WHAT IS A HEALTH SAVINGS ACCOUNT (HSA)?

Health Savings Accounts, or HSAs, were created by Congress to combat rising medical costs by providing an incentive for more consumers to pay "first-dollar" medical expenses. An HSA, like and Archer Medical Savings Account (MSA), is an IRA - like account that is designed exclusively for covering medical expenses incurred by the HSA account beneficiary (the person who establishes the account) and his or her dependents.

Overview

There are two simple parts to the process for establishing a Health Savings Account (HSA). You must have a Qualified High Deductible Health Plan (HDHP) before you can establish a HSA. The HDHP covers medical expenses after you meet the deductible and the HSA covers "first-dollar" day to day qualified medical expenses before the deductible is met.

A HDHP is an insurance policy that meets certain dollar limits as shown in the table below. To determine if you qualify, simply contact your health plan administrator or representative.

HSA vs HRA vs FSA

With the alarming increases in health care costs, employers are looking to consumer-driven health plans, such as, Health Reimbursement Arrangements (HRAs) and Flexible Spending Arrangements (FSAs), and the newly introduced Health Savings Accounts. Unfortunately, many consumers are confused about which approach is best.

One of the main differences between HRAs, FSA or HSA is the incentive to be a value-conscious health care consumer. HRA funds do not accrue to the employee and therefore offer the employee little incentive to control spending and with an FSA you "Use-it or Loose-it." The table below provides a general summary of the differences between an HRA, FSA and HSA.

Contributions

Maximum Contributions
For 2009, the maximum you may contribute to a Health Savings Account (HSA) is $3000 for single coverage or $5950 for family coverage. Minimum HDHP deductibles are $1150 for individuals and $2300 for families. The total amount you or your employer may contribute to an HSA for any taxable year is shown in the table below:

* Deductible no longer applies.
* Please review disclosure under Question: How much may be contributed to an HSA in calendar year 2009.

Minimum Contributions
After you establish your Health Savings Account you have no legal obligation, per HSA regulations, to make additional contributions, even if you continue coverage under a High-Deductible Health Plan (HDHP).

Catch-Up Contributions
In additional to the 2009 HSA contribution limits of $3000 for individuals and $5950 for family coverage, if you attained age 55 before the close of a taxable year, you may also contribute an additional amount known as a "catch-up" contribution. The catch-up contribution limit is $1000 for 2009, and is scheduled to increase through 2010 as shown in the table below.

Employer Contributions
Employers may contribute to an employee's Health Savings Account (HSA), but the employer must make available comparable contributions on behalf of all "comparable participating employees." Contributions are considered comparable if they are the same amount or same percentage of the High-Deductible Health Plan (HDHP) deductible.

Contribution Deadlines
HSA contributions must be made for a specific year on or before the due date (without extensions) for filing tax returns for that year. So, for 2008, contributions must be made on or before April 15, 2009.

Higher HDHP Deductibles
Health Savings Account holders may purchase a High-Deductible Health Plan (HDHP) with a deductible beyond the HSA contribution limit. For example, a single person can purchase a $5000 deductible HDHP. However, that person's maximum 2009 HSA contribution would still be limited to the $3000 cap for single coverage.

HSA Contributions must be Cash
Health Savings Account (HSA) contributions must be in cash.

Distributions

Distributions for Qualified Expenses
Distributions from a Health Savings Account (HSA) are used to pay for qualified medical expenses of the account owner, his or her spouse, or dependents and the distributions are excluded from gross income -- even if the individual is not currently eligible to make HSA contributions.

Distributions not used for Qualified Expenses
Distributions not used for qualified medical expenses are includable in gross income and, for applicants under age 65, subject to an additional 10% tax penalty.

For Ineligible Individuals
If the Health Savings Account (HSA) beneficiary is no longer "eligible" (e.g., over age 65, enrolled in Medicare or no longer enrolled in a High-Deductible Health Plan (HDHP), distributions used to pay qualified medical expense continue to be exempt from gross income.

Determination of Qualified Medical Expense
The person who establishes an HSA makes the qualified medical expense determination and should maintain verifying expense records. The HSA Trustee or Custodian makes no judgments on what may or may not be a qualified medical expense. Employers who make contributions to an employee's HSA cannot make a qualified medical expense determination. Determining qualified medical expense is always the sole accountability of the Health Savings Account holder.

HSA Distributions are Optional
When you incur a qualified medical expense, you are not obligated to pay the expense with available Health Savings Account (HSA) funds. You can either spend after-tax income or use your Health Savings Account funds.

HSA Distributions after Death: Spouse
If the Health Savings Account (HSA) owner dies, the HSA becomes the property of the designated beneficiary. If the spouse is the beneficiary, the surviving spouse is subject to income tax only on HSA distributions not used for qualified medical expenses.

HSA Distributions after Death: Other than Spouse
If the HSA passes to a person other than the spouse, the HSA terminates as of the date of death, and the person is required to include in gross income the assets of the HSA at the date of death. The taxable amount is reduced by any HSA payments for the decedent's qualified medical expenses, if paid within one year after death.