over into an IRA. They will stay in the HSA or be rolled into another HSA.

Can I participate in both a Medical FSA and a HSA?
You can have both types of accounts, but only under certain circumstances. General Flexible Spending Arrangements (FSAs) will probably make you ineligible for a HSA. If your employer offers a “limited purpose” (limited to dental, vision or preventive care) or “post-deductible” (pay for medical expenses after the plan deductible is met) FSA, then you can still be eligible for an HSA.

Does the HDHP policy have to be in my name to open an HSA?
No, the policy does not have to be in your name.  You can still be eligible for an HSA even if the policy is in your spouse’s name. As long as you have coverage under the HDHP policy, you can be eligible for an HSA (assuming you meet the other eligibility requirements for contributing to an HSA).

I do not have health insurance, can I get an HSA?
You cannot establish and contribute to an HSA unless you have coverage under a HDHP.

I am on Medicare, can I have an HSA?
You are not eligible to contribute to an HSA after you have enrolled in Medicare. If you had an HSA before you enrolled in Medicare, you can keep it. However, you cannot continue to make contributions to an HSA after you enroll in Medicare.