What is a Health Savings Account (HSA)?
Is an HSA the same as a Medical Flexible Spending Account (FSA) or Health Reimbursement Account (HRA)?
What is an HSA-compatible health plan?
Who is eligible for an HSA?
What kinds of coverage would make me HSA ineligible?
How is an HSA "established"? Why does establishing an HSA matter?
If my spouse is covered by another health plan that is not an HSA-compatible plan, am I still HSA eligible?
How do HSA contributions work and are there any limits?
What happens if I contribute more than the IRS limit in one year?
If I have family coverage under my HSA-compatible health plan, but I am the only eligible individual to contribute to an HSA, can I still contribute the HSA family maximum or am I limited to the single maximum?
If I become eligible mid-year, am I required to prorate contributions on a monthly basis?
How do I prorate contributions?
If I switch health insurance coverage types, how do I determine my contribution limit?
How do I correct an excess contribution?
Does an excess contribution affect my tax reporting?
What is my contribution limit if I become ineligible?
What can I use HSA funds for?
Is there a time frame in which I must use my HSA funds?
What happens if I use the funds for ineligible expenses?
If I am enrolled in single coverage under an HSA-compatible health plan, can HSA funds be used for my spouse or eligible dependent that are not under my health plan?
How is HSA activity reported for tax purposes?
How are HSA withdrawals monitored? Is there an expense verification process like an FSA or HRA?
If I use funds from my HSA for medical expenses, can I claim them as a deduction on my income tax?
What is a Health Savings Account (HSA)?
A Health Savings Account (HSA) is an account that allows you to save money for medical expenses on a tax-advantaged basis. Funds are deposited into the HSA on a tax-free or tax-deductible basis, funds grow on a tax-deferred basis, and remain tax-free when used for eligible medical expenses. It is the only existing account that provides a triple tax benefit where funds, when used for eligible expenses, are never taxed. In order to contribute to an HSA, the HSA must be combined with an HSA-compatible health plan (often referred to as a high deductible health plan or HDHP).
Is an HSA the same as a Medical Flexible Spending Account (FSA) or Health Reimbursement Account (HRA)?
While an HSA is similar to a Medical FSA and HRA, there are several key differences. For example, an HSA has no "use-or-lose" provision as funds automatically carry over from year to year. The HSA is also portable if employment changes and funds can be invested. However, since an HSA provides an attractive tax benefit, the IRS sets the annual contribution limits, limits the types of other plans that can be offered alongside an HSA and requires that the HSA be combined with an HSA-compatible health plan.
What is an HSA-compatible health plan?
An HSA-compatible health plan is a health insurance plan that meets the guidelines set by the IRS regarding deductibles, out-of-pocket expenses and acceptable coverage. The health plan cannot provide benefits before the deductible is met, except for preventive care services. All co-payments or co-insurance (e.g. prescription drug costs) must be counted toward the deductible and out-of-pocket limits. Co-payments required before a deductible is met can prevent the plan from being an HSA-compatible health plan.
Who is eligible for an HSA?
To be eligible for an HSA, you must only be covered by an HSA-compatible health insurance plan, not enrolled in Medicare and not claimed as a dependent on another person's tax return. Your eligibility to contribute to an HSA is determined on the first of each month.
What kinds of coverage would make me HSA ineligible?
Any health plan that is not an HSA-compatible plan would make you ineligible for an HSA. This includes coverage under a spouse's plan which is not an HSA-compatible plan and coverage under a General Medical FSA or HRA.
While you cannot be covered under a General Medical FSA or HRA, you should check with your employer to see if they offer a Limited Medical FSA or HRA designed to cover vision and dental expenses.
How is an HSA "established"? Why does establishing an HSA matter?
An HSA is a custodial account (similar to an IRA) and must be "established" before you are eligible to make withdrawals from your HSA. Through Benefit Resource's partnership with The Bancorp Bank (as the trustee/custodian), an account is considered established on the later of: a) the date you are first eligible for the HSA or b) when you open your account.
Example of why establishing an HSA matters:
Joan begins HSA-compatible health plan coverage on January 1. On January 15, Joan goes to the doctor and is billed $250 for the visit.
Scenario 1: Joan established her HSA January 1. If she had $250 in the account, then payment for the January 15 expense could be paid directly from her HSA. Otherwise, Joan has the option of reimbursing herself once the balance reaches $250.
Scenario 2: Joan does not open and establish her HSA until February 1. The $250 expense from January 15 would not be an eligible expense.
If my spouse is covered by another health plan that is not an HSA-compatible plan, am I still HSA eligible?
To be eligible for an HSA, you must be covered by an HSA-compatible health plan and not be covered by any non-compatible plan. If your spouse is covered by an additional plan which does not cover you, you would remain HSA eligible. If your spouse's plan also provides you with coverage, you would not be eligible for an HSA.
How do HSA contributions work and are there any limits?
Contributions can be made by you, your employer or a third party (e.g. family member or friend). Contributions can either be made on a tax-free basis through a Section 125 Plan or directly into the account on a tax-deductible basis. The IRS sets the maximum annual contribution limit. Generally, HSA contributions do not have to be prorated; however, certain exceptions and conditions apply.
| IRS Contribution Limits |
Single Coverage | Family Coverage |
| Contribution Limit (2013) | $ 3,250 | $ 6,450 |
| Contribution Limit (2012) | $ 3,100 | $ 6,250 |
| Additional Catch-up Contribution (for those 55 and older) |
$ 1,000 | $ 1,000 |
Contributions can be made at anytime up until the tax filing deadline, typically April 15.
What happens if I contribute more than the IRS limit in one year?
Contributions in excess of the IRS limit are subject to tax penalties. The combination of employee, employer and third party contributions may not exceed the annual IRS limits. If you are required to prorate your contribution limit, the prorated contribution will apply. In order to avoid the tax penalties, the IRS allows you to remove any excess funds and any earnings prior to the tax filing deadline, typically April 15. Ordinary taxes would be applied.
If I have family coverage under my HSA-compatible health plan, but I am the only eligible individual to contribute to an HSA, can I still contribute the HSA family maximum or am I limited to the single maximum?
Contribution limits are determined by your health insurance plan coverage. Plans with "single plus one" or "single plus child" coverage levels are treated as being family coverage and you may contribute the family maximum amount to your HSA.
If I become eligible mid-year, am I required to prorate contributions on a monthly basis?
No. The IRS allows you to contribute the maximum annual contribution as long as you remain eligible through December 31 of the following year. If you are concerned that you may not remain eligible for the entire period, you may want to prorate contributions based on the number of months you were HSA eligible.
How do I prorate contributions?
If you determine you want or need to prorate contributions, you will need to take the annual contribution limit and prorate it for the number of months you were HSA eligible.
| Annual Contribution Limit |
÷ | 12 months | X | # of months eligible |
= | Protrated Contribution |
| Example: | ||||||
| $ 3,250 (single annual limit for 2013) | ÷ | 12 months | X | 4 (months eligible) | = | $ 1,083 |
| $ 6,450 (family annual limit for 2013) | ÷ | 12 months | X | 6 (months eligible) | = | $ 3,225 |
If I switch health insurance coverage types, how do I determine my contribution limit?
If you switch from single coverage to family coverage, you are allowed to contribute the family maximum for the entire year. If you switch from family coverage to single coverage, you are required to prorate your contributions based on the number of months under each type of coverage.
Example: Jane has family coverage 1/1/2013 - 3/31/2013. Jane switches to single coverage 4/1/2013 and remains covered through 12/31/2013. Jane is eligible to contribute $4,050 for 2013.
$6,450 ÷ 12 x 3 (for the family coverage time frame) plus $3,250 ÷ 12 x 9 (for the single coverage time frame)
If I anticipate an excess contribution will occur, can I adjust or stop future payroll contributions to prevent the excess contribution?
HSA contribution elections can change at any time. Your employer may instruct you on specified time periods or the frequency that they will administer these changes.
How do I correct an excess contribution?
To correct an excess contribution, you must request the HSA trustee/custodian (The Bancorp Bank) to remove the funds from the HSA as an excess contribution. The request must include your name, bank account number, and instructions to remove the funds as an excess contribution. The HSA trustee/custodian will process the request and send you a check for the removed funds.
To receive a sample letter to request the excess contribution to be removed, contact Benefit Resource Participant Services at (800) 473-9595, Monday - Friday, 8am - 8pm (Eastern Time) or by email: participantservices@BenefitResource.com.
Does an excess contribution affect my tax reporting?
If you have an excess contribution that remains in the HSA when you file your taxes, you will report the excess contribution. The funds will be taxed at the ordinary tax rate plus a 6% excise tax. If you remove an excess contribution during a tax year, you will receive a 1099-SA document outlining the distribution. You will use this document when completing your tax return.
What is my contribution limit if I become ineligible?
If you become ineligible to contribute to an HSA, (e.g. you have lost HSA-compatible health plan coverage or you have ineligible coverage), you will need to take the annual contribution limit and prorate it based on the number of months you were eligible. See "How do I prorate contributions?" above.
If I am terminated or lose HSA-compatible health plan coverage through my employer, can I continue to fund my HSA?
As long as you are eligible to contribute to the HSA, you can continue to fund it even after your employment ends with your current employer. If you lose your HSA-compatible health plan coverage and do not enroll in another HSA-compatible health plan, you will not be eligible to contribute to the HSA. However, you may keep the HSA and use the funds to pay for eligible medical expenses as long as these expenses are not reimbursed from any other source (e.g. insurance).
What can I use HSA funds for?
An HSA is designed to pay for any eligible medical expenses for you, your spouse or eligible dependents. This includes expenses paid toward deductibles, co-insurance, vision and dental.
Is there a time frame in which I must use my HSA funds?
An HSA allows you to pay for or get reimbursement for any services provided after the HSA has been established. There is no time frame in which you must use your HSA funds.
What happens if I use the funds for ineligible expenses?
An HSA allows you to withdraw funds for any reason. However, you would need to pay ordinary tax and an additional penalty of 20% on any funds that are withdrawn for an ineligible expense. You are responsible for determining if an expense is an eligible medical expense and maintaining receipts for tax reporting and potential IRS audit purposes. At age 65, funds can be withdrawn for any reason and only ordinary tax applies.
If I am enrolled in single coverage under an HSA-compatible health plan, can HSA funds be used for my spouse or eligible dependent that are not under my health plan?
HSA funds can be used for you, your spouse or eligible dependents (as identified on your Federal tax return) even if they are not covered by the HSA- compatible health plan.
How is HSA activity reported for tax purposes?
The trustee/custodian of the account provides you and the IRS with IRS Form 5498-SA reporting all contributions to the account and IRS Form 1099-SA reporting distributions from the account. Tax-free contributions are reported on your W-2. Use these documents to complete IRS Form 8889, which is submitted with your Federal tax return.
How are HSA withdrawals monitored? Is there an expense verification process like an FSA or HRA?
Verification of expenses is not required for HSAs. However, total withdrawals from your HSA are reported to the IRS on Form 1099-SA. You are responsible for reporting qualified and non-qualified withdrawals when completing your taxes. You are also responsible for saving all receipts as verification of expenses in the case of an IRS audit.
If I use funds from my HSA for medical expenses, can I claim them as a deduction on my income tax?
No. Since eligible expenses are paid with tax-free dollars from your HSA, you cannot claim the same expenses on your income tax return.