Health Savings Accounts
By Brett Newberry
Due to the rising costs associated with employer-provided health care insurance to employees, many employers are reviewing their options to reduce this cost. Health Savings Accounts (HSAs) are an option available to employers and help employees to manage their own health care needs.
The HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying or reimbursing qualified medical expenses of an employee, their spouse, and their dependents. What is the eligibility to have a HSA? The employee must be covered under a High-Deductible Health Plan (HDHP). The employee cannot also be covered by any other health plan that is not a HDHP. For 2013, a HDHP must have certain plan limits. Related to individual coverage, the minimum annual deductible is $1,250, and the maximum out-of-pocket costs are $6,250. Related to family coverage, the minimum annual deductible is $2,500, and the maximum out-of-pocket costs are $12,500. There are certain exceptions for plans providing preventive care and limited types of permitted insurance and permitted coverage. The employee cannot be enrolled in Medicare, and the employee cannot be claimed as a dependent on another individual’s tax return. Your insurance agent can provide you additional information related to HDHPs.
There are certain things that must be done to set up HSAs for employees. An employee can establish a HSA in much the same way someone would establish an Individual Retirement Account (IRA) with a qualified trustee or custodian. It will be necessary to determine the annual HSA contribution and whether the employee has qualified medical expenses eligible for reimbursement with nontaxable HSA distributions. The employer, the employee, family members, and any other person may contribute to the employee’s HSA. The total contributions for the year cannot exceed certain contribution limits.
How much can the employee contribute to the HSA on an annual basis for 2013? For self-only coverage, the amount is $3,250. For family coverage, the amount is $6,450. If an individual is age 55 or older and not enrolled in Medicare, they are allowed an additional catch-up contribution of $1,000. Eligibility to make HSA contributions is determined monthly. Individuals who have qualifying HDHP coverage (and no other coverage) for only part of the year can contribute and deduct 1/12 of the annual limitation amount for each month they are covered only by a HDHP.
How does the employee claim the federal income tax deduction for the HSA contribution? Contributions to a HSA are fully deductible, the earnings grow tax deferred, and distributions to pay or reimburse qualified medical expenses are tax free. The employee may deduct contributions made by anyone other than their employer as long as they do not exceed the maximum annual contribution amount. Employer contributions to an employee’s HSA are exempt from federal income tax and from Social Security, Medicare, and FUTA taxes.
When is the contribution deadline for funding a HSA? The deadline for regular and catch-up HSA contributions is your federal income tax return due date, excluding extensions, for that taxable year. The due date for most taxpayers is April 15. How are HSA distributions taxed? The qualified medical expenses must be incurred after the HSA has been established. HSA distributions used exclusively to pay for or reimburse qualified medical expenses incurred by the employee, their spouse, or their dependents are not included in gross income. Any other distributions are included in income unless rolled over.
There are certain nondiscrimination rules that must be followed related to the use of HSAs. Employers who contribute to employee HSAs face a 35% excise tax if comparable contributions are not made for all employees with comparable coverage during the same period.
Related to Health Care Reform, as of January 1, 2011 if you are under age 65 and you withdraw funds from your HSA and do not use the funds for qualified medical expenses, they will be taxed as ordinary income and you will also incur a 20% penalty tax. Most over the counter medications will not be considered to be a qualified medical expense unless they are prescribed by a physician.
Until next time,
The Business Doctor