Health Savings Accounts (HSA)

1. What is a Health Savings Account?
A Health Savings Account, or HSA, is a tax-exempt account with a financial institution in which funds accumulate to pay for medical expenses. They were created in response to the rising cost of health care with the intent to give the consumer back the control of their health care costs as part of a movement towards consumer-driven health-care.


2. Why Would a Company Consider a HSA?
HSA’S give financial incentives for employers of all sizes to provide health insurance benefits to their employees and allow them to save money on a pre-taxed basis for their medical expenses. HSA’S allows companies to enjoy tax reductions while having affordable health insurance premiums.


3. How Does a HSA Work?
Before a health savings account can be opened, a qualified High Deductible Health Plan (HDHP) must be in place to cover the individual or family. An HDHP provides health coverage for an individual or family with an affordable premium. The guidelines for an HDHP are determined by the Internal Revenue Service each year. To determine if your plan qualifies, please contact your health plan representative. The current requirements of an HDHP are as follows:

Deductible Requirements Minimums for Tax Year 2012:

$1,200 for Single

$2,400 for Family

Maximum Out-of-Pocket for Tax Year 2012:

$6,150 for Single

$12,100 for Family

Annual Contribution Maximum for Tax Year 2012

$3,100 Single

$6,250 Family

After a qualified HDHP has been put into place, an employee decides if they are going to fund a portion ofthe deductible for the employee. Whatever portion of the deductible is not funded by the employer, the employee has the opportunity to contribute to the HSA to make up the difference. Contributions can be made according the schedule below.

4. Contribution Schedule
Health Savings Accounts (HSA) provide tax benefits for the funds that you contribute. However, the Internal Revenue Service limits the amount you are able to contribute to an HSA for each tax year. If you contribute more than the IRS allows, you could incur tax penalties. To avoid making excess contributions, coordinate your contributions with any other contributions that are being made to your account by an employer or another third-party.

• Contributions can be made by:

1. Accountholders / Individuals
2. Employers
3. Any other third party 

• Contributions are tax-deductible for the accountholder. Employer contributions and employee contributions through a Section 125 Plan are pre-tax. 

• Contributions made to an accountholder’s account belong to the accountholder until the funds are used (please see the Distributions section below).

• Employer contributions must be made on a comparable basis.

• Contributions are limited to the lesser of 100% of the deductible or the IRS Contribution Limit.

5. What are the Limits?
The Internal Revenue Service (IRS) reviews and determines the HSA contribution limits on an annual basis. An accountholder is able to contribute 100% of their qualified HDHP deductible up to the IRS contribution limit. The limits for 2012 are listed above. An additional catch-up contribution of $1000 is available to individuals over the age of 55 who are not enrolled in Medicare.

6. Distribution

• Funds can be used tax-free at any time for eligible medical expenses. 
• As of age 65, funds can be used for non-eligible medical expenses subject to ordinary income tax without any IRS penalty. 
• Prior to age 65, funds can be used for non-eligible medical expenses subject to ordinary income tax and a twenty percent IRS penalty. 
• Upon the accountholder’s death, the assets in the HSA become the property of their named beneficiary. If there is no beneficiary named, the assets go to the accountholder’s estate.

1. If the beneficiary is a spouse, the HSA may be treated as their own account.
2. If the beneficiary is a non-spouse, the HSA must be treated as ordinary income for taxation purposes. 

7. Tax Advantages
Health Savings Accounts create unique tax benefits for accountholders/individuals.

• Contributions are 100% tax-deductible.
• Funds grow on a tax-deferred basis, and if the funds are used for an eligible medical expense, the funds are tax-free. 
• Funds roll over from year to year, and funds used after age 65 are able to be used tax-free for eligible medical expenses or at your normal tax rate for any other reason.
• Over the life of your Health Savings Account, you could save thousands of dollars in taxes.
• Federally qualified Health Savings Accounts are tax-deductible, tax-deferred and tax-free.
• Tax-deductible – Contributions to your HSA are able to be deducted from your gross income.
• Tax-deferred – HSA funds grow without being subject to taxes until they are used for non-eligible medical expenses.
• Tax-free – The funds in an HSA are completely tax-free when used for eligible medical expenses.

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