© 2012 employee benefits corporation 3 health savings accounts (hsas) the basics of hsas peter...

3© 2012 Employee Benefits Corporation

Health Savings Accounts (HSAs)

The Basics of HSAs

Peter AntonieCompliance Communications

SpecialistEmployee Benefits

CorporationThe material provided in this webinar is by Employee Benefits Corporation and is for general information purposes only. The information does not constitute legal advice and may not be relied upon by anyone as such. Nor may the information be disseminated in any form.


Today’s Agenda

• Origin/Overview of HSAs• Eligible individuals• High Deductible Health Plan

(HDHP)• Disqualifying coverage• HSA contributions• Participant HSA contribution

issues• Employer contributions to HSAs• HSA Distributions• HSAs compared to Health Care

FSAs and HRAs


Origin of HSAs

The Medicare Prescription Drug, Improvement and Modernization Act of 2003

– Added new Code § 223 (created the HSA)

– An IRA-type of account for medical expenses

– Provided amendment to § 125 to allow HSAs in a cafeteria plan (exception for a benefit that provides deferred compensation)


HSA Overview

• Account established in the individual’s name - not the employer’s

• Owned by the account holder• HSA account must be with an IRS

approved trustee to hold HSA dollars– Banks– Investment companies

• Account balance is non-forfeitable, interest earned is tax free

• Portable with the individual – not tied to employer


Eligible Individual

Eligible to make or receive HSA contributions• Not another individual’s tax

dependent• Not entitled to (enrolled in)

Medicare• Covered by a qualified High

Deductible Health Plan (HDHP)

• Not covered by any disqualifying coverage


Eligible Individual

HDHP• All expenses, except preventive care, apply

to the deductible• Minimum annual deductible

$1,200 for single coverage and $2,400 for other than single coverage – limited family, family, etc. (2012);

$1,250/single and $2,500/family (2013)• Maximum out of pocket amounts under the

HDHP $6,050 for single and $12,100 for family

(deductible and coinsurance); $6,250/single and $12,500/family (2013)

• Amounts are indexed – can be adjusted annually January 1 each year New amounts are announced in June for

next year


Eligible Individual

No disqualifying coverage• Examples of disqualifying

coverageHRA that reimburses prior to

satisfying minimum HDHP deductible

Health Care FSA (own, spouse’s or parent’s - if under 26)

Health insurance that has first dollar coverage or a lower deductible than HDHP minimums

Prescription drug coverage prior to satisfying HDHP deductible (e.g., drugs covered after a co-pay)


Eligible Individual

Permitted coverageSpecified disease (e.g., cancer

ins.)Preventive careStand-alone dental and/or vision

coverageInsurance paying a fixed amount

per day for hospitalization

Workers’ compensation, tort liability or property insurance

Limited Health Care FSA or Post-deductible Health Care FSA

HRA designed to reimburse only after meeting at least minimum HDHP deductible amounts


Ineligible Individual ExampleBob and Betty are married. Both carry single health plan coverage through their employers. Bob has an HDHP and Betty has an HMO and Health Care FSA

Bob cannot contribute to an HSA because Bob is eligible for first dollar reimbursement from Betty’s Health Care FSA

If Betty participated in a Limited or Post Deductible Health Care FSA, Bob could contribute to an HSA


HSA Contributions

If employer offers pre-tax HSA contributions or makes employer contributions to HSAs, employer responsible to:

• Know that employee is covered by HDHP offered by the employer

• Know that the employee does not have disqualifying coverage offered by the employer

• Know whether the employee is eligible for “catch up” HSA contributions


HSA Contributions

• By individual or family member as tax deduction at year-end (post-tax)

• By individual as pre-tax deduction in cafeteria plan

• By employer (employer’s contribution reduces the maximum the individual can contribute)


HSA Contributions

HSA contribution limits• $3,100 for single coverage and

$6,250 for family coverage (2012) $3,250/single and $6,450/family (2013)

• Additional “catch up” contribution of $1,000 allowed for individuals 55 or older

• Joint limit applies to married individualsLimited to family maximum split

between the spouses if either or both have family HDHP coverage

Assume 50%/50% split unless agreed upon differently


HSA Contributions

Annual maximum contribution is the sum of the monthly contribution limits (annual/12) for the months the individual was eligible to make contributions• e.g., 2012 single maximum of

$3,100 equates to $258.33 per month

• Full Contribution rule* for mid-year HDHP enrollees or coverage change allowed

* also referred to as the last-month rule


HSA Contributions

Full Contribution rule• Must be HSA eligible December 1• 13-month testing period applies• Contribution maximum is the greater of

The annual maximum for coverage in effect December 1, or

The sum of the monthly maximums for the HDHP coverage that was actually in effect for each month of the year


HSA Contributions

Full Contribution rule• 13 month testing period applies• Individual must remain HSA eligible

from December 1 of the year the full contribution rule is used until the end of December of the following year

• If not, any additional contributions (those in excess of the sum of the monthly maximums) are treated as taxable income plus additional 10% tax


HSA Contributions

Full Contribution example #1• John enrolled in family HDHP coverage

October 1 (no HDHP coverage prior) and uses the full-contribution rule

• John’s monthly maximum sum is $1,562 ($6,250/12 months X 3 months)

• John makes the full $6,250 contribution• John’s additional contributions are

$4,688• John must remain HSA eligible until

December 31 of the following year• If not, he is taxed on the additional

contributions of $4,688 plus an additional tax of $468.80


HSA Contributions

Full Contribution example #2• Mary was enrolled in single HDHP

coverage from January through August (8 months)

• Mary enrolled in family HDHP September 1

• The sum of her monthly maximums is $4,155.01 ($3,100/12 mo x 8 mo) + ($6,250/12 mo x 4 mo)

• Family HDHP contribution maximum is $6,250

• Mary contributes $6,250 using the full contribution rule

• Mary’s additional contributions = $2,094.99 (subject to taxation if she doesn’t remain HSA eligible through the testing period)


HSA Contributions

Roll over from Health Care FSA or HRA

• No longer available• Roll over must have been completed

by December 31, 2011• Participant must have been a

participant in the employer’s Health Care FSA or HRA on September 26, 2006

• Could roll over the lesser of balance on 9/26/06 or the end of current plan year

• Participant must remain HSA eligible during the 13-month testing period


HDHP & HSA Limits** minimum = deductible, maximum =

out-of-pocket • 2012 min/max– Single

$1,200/$6,050– Family

$2,400/$12,100• 2012

contribution limit– Single $3,100– Family $6,250

• 2013 min/max– Single

$1,250/$6,250– Family

$2,500/$12,500• 2013

contribution limit– Single $3,250– Family $6,450


Participant HSA contribution issuesScenarios assume the participant’s

employer has HDHP with HSA• Spouse’s employer implements non-

HDHP • Spouse takes job with employer that

has non-HDHP coverage

• Spouse takes job with employer that has HDHP with HSA coverage

• Participant marries• Participant’s spouse loses job and HDHP

with HSA coverage• Participant’s spouse loses job and non-

HDHP coverage


Spouse’s employer implements non-HDHP• Participant drops health plan and

enrolls on spouse’s non-HDHP Participant cannot make future HSA

contributions• Participant switches to single health

plan, spouse enrolls in single non-HDHP Participant can make future single plan

HSA contributions, unless spouse elects a Health Care FSA

• Participant remains in family coverage, spouse does not enroll in non-HDHP coverage Participant can continue family HSA

contributions, assuming spouse does not elect a Health Care FSA


Spouse takes job with employer that has non-HDHP coverage• Participant continues family

HDHP coverage and spouse does not enrollParticipant continues family HSA

contributions, assuming spouse does not elect Health Care FSA

• Participant switches to single HDHP coverage and spouse enrolls in single non-HDHPParticipant limited to single HSA

contributions for remainder of tax year, assuming spouse does not elect Health Care FSA


Spouse takes job with employer that has non-HDHP coverage (continued)• Participant switches to single or

drops plan and spouse enrolls in family non-HDHP Participant ineligible for future

HSA contributions


Spouse takes job with employer that has HDHP with HSA• Spouse enrolls in family HDHP,

participant drops his/her employer’s health plan Participant continues to make family HSA

contributions (spouse makes none), or Spouse establishes account and makes

family contributions (participant makes none), or

Spouses split the future family HSA contributions

• Participant continues in family coverage Spouse can enroll in single or family

coverage. Participant continues to make his/her own family HSA contributions (spouse makes no contributions), or

Participant splits family contributions with spouse


Spouse takes job with employer that has HDHP with HSA (continued)• Participant switches to single health

plan, spouse enrolls in single HDHP Participant's future HSA contributions

reduce to single amount for remainder of tax year. Spouse can make single HSA contributions for remainder of tax year

• Participant switches to single health plan, spouse enrolls in family HDHP Participant and spouse can split family

HSA contribution amount, or Participant can stop making

contributions and spouse makes family contributions for remainder of tax year


Participant marries

• Participant drops his/her employer’s health plan and enrolls on spouse’s planIf spouse’s plan is HDHP,

participant can make family HSA contributions or split family contribution with spouse for remainder of tax year, assuming spouse has no Health Care FSA

• Participant and spouse keep single health plans with their employersParticipant limited to single

amount for HSA contributions unless spouse has a Health Care FSA, then no future HSA contributions allowed


Participant marries (continued)

• Spouse drops his/her coverage. Participant enrolls in family HDHPParticipant eligible for family HSA

contributions for remainder of tax year (limit can be split between spouses or all contributed by one spouse), unless spouse has Health Care FSA


Participant’s spouse loses job and had HDHP with HSA coverage• Participant can enroll in

employer’s health planParticipant or spouse can make

family HSA contributions or split the limit

Contributions can be into the spouse’s account or participant can establish new HSA account


Participant’s spouse loses job and non- HDHP coverage• Spouse and participant do not

elect COBRA, participant can enroll in family HDHP coverage and make family HSA contributions for remainder of tax year (participant alone or split with spouse)

• Spouse elects COBRA for single plan, participant enrolls in single HDHP and can make single HSA contributions for remainder of tax year, unless spouse elected COBRA for Health Care FSA


HSA Contributions

Pre-tax vs. Post-tax• Pre-tax through cafeteria plan

Immediate tax savings Automatic contributions Could affect future Social Security

Benefit Employer and employee contributions

subject to IRC §125 nondiscrimination testing

• Post-tax outside cafeteria plan Line item adjustment at year-end No effect on future Social Security

benefit Any employer contribution subject to

Comparability rules of §223 No effect on §125 nondiscrimination

testing


Employer HSA contributions• Through a cafeteria plan

If employees can make pre-tax contributions, employer contributions are considered made through the cafeteria plan (Treasury Reg. §54.4980G-5)

Employer contributions and any employee pre-tax contributions are subject to IRC §125 nondiscrimination testing

• Outside a cafeteria plan Subject to Comparability rules of § 223 Comparable contributions for comparable

participating employees (e.g., same dollar amount for all enrolled in single plan coverage, % of HDHP deductible, etc.)

Cannot be based on age, years of service or compensation


HSA Contributions through Cafeteria Plan§125 Nondiscrimination Testing• HSA contributions (employer &

employee) treated as premiums• HSAs are taken into account when

performing the § 125 Contributions & Benefits test* and Key Employee 25% Concentration test

• Failing either or both tests means the HCEs or Key employees are taxed on all their pre-tax benefits (premium share, FSAs and pre-tax HSAs)

*If employer HSA contributions are not comparable, the C&B Availability test fails if HCEs receive a higher amount


HSA Distributions

• Distributions are tax free for qualified medical expenses incurred after HSA is established non-medical distribution is taxed plus

additional 20% penalty

• Distributions act as reimbursement of medical expenses to the account holder

• Generally for medical expenses of account holder, spouse or tax dependents (eligible child rule to age 26 does not apply)

• Qualified medical expenses the same as for a Health Care FSA (IRC § 213(d)) with exception for some premiums


HSA Distributions

Premiums eligible from HSA• Qualified long term care insurance

(LTC)• COBRA or USERRA leave premiums• Any health plan premiums during

period receiving unemployment compensation

• If over 65, account holder’s health coverage other than Medicare supplement (e.g., premiums for retiree coverage, Medicare Part B or D or Medicare Advantage, etc.)


Health Care FSA vs HRA vs HSA

Feature Health Care FSA EBC HRA HSA

Contributions

Employer and

employeeEmployer

Employer and

employee

Maximum Contribution

Set by employer

Set by employer

Indexed annually

Tax status of ER

contributions

Excludable from EE income

Same Same

Portability None None Individual account

HDHP Not required Not required Required

Non-Medical expenses Not allowed Not allowed

Subject to 20% penalty

+ tax


Health Care FSA vs HRA vs HSA(continued)

Feature Health Care FSA EBC HRA HSA

Coverage Period 12 months Plan

determinesDoes not

apply

Uniform coverage

ruleApplies Does not

applyDoes not

apply

Substantiation

requirements

Plan must substantiate

Plan must substantiate

Individual substantiatio

n

Reimbursement order

FSA pays last unless HRA document over rides

HRA pays first unless

HRA document stipulates

FSA

Cannot have FSA or HRA cover same expenses


Questions?

• Any questions can be addressed by e-mail or phone at your convenience

Compliance Department800 346 [email protected]

• Thanks for Attending!!

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© 2012 employee benefits corporation 3 health savings accounts (hsas) the basics of hsas peter...

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