Health Savings Account Rules
A Health Savings Account or HSA is tax advantaged
medical savings account that is owned by the individual (this means they are portable). They are
designed to be used in conjunction with a High Deductible Health Insurance Plan, which means the money you
save on lower insurance premiums can fund your HSA. The money contributed to the account is not
subject to federal tax at the time of deposit, so it's pre-tax dollars for employees or tax deductible if you
are self employed. The funds in a Health Savings Account can be used to pay all eligible medical
related expenses that are not covered by your Health Insurance Plan.
Health Savings Account (HSA)
Contribution Limits
Initially, Health Savings Account contributions were limited to the lesser of the actual deductible or specified
IRS limits. Congress later eliminated the deductible based limit and set guidelines to limit maximum
contributions.
These contribution limits are according to IRS Publication 969, "Health Savings Accounts and Other Tax-Favored
Health Plans". You can make HSA contributions for any calendar year until April 15 of the following calendar year,
(or the date your personal taxes are due), the same as IRA contributions.
2014 HSA Contribution Limits Rise Slightly From 2013.
Increases in the contribution
limits are based on inflation and due to the fact that overall inflation measured by the CPI was subdued
there was a small inflation adjustment. Therefore, the 2014 HSA contribution limits rose by
$50 for individuals and $100 for families over 2013.
The 2014 HSA Contribution Limits have been announced by the IRS
and will increase $50-100 from 2013. These have been included in the table below as well as all
the changest going back to 2004.
Year
|
Contribution Limit
(Single)
|
Contribution Limit
(Family)
|
Additional Catch-Up Provision
(55 or older) (Single and Family)
|
2004
|
$2,600
|
$5,150
|
$500
|
2005
|
$2,650
|
$5,250
|
$600
|
2006
|
$2,700
|
$5,450
|
$700
|
2007
|
$2,850
|
$5,650
|
$800
|
2008
|
$2,900
|
$5,800
|
$900
|
2009
|
$3,000
|
$5,950
|
$1,000
|
2010
|
$3,050
|
$6,150
|
$1,000
|
2011
|
$3,050
|
$6,150
|
$1,000
|
2012
|
$3,100
|
$6,250
|
$1,000
|
2013
|
$3,250
|
$6,450
|
$1,000
|
2014
|
$3,300 |
$6,550
|
$1,000
|
This means in 2014 a family may contribute $6550 ( $545.83 /mo. ) to an HSA. If the owner of the family plan is
age 55 or older the catch up provision allows an additional $1000 for a total contribution of $7550.
Any money in your HSA account that is not used during a calendar year is rolled over to the following year, so
this means your account balance can grow over time. This is one of the primary benefits of an HSA when compared to
a Flexible Spending Account (FSA).
Health Savings Account Eligibility
In order to establish a Health Savings Account ( HSA ) you must have a High Deductible Health Plan ( HDHP ). You
may choose the deductible and co-insurance combination you wish to have but they must fall within these guidelines
for 2014. Note: There are slight increases coming for the 2014 HSA qualifying deductible.
Participant |
Minimum Deductible
|
Maximum Out Of Pocket
|
Individual |
$1,250
|
$6,350
|
Family |
$2,500
|
$12,700
|
For example: If you are an individual with more than $5000 in your HSA you may choose a
HDHP that has a $5000 deductible and no co-insurance. This plan would be inexpensive and would meet the HSA
Eligibilty requirements. However, a plan with a $5,000 deductible and 20% co-insurance for a maximum out of pocket
of $7000 would not qualify as it is above the Maximum Out Of Pocket limit of $6,350.
Health Savings Account Investments
Your HSA account has investment options similar to an IRA account. Money market or similar cash instruments are
common as people want to make sure funds are available to cover out of pocket medical expenses. If your balance
grows beyond your annual maximum out of pocket expenses, then you may choose to put the excess into a stock mutual
fund or other "at risk" investment option. Your HSA administrator may charge extra fees to establish brokerage
services and these vary from company to company. Please consult your account representative for advise and
investment options.
Health Savings Account Qualified
Expenses
You can use your health savings account to pay for a wide range of medical and health related services. When you
incur a medical or health related expense that is not covered by your insurance, there is a good chance that you
can pay for it out of your HSA.
The IRS defines qualified expenses as: "Medical expenses are the costs of diagnosis, cure, mitigation,
treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These
expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical
practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.
Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do
not include expenses that are merely beneficial to general health, such as vitamins or a vacation.
Medical expenses include all out of pocket expenses for medical care and the amounts you pay for transportation
to get medical care. Medical expenses also include amounts paid for qualified long-term care services and can
include insurance premiums (Cobra) if you are unemployed." Source: IRS.Gov
Examples of HSA Qualfied Expenses Include:
Doctor Visits and Tests not covered by your insurance policy.
Surgical procedures and hospitalization related charges not covered by your insurance.
Prescription Drugs
Certain OTC Drugs
qualify but now need a prescription from your doctor.
Insulin as well as Diabetic Testing Supplies
Vitamins & supplements do not qualify.
Accupuncture & Chiropractic Care
Eye Exams, Glasses and Laser Surgery
Hearing Tests and Hearing Aids
Dental Exams, Dental Work and Dentures
Alcohol and Drug Abuse Treatment
Insulin and Diabetic Testing Supplies
Long Term Care related expenses.
Wheel Chairs, hand rails or other disability related home improvements.
Your health insurance provider or HSA administrator will provide you with a complete list of goods and services
that are eligible.
The complete list is also available on pages 5-14 on IRS Publication 502
Record Keeping: Make sure you save all
your HSA related receipts in case you are ever audited. Similar to a tax audit you will need proof of what you
purchased using your account.
How To Open A Health Savings
Account
The health insurance provider where you purchase
your High Deductible Health Plan will provide you with a list of local institutions or you can choose any
institution that sponsors HSA plans. The fees do vary between institutions but are generally
between $2.25 - $4.50 per month. Several will waive the fees once your account balance reaches $2500, $3000
or $5000.
Most HSA accounts come with a check book and debit
card for paying for medical services.
You will want to choose an institution that not only
has reasonable fees but also offers the investment options that suit your needs.
Here are a few examples of fees charged for HSA's by various institutions:
HSA Withdrawal Rules
It is not necessary for HSA participants to obtain approval in advance of withdrawing funds, and the funds are
not subject to income tax if they are used to cover for qualified medical expenses. Most HSA administrators make both checks and a
debit card available for easy access to your money. Some also allow a for a reimbursement process similiar to the
one used by most health insurance companies however this is uncommon.
Funds can be withdrawn for any reason using checks and debit cards, however any withdrawls that are not used for
qualified medical expenses are subject to a 20% penalty as well as income taxes. The 20% penalty is waived for
people age 65 and older or those who have become disabled. Income taxes still apply in these situations but there
are no additional penatlies. These rules are very similar to the ones governing other tax sheltered accounts such
as IRAs.
Any funds withdrawn for qualified medical expenses are always tax free. You must however keep documentation
pertaining to all qualifed medical purchases. A lack of documentation can be grounds for the IRS to rule that funds
were not used for qualified medical expenses and the account holder would be subject to additional penalties.
When an account holder dies, the funds transfer to the beneficiary designated on the account. If a surviving
spouse is the beneficiary, the funds will transfer on a tax free basis.
Health Savings Account Contribution
Limits
Health Savings Account Eligibility
Health Savings Account Investments
Health Savings Account Qualified Medical
Expenses
How To Open A Health Savings Account
Health Savings Account Withdrawal
Rules
Additional Information Source: US Department Of The Treasury
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