the complete hsa guidebook - franchising, buying a franchise

1

Foreword

Sophie M. Korczyk, Ph.D. Hazel A. Witte, J.D.Stephen D. Neeleman, MD, CEO, HealthEquity, Inc. 15 West Scenic Pointe Drive, Suite 400, Draper, UT 84020 801.272.1000 www.healthequity.com

TheComplete HSA

Guidebook

How to Make

Health Savings Accounts

Work for You

3rd Edition

The Complete HSA Guidebook

“The Complete HSA Guidebook is the most comprehensive explanation

of how HSAs work to date—it should be a tremendous resource for

people who want to be protected from catastrophic illness and save tax

free money for the future.”

--John Desser, Founder, Coalition for Affordable Health Coverage

(www.cahc.net)

“The most comprehensive and user-friendly guide—of any kind—I

have ever had the pleasure to read! Clearly, this is a must-read for

anyone— agent, accountant and patient/insured anywhere.”

--Harry Randecker, President, National Association of Alternative

Benefits Consultants

(www.naabc.com)

“The guidebook has everything a consumer, business owner, or

broker will need to understand, establish, and utilize an HSA.”

--Grace-Marie Turner, Galen Institute

(www.galen.org)

“The most consumer-friendly guide to the most consumer-friendly

health insurance product to appear in years.”

--Dr. Merrill Matthews, Director, Council for Affordable

Health Insurance

(www.cahi.org)

The Complete HSA

Guidebook

How to Make Health Savings Accounts

Work for You

3rd Edition

Sophie M. Korczyk, Ph.D. Hazel A. Witte, J.D.Stephen D. Neeleman, MD, CEO, HealthEquity, Inc. 15 West Scenic Pointe Drive, Suite 400, Draper, UT 84020 801.727.1000www.healthequity.com

Copyright 2008 HealthEquity™. All rights reserved. www.healthequity.com

ISBN: 0-9763992-1-0 Printed in the United States of America

The Complete HSA

Guidebook

How to Make Health Savings Accounts

Work for You

3rd Edition

Sophie M. Korczyk, Ph.D. Hazel A. Witte, J.D.Stephen D. Neeleman, MD, CEO, HealthEquity, Inc. 15 West Scenic Pointe Drive, Suite 400, Draper, UT 84020 801.727.1000 www.healthequity.com

i

Foreword

We began writing the First Edition of the Complete HSA Guidebook just a few short months after the original HSA law came into effect on January 1, 2004. Now, four years have passed and we are beginning to see significant growth in the number of health savings accounts (HSAs) throughout the country. Recent estimates suggest that nearly 10 million Americans have health benefits that are covered through HSAs.

Some of the most recent national data suggests that people with HSAs are behaving differently than those with HMO or PPO type insurance. Large populations of consumers with HSAs have been shown to shop more carefully for medical care and go to the emergency room less often for non-life threatening illnesses. Other studies show that the vast majority of people with HSAs finish the year with growing money in their accounts that they can roll over to pay for future medical expenses or into long-term savings and investments.

In our First Edition of the Complete HSA Guidebook, we asked the question, “Can private US health care be saved?” I believe the answer is a resounding “YES!” It will not come through inefficient, government run systems, but through incentivized consumers that demand innovative, free market solutions to improve and pay for health care in the United States.

Health savings accounts have already collectively saved their owners millions of dollars in health care costs and the account balances are growing quickly—at the time we are writing this edition, it is estimated that national HSA balances are approaching $2 billion.

Our initial goal with the guidebook was to create a book about HSAs that was both comprehensive as well as easy

Foreword

ii

to understand. I believe we accomplished that goal as many of our readers have commented on the important role the Complete HSA Guidebook has played in helping them better understand HSAs. This 3rd Edition has been updated to include the most recent amendments to the HSA law and clarifications from the IRS.

We remain committed to helping people improve their health and their financial well being through better understanding and adoption of HSAs. We hope this guidebook remains a powerful tool to accomplish that end.

Stephen D. Neeleman, MD Salt Lake City, Utah January, 2008

iii

Contents

Table of ContentsForeword ............................................................................. iContents .............................................................................iii Intoduction Health Care worries .........................................................viiWhat is an HSA? ................................................................viiIs the HSA a Brand-New Concept? .................................... ixSo What Is New About This Type of Health Care Coverage? .............................................. xiWhy Now? ........................................................................ xiHow Does the HSA Improve the Situation? ...................... xiiWhat This Book Does ......................................................xiii

Chapter 1: Health Savings Accounts—A New ApproachThe High Deductible Health Plan (HDHP) ......................1-1The Health Savings Account (HSA) .............................. 1-11 The Two-Part Plan—How it Differs from Other Health Plans; How it’s the Same .............................. 1-16 Not All HSAs Are the Same .........................................1-18Choosing an HSA Provider ...........................................1-18The Health Savings Account (HSA) .............................. 1-11Keep in Mind .................................................................1-22Up Next .......................................................................1-22

Chapter 2: Who Would Want an HSA? Eligibility—Who Can Establish and Contribute to an HSA ............................................................................2-1Eligibility for HSA Distributions ..................................... 2-14Eligibility for Tax Deductions ......................................... 2-17

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iv

Making Sure HSAs are Right for You ............................2-24Also Think About These Options .................................2-27Keep in Mind .................................................................2-27Up Next .......................................................................2-28

Chapter 3: How to Set Up an HSA HSA—Remember the Definition .....................................3-1In a Nutshell.... .................................................................3-3How to Find out about HSAs ..........................................3-4Getting a Certificate of Coverage ...................................3-4The Employer and the HSA ............................................3-5Keep in Mind ...................................................................3-8Up Next .........................................................................3-8

Chapter 4: How Does Your HSA/HDHP Work? Using the HDHP .............................................................4-1Permitted Coverage Alngside an HDHP ..........................4-1Using the HSA ................................................................4-8Knowing Who Can Provide You Treatment ..................4-10How You Pay ................................................................ 4-14Keep in Mind .................................................................4-23Up Next .......................................................................4-24

Chapter 5: A Consumer Guide to Paperwork and Record KeepingWhy Record Keeping Is Especially Important .................5-1Paperwork Your HDHP and HSA Will Send You ...........5-3Paperwork to Keep the IRS Happy .................................5-4Submitting Expenses to Your Plans .................................5-5How Long to Keep HSA Receipts, Statements and Other Documentation ................................................5-9

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Contents

Troubleshooting ............................................................5-10When You Disagree with Your HSA Statement ............5-10If You Are Not in an Integrated Plan ............................ 5-11Keep in Mind ................................................................. 5-11Up Next .......................................................................5-12

Chapter 6: Making an HSA Work for You Your Cost-Benefit Analysis ..............................................6-1Determining the Right Amount of Money to Contribute to Your HSA .............................................6-2Case Studies ....................................................................6-4Keep in Mind .................................................................. 6-13Up Next......................................................................... 6-14

Chapter 7: Your HSA/HDHP and Everyday Health Care Challenges You Need Elective (Non-Emergency) Surgery ................7-1It’s an Emergency ...........................................................7-4Family Matters ................................................................7-5You Change Jobs or Lose Your Job ...............................7-10It’s Business ................................................................... 7-11You Retire Before You Are Eligible for Medicare ........... 7-13When You Enroll in Medicare ....................................... 7-13Using Your Account After Disability ............................. 7-14Keep in Mind .................................................................. 7-16Up Next ....................................................................... 7-16

Chapter 8: The HSA Law The Federal HSA Law .....................................................8-1Estate Treatment of HSAs ...............................................8-8Employer Requirements ..................................................8-8

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vi

Bankruptcy ...................................................................8-12State Law ......................................................................8-12Keep in Mind ................................................................. 8-14Up Next ....................................................................... 8-15

AppendixGlossary of Health Care Coverage Terms ....................... A-1IRS Forms ......................................................................A-13Updates .........................................................................A-13Publication 502 Excerpt for tax year 2003 .....................A-14How You Can Spend Your Tax-Free HSA Dollars ..........A-14How You Cannot Spend Your Tax-Free HSA Dollars ....A-44Index ............................................................................. A-51

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What is an HSA?

Health Care worries

What issue tops off every list of national worries? Health care. Everyone—employers, employees and individuals—wrestles with how to get and pay for the necessities of medical care. Health care costs are a moving target as inflation, accessibility and complexity take their toll.

Consumer-driven health plans are the latest response to soaring costs. They teach and empower consumers to take financial control of their health care spending; Health Savings Accounts (HSAs) are the centerpiece of this new approach.

What is an HSA?

An HSA is a savings account that is combined with a qualified high-deductible health plan (HDHP). The HDHP protects the insured from the cost of a catastrophic illness, prolonged hospitalization or a particularly unhealthy year. The HSA can be used for meeting expenses before the HDHP deductible is met or for other health care expenses allowed under the Internal Revenue Code. These accounts can provide consumers flexibility and choice, along with incentives to become careful consumers.

The HSA account is administered by a bank, insurance company or approved third-party custodian or trustee. As long as the individual has a qualified HDHP, contributions to the HSA can be made tax-free. Employers can also make tax-free deposits to an employee’s HSA account.

viii

Introduction

viii

HEALTH PLAN COMPONENTS

HSA HDHP

HSAs help individuals save for medical and retirement health expenses tax free. Essentially, the individual decides how to use the money, including whether to save it or spend it through the years. The HSA can be used to finance work/life transitions, such as COBRA payments (for health care coverage through your former employer) or premiums for long-term care. HSA funds can be used to offset retiree health expenses, such as Medicare Part B, or retiree health care coverage sponsored by your former employer. To help individuals make decisions, HealthEquity—the HSA Company, provides the tools to compare hospital, drug, or doctor costs and assist in making decisions on care and spending.

HSAs are like IRAs or 401(k) plans in that both individuals and employers can make tax-free deposits and investments that grow tax-free. HSA dollars can be spent on a wide variety of medical products and services. Money can be taken from the account for non-medical expenditures by paying taxes and a penalty. Taxes and penalties do not apply after the account owner has

enrolled in Medicare.

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What is an HSA?

Is the HSA a Brand-New Concept?

Not exactly. For over a decade, employers have offered components of consumer-driven health plans through savings accounts such as Medical Savings Accounts (state MSAs or federal Archer MSAs), health reimbursement arrangements (HRAs) and flexible spending accounts (FSAs). These have been used to pay for medical copayments, dependent care, dental and vision plans and other costs, with tax-deductible or pre-tax dollars. However, all but the MSA plan present special restrictions—they can’t be taken to new jobs and can’t be carried over to the next year (the famous “use-it-or-lose-it” conundrum).

While MSAs (or Archer MSAs) have been in existence since the mid-1990s, this federal pilot program was limited to small employers and the self-employed, as an affordable alternative to high-priced, low-deductible health plans. MSAs required that the individual also have an HDHP in place, and savings in the MSA could be rolled over year to year. However, there were limitations on who could have an MSA and the number of MSAs that could be established, as well as an end-date to the pilot program.

For many years, certain retirement plans like section 401(k) plans and individual retirement accounts (IRAs) have used the concepts of investment accounts and year-to-year rollovers. Variations on that approach, including Roth IRAs, 529 education accounts and Coverdell accounts, all have sensitized and educated individuals on

x

Introduction

x

the many ways consumers can plan for and use individual savings accounts.

Congress created HSAs as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This legislation replaced MSAs and made HSAs a permanent health care coverage vehicle, combining some of the features of many of the individual savings accounts mentioned above. It also extended eligibility to those who are unemployed, self-employed or employed by an employer of any size.

2008 IRS HSA information Single Family

Annual HDHP Deductibles

Minumum $1,100 $2,200

Maximum OOP $5,600 $11,200

Annual HSA Contributions

Single Maximum $2,900 $5,800

All amounts will increase by consumer price index (CPI) each yearMaximum HSA contribution is as listed, or the prticipant’s HDHP annual deductible whichever is lessFor updates please visit www.hsaguidebook.com

Is the High Deductible Health Plan a New Concept?No. High deductible health plans (HDHPs) have been around for a long time, as protection against the economic consequences of injury and illness. Such expenses can be too high for most families to pay on their own.

xi xi

What is an HSA?

So What Is New About This Type of Health Care Coverage?

The HSA/HDHP is a permanent health plan option that ties together the ability to own and use a tax-favored savings account with a health plan that provides the security of major medical health insurance coverage. While some of the concepts behind the HSA aren’t entirely new, these accounts are in many respects more attractive than older versions, allowing individuals to invest their money, carry it over from year to year and take it with them as they change jobs or retire.

With the HSA/HDHP, consumers have significant power and responsibility for their health care decisions. The consumer (or the employer, or both) sets aside a pool of money to spend on health care before HDHP coverage kicks in. Policymakers hope that, by having such a financial incentive, participants will become better and more prudent health care consumers.

Why Now?

Health care costs are escalating for many reasons, including new medical technologies that increase life expectancy, medications that increase quality of life, increasing numbers of patients with chronic illness, over-utilization of health care and administrative waste. Everyone is challenged by health coverage rate increases, and is searching for reasonable ways to control costs. Changes in the practice of medicine, as well as consumer preferences, also affect the way health care dollars are assigned and spent.

xii

Introduction

xii

Our health care system does not make a direct connection between receiving a service and paying for it. Instead, a third party—the insurance company or plan administrator—actually processes and pays the bill; the consumer never sees the actual price tag. The consumer is usually only aware of the amount of his or her co-payment, rather than the full price for office visits, lab tests, etc. The co-payment seems to be the price, cost-conscious. But as services become more expensive, the consumer does pay for the increase indirectly, through higher deductions from wages for health care. .The result is that premium costs are pricing health care out of reach for employers and individuals. Dissatisfaction with the lack of choice in care and financing adds to the precarious state of health care coverage.

How Does the HSA Improve the Situation?

The HSA/HDHP can bring both consumer choice and flexibility back into health care. You can use the HSA for co-payments and deductibles and for services that are not offered by the health plan, with tax-free dollars. You may also decide to seek a physician out of your network, and you can pay for that care from your HSA. The HSA also gives you a chance to deal with the variability of health care expenses. For instance, one year you may have just a few doctors’ appointments, while the next year you may meet the deductible mid-year and still need extra physical therapy appointments. With the HSA funds from the previous year, and the funds added during the current year, you might be able to meet all your needs tax-free. You can use the HSA to bridge life

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What is an HSA?

events, such as unemployment, job changes and periods of disability by paying for health insurance premiums, or health care directly.

What This Book DoesThis book is your guide to getting the best from an HSA. It gives you the basics, as well as advantages and limitations of HSAs, and provides examples of real-life situations that you can relate to your own circumstances.

Each chapter has cross-references, definitions and charts that will assist you. With this book, you will be ready for the consumer health care revolution.

1Chapter Chapter 1

Health savings account (HSA) based health coverage

actually has two parts, a high deductible health

plan (HDHP) and a health care saving and spending

account (the HSA). This chapter provides an

overview of how health savings accounts, combined

with high deductible health plans, are poised to

change the health care coverage landscape.

4 The HDHP

4 The HSA

4 The Two-Part Plan—How it Works

4 Not All HSAs Are the Same

4 Choosing an HSA Provider

4 HSA Transition Rules and Grace Periods

Health Savings Accounts— A New Approach

Health Savings Accounts—A New Approach

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The High Deductible Health Plan (HDHP)

Before you can open an HSA, you must first establish a qualified HDHP. The HDHP is the insurance component of the HSA-based health coverage. The purpose of the HDHP is to cover higher cost health care expenses that would be difficult to pay for out-of-pocket, even with your HSA – care that is unexpected and very expensive. You will find that HDHPs are typically much less expensive than traditional, full-coverage plans. The IRS requires that you have one of these plans prior to opening an HSA. The HDHP must satisfy certain requirements regarding deductibles and out-of-pocket limits in order to “qualify” you to have an HSA. These requirements will be addressed in the following sections. Plans that satisfy these deductibles and out-of-pocket limits are referred to as qualified HDHPs. To understand these plans, you will need to be familiar with the following terms and concepts:

Deductibles

The deductible is the amount of covered expenses that an individual must pay in a given plan year before any charges are paid by the medical plan or insurance company. The plan year may be the calendar year (January 1 to December 31), or some other twelve-month period (some plans allow deductibles to accumulate for longer than twelve months – see Carry-Over Deductibles in this section) that your employer or insurer chooses for managing your plan and keeping track of deductibles and other limits. To qualify to open an HSA in 2008, a single person must have an HDHP with a deductible of at least

Chapter 1

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$1,100. The minimum deductible is $2,200 for a family. The deductible limit is subject to change annually due to increases in the Consumer Price Index (CPI). The IRS typically announces changes to these limits in June the year prior to the change.

Minimum Health Plan DeductibleIndividual 2008 $1,100 (no change)

Family 2008 $2,200 (no change)

Embedded DeductiblesSome HDHP plans provide multiple deductibles or “embedded” deductibles. In such plans, the lowest deductible in the plan is the one that determines whether the plan is a qualified HDHP.

Example: The Jones family is covered under a plan that provides family coverage with a per-person embedded deductible of $1,000 per family member and a total family deductible of $2,200 (also called an umbrella deductible). The plan begins paying for care for individuals in the family that exceed $1,000 in expenses even if the total $2,200 family deductible has not been met. Mr. Jones incurs covered medical expenses of $1,500 during the year. The plan pays benefits of $500 on his behalf, even though the $2,200 family deductible has not been met. Since claims are paid by the insurance company for individuals before they reach $1,100, the plan is not a qualified HDHP, and the family is therefore not eligible to contribute to an HSA. Without the $1,000 per-person deductible, however, the plan would be an eligible HDHP.


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Carry-Over Deductibles

There are two common types of carry-over deductibles: 1) When an insurance plan is switched mid-year, either

by an employer or individual, occasionally, the insurance carrier will allow expenses that were applied to the previous deductible to “carry over” to the new policy. However, in order to be HSA-qualified, plans can not “carry over” expenses. The full deductible still has to apply, even when you switch mid-year.

2) Some insurance carriers will allow expenses that were applied to the previous deductible to be applied to, or “carried over” to, the new policy when the plan year resets. Usually, the “carry over” deductible is applied for expenses incurred at the end of the plan year during a certain period of time (usually one to three months before the plan year end). This is not a requirement, but it is a nice feature when expenses occur late in the year. In only the rarest of circumstances will this type of “carry over” deductible exclude your plan from being HSA-qualified. Because the deductible includes more than 12 months, the IRS minimum deductible limit (based on a 12-month plan year) must be increased.

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Example: If Matt has a plan that allows him to include expenses from 15 months (3 month carry over) to satisfy the deductible, the minimum deductible for his individual policy in 2008 is 15/12 x $1,100 = $1,375 and for family coverage 15/12 x $2,200 = $2,750. If Matt’s plan does not satisfy these increased minimums it is not a qualified HDHP.

Out-of-Pocket Limits

The out-of-pocket limit is the highest amount of money you may have to pay during a plan year. In many HDHPs, the out-of-pocket limit and the deductible are the same amount. However, some plans do not completely cover expenses post-deductible. In this scenario, a plan may “split the bill” with a member until the out-of pocket maximum is reached. This is called coinsurance.

Example: Tricia has a deductible of $1,100 and an out-of-pocket max of $3,000. Tricia pays up to her $1,100 deductible, after which her plan agrees to split the bill 80/20. The plan will pay 80 percent of costs after the deductible and Tricia will pay 20 percent. If Tricia has a further $9,500 in expenses, she will pay 20 percent of that bill, or $1,900. At this point her total spending will have reached $3,000. She has hit her out-of-pocket max and her insurance plan will pay the rest of her covered medical expenses for that plan year.


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Amounts you pay as deductibles, co-payments, or coinsurance, are included in your out-of-pocket expenses, which are kept as a running total. Insurance premiums you pay are not counted toward out-of-pocket limits. Once you have reached your plan’s limit for the year, remaining eligible expenses are covered at 100 percent regardless of the plan’s usual co-payment or coinsurance arrangements. Some plans refer to this limit as the stop-loss limit.

In 2008, a qualified HDHP’s out-of-pocket limits must be no higher than $5,600 per year for individual coverage and no higher than $11,200 per year for family coverage, though they can be lower.

Maximum Health Plan Out-of-Pocket

Individual 2008 $5,600

Family 2008 $11,200

If a plan has multiple out-of-pocket limits, the sum of these limits must be equal to, or less than the amount stipulated by law.

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Example: Dean and Laurie and their two children have a family plan. Their plan specifies that each out-of-pocket maximum is $2,200, after which the plan pays 100 percent for each member of the family that reached that maximum. Since the out-of-pocket maximum per family by law is $11,200, their plan would be a qualified HDHP (4 x $2,200 = $8,800). However, if they had four children, their plan would not be a qualified HDHP, because the maximum out-of-pocket limit would be higher than legal maximum (6 x $2,200 = $13,200).

Network Plans

A network plan (such as a PPO) is a health plan that generally provides more favorable pricing and benefits for services provided by its network of providers than for services provided outside the network. If your HDHP is a network plan, your expenses will be re-priced if you use in-network health care providers. Re-pricing refers to the adjustment of health care providers’ “sticker” or “retail” prices to reflect discounts the providers may have negotiated with your health plan. Network plans and re-pricing are both allowable in qualified HDHPs, but they are not required.

Network plans may provide a different level of benefits for members when they use in-network vs. out-of-network providers. Many of these plans have separate out-of-pocket limits and deductibles for network and non-network care; a powerful incentive for plan participants to use network providers.


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The law does not specify any maximum out-of-pocket limit for spending on non-network care, so an HDHP may have higher out-of- pocket limits for services provided outside the network than the $5,600/$11,200 limits allowed for an HDHP. A plan may also restrict benefits to what is considered the usual, customary and reasonable amounts, and any expenses above that amount that are not paid by an HDHP do not have to be included in determining maximum out-of-pocket expenses

Example: Your plan determines that the reasonable cost of certain types of surgery is $2,000, a price they have negotiated with their in-network providers. You go to an out-of-network provider and the bill totals $2,500. The health plan may pay only $2,000 of this bill.

You should understand whether your HDHP has separate limits, as well as what the extent of their network is and choose your health care providers accordingly. These details can be found by speaking with your employers’ benefits administrator, your insurance broker or by reading the summary of plan benefits provided to you at the time you are choosing your health plan.

Yearly and Lifetime Limits

Like a traditional, lower deductible health plan, an HDHP may also have lifetime limits on benefits as long as they are reasonable (e.g. they don’t try to circumvent the

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maximum out-of-pocket limits). The HDHP can also impose a yearly limit on specific benefits that are covered under the plan after the deductible has been met, such as limiting your reimbursements for substance abuse treatment to a certain number visits per year. The result of this limit is that anything above it, other than the deductible (or possibly co insurance), is not considered to be an out-of-pocket expense.

Example: Rachel’s plan has a yearly limit of 15 visits to the chiropractor. Even though she hasn’t met her out-of-pocket limit of $5,600, any visits beyond those 15 cannot be counted toward her deductible or out-of-pocket limit. This is considered to be a reasonable limit on plan benefits. However, if her plan had an annual limit of $10,000 for a single condition, such as cancer, the annual limit would not be considered a reasonable limit because it is reasonable to expect that treatment costs may exceed that annual limit for a person with a serious condition.

Preventive Care, Permitted Coverage and Prescription

Drugs

Under the law, a qualified HDHP cannot allow first-dollar coverage, with some exceptions (see below). First-dollar coverage may mean different things in different plans. Some states require health plans to provide first-dollar coverage for certain health benefits. This is coverage that pays the entire covered or eligible amount without the application of a deductible, or with just the application of a co-payment or coinsurance amount. A co-payment is a


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fixed-dollar payment the patient makes per doctor visit, treatment, study or prescription filled. Coinsurance is the percentage of an insurance claim for which the patient is responsible. Health savings account law does make an exception for first-dollar coverage if the coverage applies to preventive care and permitted coverage.

Preventive Care Benefits

Plans do not have to offer preventive care, but if they do, the IRS states benefits eligible for first-dollar coverage may include:

Periodic health evaluations, including tests •and diagnostic procedures ordered in connection with routine examinations, such as annual physicals

Routine prenatal and well-child care•

Child and adult immunizations•

Tobacco cessation programs •

Obesity weight-loss programs •

Screening services (for a list of these •services, see Table 4.1 in Chapter 4)

Drugs or medications where the person has •benefit intended to treat an existing illness, injury, or condition. In situations where it would be unreasonable or impracticable to perform another procedure to treat the condition, any treatment that is incidental or ancillary to a preventive care screening or service is allowed

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The definition of preventive care that applies to HSA/HDHP plans generally excludes any service or benefit intended to treat an existing illness, injury, or condition. In situations where it would be unreasonable or impracticable to perform another procedure to treat the condition, any treatment that is incidental or ancillary to a preventive care screening or service is allowed.

Permitted coverage

If you have an HDHP, you may also have certain types of permitted coverage including insurance for accident, disability, dental and vision care and long-term care coverage. This topic is discussed further in Chapter 4: How Does Your HSA/HDHP Work?

Prescription Drug Benefits

Some plans offer prescription drug benefits through separate plans, also called health plan riders, which cover prescription drugs outside of any deductibles that may apply to other services covered under the plan. Such prescription drug benefits are not considered permitted coverage under the HSA law unless these riders are specifically designed for preventive care medications as described above. Thus, a participant who is covered by an HDHP that meets the law’s requirements and is also covered by a non-preventive prescription drug plan or rider that provides benefits before the HDHP’s deductible is met may not open or contribute to an HSA. This is because the prescription plan provides first-dollar coverage for a benefit that is not permitted. Discount cards that entitle you to price reductions on services or


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products, such as prescription drugs, are allowed with the HSA/HDHP, as long as you are required to pay the cost (at the reduced rate) until the deductible is satisfied.

The Health Savings Account (HSA)

An HSA is a special tax-advantaged savings account, the proceeds of which may be spent for qualified medical expenses. Qualified medical expenses are expenses incurred by the account owner, his or her spouse, or dependents for medical care as defined in section 213(d) of the Internal Revenue Code. These are generally the same expenses as those that individual taxpayers can deduct on their federal income tax returns. The qualified medical expenses are broader than what most health plans cover. Certain types of health insurance premiums are also considered qualified medical expenses for purposes of HSAs (see also Chapter 4, Tables 4.2-4.4, and Appendix). Remember: To establish and contribute to an HSA, you must also have a qualified high deductible health plan (HDHP). Please see prior section for more information on HDHPs.

Contributions

Anyone (employer, family member, or any other person) may contribute to an HSA on behalf of an eligible HSA holder. Even state governments can make HSA contributions on behalf of eligible individuals insured under state high-risk pools that qualify as HDHPs.

Health savings account contributions are tax-deductible (see Chapter 2 for details on who may claim the

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deduction), grow tax-free and are never taxed if used for qualified medical expenses. Unused money rolls over to the next year and is fully portable; this means you take it with you when you leave your employer, if your employer changes plans, or if you change your plan. HSA dollars are owned by you, the account holder, and cannot be taken by the employer’s creditors in the event of a company lawsuit or bankruptcy.

The maximum amount you can contribute to your HSA is determined by the IRS. All HSA holders with a qualified plan may contribute up to these limits. The limit for individuals in 2008, is $2,900 and the limit for families is $5,800. These limits are the maximum allowed contributions for total contribution (from all sources) over a year period, though HSA holders and employers may contribute less if they wish.

HSA Contribution Limit

Individual 2008 $2,900

Family 2008 $5,800

Example: Jerry and Lynn are married and have a qualified HDHP with a family deductible of $3,500 effective January 1, 2008. Their maximum HSA contribution can be $5,800, though they can also choose to deposit less or no money into their account.


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New account holders may contribute up to the maximum as long as their account was opened by December 1 of that year. Even if a person signs up for an HSA in November, they can still contribute $2,900 for an individual (or $5,800 for a family). However, the law stipulates that this amount can only be contributed if the person remains eligible for the 12 consecutive months or full calendar year following the December 1st of that first year of eligible coverage. If an account holder closes their account prior to the end of this period, the amount they can contribute is prorated monthly. In addition any time an account holder closes their account mid-year, their contributions for that year are prorated monthly by the amount of time the account was open.

Example: If Becky opened an account June 1, 2008, she would need to remain in HSA-based coverage until January 2010 to qualify for the maximum contribution rate in 2008. If Becky chooses to leave her qualified plan in March 31, 2009 she would only have been eligible to contribute 6/12 of $2,900 in 2008 and 3/12 of $2,900 in 2009. In other words, $1,450 in 2008 and $725 in 2008. If Becky contributed more than these amounts, she would need to withdraw the excess money and report it on her tax documents. If Becky stays in a qualified plan until January 1, 2010, she would be eligible to contribute the full IRS limit in 2008 and 2009.

Note: The Tax Relief and Health Care Act of 2006

Prior to 2007, HSA holders were only allowed to contribute up to their deductible or the IRS limit,

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whichever was the lowest. The deductible stipulation was removed by the Tax Relief and Health Care Act of 2006 for contributions beginning January 1, 2007.

Also prior to 2007, HSA holders opening an account midyear could only contribute up to the IRS maximum prorated monthly in accordance with how long the account was open that year. This rule was relaxed in the Tax Relief and Health Care Act of 2006, allowing account owners to contribute the full amount during their first year. However, to do this the individual must remain eligible for the 12 consecutive months or full calendar year following the December 1st of that first year of eligible coverage. Should the account holder become ineligible prior to the 12 months passing, both years would have to be pro rated and any excess contribution removed (see previous section for example).For updates on contribution limits and law, please visit: www.hsaguidebook.com

IRA, FSA, and HRA Rollovers

The Tax Relief and Health Care Act of 2006 introduced several new ways to fund an HSA, as of January 1, 2007. Health savings account holders may now transfer money from a Roth IRA into an HSA to help build their account balance. In addition to transfers from a Roth IRA, account holders may also roll over money from health reimbursement arrangements (HRAs) and flexible spending accounts (FSAs). However, the circumstances allowing for HRA and FSA rollovers are very strict. For more information regarding these transfers rollovers,


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please see Chapter 2 – Health FSA/HRA Rollovers and IRA Transfers).

Special Funding Rules for Individuals 55 or Older

For individuals age 55 and older, contributions can be made that are higher than the limits. These are called “catch-up contributions”. Like an IRA, the amounts in the HSAs can be rolled over year-to-year which encourages savings. Like IRA owners, HSA owners over age 55 can contribute more in hopes of boosting the savings in the HSA. These “catch-up amounts” are as follows:

2008 - $900 •

2009 - $1,000 •If each spouse is over age 55, each spouse must have an individual HSA in order for each to make a catch-up contribution. A married couple may make catch-up contributions totaling $1,800 in 2008. They have their own individual HSA. All contributions must cease once an individual enrolls in Medicare as they are no longer HSA-qualified.

Like the previous change in contributions, if the account holder becomes eligible sometime after January 1st, he/she can choose to contribute the entire catch-up contribution. In order to do so, the individual must remain eligible for the remainder of that year and the entire 12 month period following that year. If the account holder does not remain eligible during that period of time, both years must be pro-rated and the excess contribution removed. The excess amount will be

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included as income for tax purposes. All contributions can be made as late as April 15 of the following calendar year.

Example: If Roger and Noelle are both older than 55 years and neither is covered by Medicare, they can contribute an additional $1,800 ($900 each) to their individual HSAs for 2008. If only Roger has an HSA, he can contribute an extra $900 only.

The Two-Part Plan—How it Differs from Other Health Plans; How it’s the Same

High deductible health plans are not new—many insurers and employers have offered plans with high deductibles for a long time. HSAs have features in common with other benefits such as individual retirement accounts (IRAs) and section 401(k) plans, which are tax-advantaged accounts that keep their tax advantage when used for specific purposes. These aspects include year-to-year rollover, portability, employee’s choice of account investments and survivor benefits.The HSA also has aspects similar to other health plans, including health reimbursement arrangements (HRAs) and flexible spending accounts (FSAs):

In an HRA, the employer funds an account •from which the employee is reimbursed for qualified medical expenses, such as co-payments, deductibles, vision care, prescriptions, long-term care insurance and most dental expenses. Reimbursements are not taxable to the employee, and are


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tax-deductible by the employer. Important: if you changed jobs, most HRAs are not allowed to be transferred from employer to employer.

A health FSA allows employees to set •aside pre-tax earnings to pay for benefits or expenses that are not paid by their insurance or benefit plans. You cannot roll over your FSA balances from year to year, though, FSA participants may have until 2½ months after the plan year ends—a total of 14 ½ months—to use up balances accumulated in their accounts during the plan year if their employer allows. This extension is not automatic; the employer must amend the plan to make it available. The employee forfeits any amounts unused after the extension expires.

There are elements of all these types of •benefits in the HSA concept, and in some circumstances, all three types of accounts can be used together (for allowable combinations, see further discussion in Chapter 2 on eligibility). However, HSAs are unique because, in addition to being able to be spent tax-free on qualified expenses, HSAs are owned by the individual (not an employer) and the savings can accumulate year after year and can even be invested in growth accounts. Health savings accounts combine the best components of all the

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other tax-deferred savings vehicles but avoid the problems of early use penalties for qualified expenses or the “use it or lose it” dilemma caused by FSAs.

Not All HSAs Are the Same

You can’t just set aside your HSA contributions in a shoebox, or even a safe deposit box or in an ordinary bank or other account—the money has to be set aside in an account specially designed for this purpose.

Trust Custodian Issues: What a Custodian Does

The HSA trustee or custodian holds your balances for you, receives and records contributions and processes distributions. In general, an insurance company or a bank can be an HSA trustee or custodian, as can any entity already approved by the Internal Revenue Service (IRS) to be a trustee or custodian of IRAs. Other entities may request approval to be an HSA trustee or custodian under IRS regulations.

However, be warned, not all of these companies will provide the same level of service or support. Many banks that offer HSAs know little about the health care side of these accounts, while insurance companies may lack knowledge about the banking aspect. Do your homework about the quality of product offered before you sign up for a provider.

Choosing an HSA Provider

Your employer may make arrangements for you to


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establish an HSA with a particular provider. You may be required to select your own provider, or you may have the option of selecting a different provider from the one your employer has chosen (see further discussion of this issue in Chapter 8: The HSA Law). Here are some questions you should ask before choosing an HSA provider. Some of the issues you should examine include fees, account investment earnings and how your account will be managed.

Ask the following questions about fees:

How are fees set? It costs money to manage •your account, keep records and send out the appropriate forms and statements. Is your fee based on the amount in your account or on how much you contribute monthly? Or is it a fixed fee that is independent of how much you contribute?

Which fees can be assessed? Some possible •fees include those for account maintenance, replacement of checks if lost or stolen, and stop-payment charges if you should have a dispute with a health care provider or if an erroneous charge to your account is made. Other charges could apply if the account is rolled over to another custodian, or permanently closed. The disclosure rules apply to account fees and will depend on the custodian selected; fee disclosure rules are different for banks, insurance companies, mutual funds and other entities.

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If your account is offered through your •employer, who pays the fees? You? Your employer? Can you pay fees directly or must they be paid out of your account? If fees are charged against your account they will reduce the amount you have available to spend on health care.

Part of the value of having an HSA is that unspent balances accrue investment earnings over time. Ask the following questions about account earnings:

What is the rate of return on your account? •For instance, if the HSA is in a bank, what interest rate does it earn, and how is it compounded?

What is the minimum threshold of money •in the HSA in order to make investments? Is there a charge to make investments or is there a minimum amount of money that must be invested?

Are investment earnings on an account •ever forfeitable? Does the account carry investment risk? Is it insured?

Manage your HSA in the same, careful way you manage any other investments. Here are some account management issues you should be sure to understand:

Can your creditors seize balances in your •HSA in the event you declare personal bankruptcy? For more on this question, see Chapter 8: The HSA Law.


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Does the account trustee or custodian •impose limits on the size or number of distributions you can take in a month or other time period?

Does the account trustee or custodian •accept rollovers or trustee-to-trustee transfers from other eligible accounts? Trustees and custodians may accept rollovers and transfers but are not required to do so.

The field of health care can be confusing to navigate. Health care prices are not always readily apparent. As a smart HSA owner, you will want to maximize your investment and spend your money wisely. Some forward thinking HSA providers have provided services to assist you in this area. Make sure to find out if your potential HSA provider offers value added services to help you better manage how to save and spend your health care dollars. These services may include:

Does the account trustee or custodian •provide you with bill review and negotiation help?

Do you have access to price transparency •and quality comparison tools?

Does your account trustee or custodian •provide phone or web consultant help to assist you in reviewing and minimizing your health care spending?

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Keep in Mind

The HSA must be combined with a qualified •HDHP.

The HSA is funded by contributions; the •HDHP is funded by premiums.

You own and control any balances •accumulated in your HSA, but your employer, insurer or both control the

HDHP.

Up Next

This chapter has covered the basic outlines of the HSA/HDHP. In Chapter 2 we guide you through deciding who is eligible and when.

Chapter 2

Chapter 1 provided the basics of the HSA/HDHP

plan. This chapter examines:

4 Who Can Establish and Contribute to an HSA

4 Eligibility for HSA Distributions

4 Eligibility for Tax Deductions

4 HSAs and Other Plan Options

4 Making Sure HSAs Are Right for You

4 Options to Think About

Who Would Want an HSA?

Making an HSA Work for You

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Eligibility—Who Can Establish and Contribute to an HSA

Everyone deals with eligibility issues during their working lives. Every employee has faced eligibility for vacation leave, over time, pension plans, disability benefits or education benefits at least once.Eligibility has three possible meanings for HSA owners:

Eligibility to set up and contribute to an •HSA;

Eligibility to have medical expenses paid •from the HSA; and

Eligibility to claim a tax deduction. •In this section we consider eligibility to establish an HSA and make contributions.

An Eligible Individual

Eligibility is a key concept that requires close attention. Under the law, an eligible individual:

Must be covered under a qualified high-•deductible health plan (HDHP) on the first day of any month for which eligibility is claimed;

May not also be covered under any health •plan that is not a qualified HDHP, with the exception of certain permitted coverage (discussed in Chapter 1: Health Savings Accounts)—A New Approach and Chapter 4: How Does Your HSA/HDHP Work? and certain health-related payment plans discussed later in this chapter;

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Must not be enrolled in Medicare (the •health care component of the Social Security program); and

May not be claimed as a dependent on •another individual’s tax return (see Table 2.1, at the end of this chapter for the criteria governing who can be claimed as a dependent).

Any eligible individual can contribute to an HSA, as can his or her employer or another person on behalf of the individual, such as a family member. An employer may pay for both an HDHP and an HSA, or pay for some or all of the HDHP and a certain amount toward an HSA. The employer may offer an HDHP only, with a certain amount allowed for other benefits including an HSA, perhaps through a cafeteria plan. In any of these cases, the participant is the eligible individual and owner of the HSA. The circumstances as required by law have been met.

If an individual is a Subchapter S owner, self-employed or unemployed, the individual can make the contribution as long as the eligibility requirements are met.

Example: Jane is a self-employed individual with an HDHP; she may set up and fund an HSA. However, without an HDHP, she cannot contribute to an HSA. If she enrolls in Medicare, she is also ineligible to contribute to an HSA, even if she continues to work.


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The HSA may also be a valuable tax-advantaged source of health care coverage for family members in life transitions. Under the law, a family member may contribute to an HSA on behalf of another family member if the other family member qualifies as an eligible individual. However, only the HSA holder receives a tax deduction for contributions. A graduating college student who meets the eligibility requirements noted above may receive a very useful graduation present—an HDHP and an HSA funded by parents, friends or other family members. If that first job doesn’t have health benefits, coverage can continue, and they can begin to contribute themselves once financially able. Even if the job comes with health benefits that don’t include an HDHP, their HSA can continue to grow through interest or investments (though they can not contribute more money if they are not on a qualified plan, the HSA may still be invested or used to pay for expenses).

Additional eligibility requirements—employers

Employers may have additional requirements for employees wishing to participate in a health plan, including those with an eligible HDHP and who wish to contribute to an HSA. These eligibility requirements are separate from those required under law, and are found in employer-sponsored health plans across the board. Nevertheless, it is important that employees understand all eligibility requirements in order to limit any misunderstanding or confusion that may occur when a new type of health plan is implemented.

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Health plans typically require new employees to be working for the employer for at least a short period of time before they are eligible to participate. Unless the employee is covered by some other qualifying HDHP during this period, he or she may have to suspend HSA contributions until it is possible to resume coverage under a qualified HDHP.

Retiree and disabled eligibility

If an otherwise eligible person is not actually enrolled in Medicare even though that individual has reached age 65, he or she may contribute to an HSA until the month that person is enrolled in Medicare. They may also continue to make catch-up contributions until they enroll in Medicare (see further discussion below and in Chapter 1: Health Savings Accounts—A New Approach).

Keep this in mind—you are not eligible to set up an HSA if you do not have a high-deductible health plan. Medicare is considered to be first dollar coverage, not a high-deductible health plan. If you are enrolled in Medicare, you are ineligible to set up or contribute to an HSA. There are a few Medicare pilot programs in the country for medical savings accounts or MSAs. These are separate and distinct from HSAs.

However, if you are 65 and are not enrolled in Medicare, AND you have a qualified high deductible health care plan, you may set up and contribute to an HSA. If you have access to a “retirement” health reimbursement arrangement, which provides reimbursement only after


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you retire, and you have an HDHP, you can still set up an HSA. The key is that you have an HDHP. If you have first dollar coverage—whether from Medicare or your former employer’s retiree health plan—you cannot set up an HSA (unless the first dollar coverage is for preventive care as described in Chapter 1).

Likewise, an otherwise eligible person who is also eligible to receive Veterans’ Administration medical benefits, but does not actually receive those benefits during the preceding three months, may contribute to an HSA. Anyone who receives health benefits under TRICARE (the health care program for active duty and retired members of the uniformed services, their families and survivors) is ineligible to contribute to an HSA, because the coverage options under TRICARE do not meet the requirements of an HDHP.

If you are covered by an HSA/HDHP and qualify for short-term or long-term disability benefits under an employer-sponsored plan, nothing should change if the basic health care coverage arrangement remains intact during the disability period. If you decide to apply for Social Security Disability Insurance (SSDI) benefits, everything changes because you cease to be an eligible individual. We discuss this issue further in Chapter 7: Your HSA/HDHP and Everyday Health Care Challenges.

Contribution Eligibility and Limits

You are eligible to contribute to an HSA if you are enrolled in a qualified high deductible health plan and

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are not enrolled in any supplemental care plans that would preclude your eligibility as discussed earlier in this chapter. As long as you are eligible, anyone – employer, family or friends – can contribute money to your HSA. However, only you and your employer will receive tax benefits from these contributions.

The same annual contribution limit applies regardless of who contributes. These contribution limits are set by law (see Chapter 1) and will be updated each year to allow for inflation. If you contribute more than the allowable amount, it is called an excess contribution. Excess contributions are subject to a 6 percent excise tax. Excess employer contributions also become subject to income tax.

HSA Contribution LimitIndividual 2008 $2,900

Family 2008 $5,800

For updates on contribution limits and law, please visit: www.hsaguidebook.com

When the Contribution Must be Made

Eligibility to contribute to an HSA is determined on a monthly basis (see Chapter 1). For instance, if you drop your HDHP during the last 2 months of the year, you cannot make contributions for those months. But there is some flexibility about the timing of contributions. Contributions for a given tax year may be made in one


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or more payments, at the convenience of the individual or the employer, depending on who is making the contribution. Participants must be enrolled in a qualified HDHP on the first day of the month in order to make or receive an HSA contribution during that month. Contributions are reported on the individual tax return and therefore are tied to the tax return for that year. So, the contribution may not be made before the beginning of the tax year that it covers, and must be made no later than the legal deadline, without extensions, for filing the individual’s income tax return for that year. Most individuals are calendar-year taxpayers. For such individuals, contributions for a given year may be made between January 1 of a given year and April 15 of the following year. Even though your health coverage plan year may be any 12 month period established by an employer or insurer for managing the plan and accounting for benefit payments, the schedule for HSA contributions aligns with the calendar year.

The Account is Yours

An account beneficiary’s interest in an HSA is not forfeitable, so an employer cannot recoup any contribution previously made to the employee’s HSA.

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Example: Ken’s employer contributed $2,000 to his HSA on January 2, 2008, expecting that he would work through December 31. Ken quits on May 3, 2008. His employer may not recoup any portion of the contribution to Ken’s HSA. However, Ken must remain in a qualified HDHP for an appropriate amount of time in order to avoid paying taxes on some of his employer’s HSA contribution. The 2008 individual contribution limit is $2,900. If this number is prorated monthly, it comes to roughly $242 a month. For a $2,000 contribution at this prorated amount, Ken would need to stay qualified for nine months that year, or until the end of September.

Trustee to Trustee Transfers

Trustee to trustee transfers are transfers of account balances directly from one trustee or custodian to another. Transfers from other HSAs, or from Archer MSAs (see Introduction) into an HSA are permitted as long as you are the owner of both accounts. You may not transfer money from another individual’s HSA, even if they are a family member or spouse, into an HSA in your name. Health savings account transfers of balances accumulated in previous years do not affect the current year’s contribution limits. This type of transfer is similar to moving funds from one IRA to another IRA. This can be done an unlimited number of times within a 12 month period.


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Rollover Contributions

Rollover contributions are moving the funds from one HSA or Archer MSA to another, but the funds are sent to the account holder rather than directly from one trustee/custodian to another. The individual would have 60 days to get the funds back into an HSA without having any taxes or penalties. Only one rollover can be completed in a 12 month period. Just like trustee to trustee transfers the rollover does not apply towards the contribution limits for the year.

Example: Tyler has an HSA of $5,000 at Bank A and wishes to transfer the entire account to an HSA at Bank B. He can withdraw the balance from Bank A and redeposit it in Bank B as long as it is within 60 days. This is a rollover. He may also request a trustee to trustee transfer, in which Bank A sends the money directly to Bank B. Tyler may do either of these options and still make whatever contributions for which he is eligible without having to consider the amount rolled over in calculating his limit. However, if Tyler withdraws the money and does not redeposit it or spend it for qualified health care, a 10 percent penalty will apply and he will have to pay income taxes on the amount.

Health FSA/HRA Rollovers

As discussed in Chapter 1, under limited circumstances, health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) may be used to fund an HSA in a one-time rollover. There are specific rules that must be followed to do this. A qualified

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HSA distribution from the health FSA or HRA can be completed if it is a direct transfer from the employer to the HSA custodian or trustee and can not exceed the lesser of the amount in the account on September 21, 2006 or the balance at the time of the transfer. Because of this, if an individual did not have one of these accounts in place as of September 21, 2006 he or she can not elect an HSA distribution. Rollovers from HRAs and FSAs should be initiated by the employer sponsoring those accounts. The employer must update their plan document to allow for the rollover prior to the end of the run-out period of their plan year. In addition, the option to transfer funds to an HSA must be offered to all qualified employees. The transfer must be made before January 1, 2012. Employers considering this option should consult with their health care broker, accountant and/or legal team.

This rollover does not count towards or reduce the annual contribution amount. When the qualified HSA distribution is made from an FSA or HRA, it reduces the balance of those accounts to zero, but it does not cause the coverage period to end. The account holder must remain HSA eligible from the time of the rollover through the last day of the 12th month following the distribution. Should the account holder not remain eligible through this period of time the amount transferred will be included into income for tax purposes and an additional 10 percent tax assessed. The rollover amount is not considered an excess contribution and removing the amount will not keep the individual from paying the income tax or 10 percent penalty.


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Consequently, any FSA or HRA rollovers that occur other than at the end of the coverage period will result in the account holder being ineligible and he/she will have to include the transferred amount in income and pay the additional 10 percent tax.

IRA Transfer

To help fund the HSA, an account holder can do a once per lifetime trustee-to-trustee transfer from a Roth IRA to the HSA. This transfer is limited to the maximum annual contribution for the year and reduces the annual amount that can be contributed. The individual must remain an eligible individual for the entire 12 month period following the month in which the transfer was completed. If he or she does not remain an eligible individual, the transferred amount is included in income for tax purposes and is assessed an additional 10 percent penalty. Simple and SEP IRAs are not eligible for transfer.

Contributions by spouses

Spouses often have to make decisions on how to fund health care when both have access to health care coverage, typically from their employers. Most couples have experience exploring how to best use the benefits available to them. For HSAs, contributions that are allowed for spouses depend on the coverage each spouse chooses—again, unless one spouse is ineligible. Equal division of the allowable contribution amount between spouses is the

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default option; the spouses could agree on a different division.

Examples: Both spouses have family coverage. Tom and Alice are married. Tom is 58 years old and Alice is 53. Tom and Alice both have family coverage under separate HDHPs. Tom’s HDHP has a $3,000 deductible and Alice’s has a $2,200 deductible. Because both plans provide family coverage, Tom and Alice are treated as having coverage under one family plan and can contribute a combined amount up to the annual statutory CPI amount. Tom can contribute $3800 to an HSA (1/2 of the annual statutory amount of $5,800 for 2008, plus a $900 catch-up contribution because he is age 55 or older). Alice can contribute $2,900 to an HSA. Tom and Alice can agree to contribute different amounts but their total annual contributions cannot exceed $6,700 ($5,800 + $900).

Both spouses have self-only coverage. Jim and Kathy are married. Jim is 35 years old and Kathy is 33. Jim and Kathy each have a self-only HDHP. Jim’s plan has a $1,100 deductible and Kathy’s has a $1,500 deductible. Jim can contribute $2,900 to an HSA and Kathy can contribute $2,900. The same result applies whether Jim and Kathy work for different employers, one is self-employed and one is an employee, or both are self-employed.

One spouse has qualifying coverage, the other doesn’t: David and Sherry are married. His employer offers David an HSA/HDHP plan. Sherry has a traditional plan that does not meet the criteria for an HDHP. Sherry elects family coverage, thereby


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Spouses cannot roll over their HSAs into a joint account. Keep in mind that an HSA is an individual account only. Even in the case of a husband and wife working for the same employer, the HSA as well as the contributions must be separate. An employer making contributions to

covering David under her non-qualifying plan. David is not eligible to contribute to an HSA, because he is covered by Sherry’s plan. However, if Sherry elected coverage under her plan only for herself, or herself and their children, David would not be covered under her plan, and could contribute to an HSA if otherwise eligible.

One spouse is eligible, the other isn’t. Joe and Jenny are married. Joe has just turned age 65 and has enrolled in Medicare. Jenny is 56. Joe and Jenny have separate HSAs, each with self-only coverage. Joe can no longer contribute to an HSA, but can use the funds accumulated in his account to pay qualified medical expenses including his Medicare premiums (for definitions and examples, see Chapter 4 on how an HSA works). Jenny is enrolled in a plan with a deductible of $1,500. She is eligible to contribute up to the CPI indexed amount, $2900 for 2008 to her HSA, plus a catch-up contribution of $900 for 2008.

Family and single coverage at the same time. Al and Sue are married. Al has a family HDHP with a $5,000 deductible. Sue, however, has a self-only HDHP with a $2,000 deductible. They will be treated as having only family coverage, and their maximum combined contribution is the IRS statutory amount for family coverage, $5800 for 2008 to be divided between them by agreement.

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HSAs must make comparable contributions on behalf of all eligible participating employees, which must be the same percentage of the deductible or same dollar amount for all employees in the same coverage category; otherwise, they will run afoul of the nondiscrimination rules. There are some limited exceptions to these rules, please see Chapter 8: The HSA Law for more information.

Eligibility for HSA Distributions

How is it possible to ensure that the money saved in an HSA actually goes to health care spending? After all, the purpose of the HSA is for the consumer to decide how best to spend his/her health care dollar, and have the ways and means to do so.

Under the law, HSA distributions are tax-free if used for any of the qualified medical expenses of the participant, his or her spouse or dependents. This is true whether or not the spouse or dependent is covered by an HDHP (see Table 2.1, end of this chapter, for what makes a person your dependent). Even if both spouses have HSAs, one can pay those expenses for the other. However, you may only pay medical expenses for a married dependent if that dependent does not file a joint income tax return with a spouse. Also, both HSAs may not reimburse the same expense. Distributions from the HSA may cover qualified expenses even if they are not applied toward your deductible under the HDHP; as long as they are qualified according to the IRS (See Table 4.2 at the end of Chapter 4 for a summary of these


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expenses). In this way, the HSA provides extra flexibility in making medical care decisions.

Any money from the HSA that is used for non-medical purposes will be included in the individual’s gross income for tax purposes and is subject to an additional 10 percent penalty on the amount included. However, if the account beneficiary reaches age 65 or dies, distributions may be used for other purposes without being subject to the 10 percent penalty. Mistaken distributions from an HSA can be repaid by April 15th of the following year without penalty or tax, provided this is permitted by the trustee, and there is “convincing evidence that the amounts were distributed from an HSA because of mistake of fact due to reasonable cause.” (IRS Notice 2004-50 - Part iii - Administrative, Procedural, and Misc.)

Spouse

HSAs can provide flexibility for couples paying health care expenses.

Example: In the last example of David and Sherry, Sherry has a traditional plan that does not meet the criteria for an HDHP and does not include coverage for David. Sherry’s plan has first dollar coverage that is subject to co-payments. David elects an HSA/HDHP for himself. Even though Sherry is not covered by David’s HSA/HDHP plan, he can use his HSA to pay her co-payments. Likewise, in the example of Joe and Jenny at the end of the last section, Jenny can use her HSA to pay Joe’s qualified medical expenses.

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Loss of Job or HDHP

If you lose your job or change jobs, or your employer changes the plans it offers, you may no longer be covered by an HDHP. If so, you may lose your eligibility to contribute to an HSA. But losing your eligibility to contribute to an HSA doesn’t mean you can’t use the HSA. You may still use any balance in the HSA for qualified medical expenses. You continue to own the account as it is, even though you can no longer contribute to it. If you become eligible again in the future, you will be able to resume contributions.

At Age 65 and Later

After you reach age 65, if you enroll in Medicare you can still use your HSA for health care expenditures, but you can no longer make contributions since you no longer have a qualified HDHP. Medicare premiums, long-term care coverage, and premiums in an employer-sponsored retiree health care coverage plan can all be paid out of your savings in the HSA. You can even use your accumulated balances for any other purpose you desire without incurring the 10 percent penalty for non-medical uses that applies before this age. However, you cannot pay Medicare supplementary insurance premiums (also called Medigap) out of your HSA without paying taxes on the amount.

After the Account Owner’s Death

When the account owner dies, any amount remaining in the HSA passes to the individual named as the HSA


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beneficiary. If the owner’s surviving spouse is the named beneficiary, the HSA becomes the HSA of the surviving spouse. An HSA is considered an individual account, and as such the spouse inheriting the HSA is considered the owner. The spouse can then use the HSA as any other HSA owner would. The surviving spouse is subject to income tax on amounts in the account only if they are not used for qualified medical expenses.

If the HSA passes to a person other than a surviving spouse, the HSA ceases to be an HSA, and the heir is required to include the fair market value of the HSA in gross income. Fair market value is calculated as of the date of the account owner’s death, and is reduced by any payments made from the HSA on behalf of the decedent within one year after death.

Eligibility for Tax Deductions

The employer, employee or individual, or both, depending on who makes the contribution, may claim deductions for HSA contributions. Health savings accounts qualify as a deduction for federal taxes and most state taxes. For more information, see Chapter 8: The HSA Law.

Income Tax Deductions for the Employee or Individual

Purchaser

The tax-deductible contribution amount is calculated on a month-to-month basis based on the total amount of the deduction and the number of months of participation (see examples in Chapter 1, where we explain the basics

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of HSAs). The contribution is an “above-the-line deduction,” for the purposes of calculating adjusted gross income, unless done through a cafeteria plan (see also Chapter 8: The HSA Law).

Example: Hank, a single taxpayer, makes $36,000 a year and contributes $1,000 to his HSA. He can subtract the $1,000 HSA deposit when calculating his adjusted gross income.

However, if you itemize, you cannot count the HSA contributions twice by calculating it against the gross income and deducting the HSA contributions as an itemized medical expense. In fact, no expense can be deducted twice or paid twice out of different tax-exempt accounts or through different insurance plans (for more on this issue, see Chapter 4: How Does Your HSA Work?).

As an eligible individual, you can deduct a contribution on your return even if another person makes it on your behalf (see also Chapter 7: Your HSA/HDHP and Everyday Health Care Challenges).

Contributions an employer makes to the employee’s HSA are treated as employer provided coverage for medical expenses under an accident or health plan and are excludable from the employee’s gross income if made on behalf of an eligible individual. The employer contributions are not subject to income tax withholding from wages or subject to the Federal Insurance


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Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act. Employer contributions may be subject to certain state taxes (see further discussion in Chapter 8. The HSA Law).

Contributions for Self-Employed and Owners of S

Corporations

Self-employed individuals and owners of S corporations are not considered employees. As such, they cannot receive employer contributions. However, they can make contributions on their own and claim the above-the-line deduction on their personal income taxes.

Contributions by a partnership to the HSA of a bona fide partner are treated as a distributive share of partnership income. They are considered to be guaranteed payments derived from the partnership’s trade or business, and reported as such on IRS Schedule—K1 (form 1065). The contributions are included in the partner’s net earnings, from which the partner is then able to deduct those contributions as an adjustment to gross income—just as any HSA owner is able to do—within the confines of the law.

Contributions to the HSA of a 2 percent shareholder-employee in consideration for services rendered are treated as a guaranteed payment, and are includable in the 2-percent shareholder-employee’s net earnings. The contributions can then be deducted as an adjustment to gross income.

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Tax Deductions for the Employer

To be tax-deductible, employer HSA contributions must be comparable. There is one exception to this rule. Employers may contribute more to HSAs of non-highly compensated employees. The IRS uses the same definition of “highly compensated employees” for HSAs as they do with other retirement accounts.

Contributions are considered comparable if the employer makes the same contributions on behalf of all eligible participating employees with comparable coverage during the same period. Contributions are considered comparable if they are either the same dollar amount or the same percentage of the deductible under the HDHP. For instance, Company A’s contribution is considered comparable if each eligible employee gets $500 towards an HSA. Company B’s contribution is also considered comparable if it covers 75 percent of the deductible.

Even in the case of a husband and wife working for the same employer, the HSAs must be separate as well as the contributions, or the comparability rules may be breached.

Except as described below under cafeteria plans, an employer may not institute matching contributions to HSAs. However, comparability rules do not apply when contributions are made through cafeteria plans (see further discussion later in this chapter and in Chapter 8 on the laws governing HSAs).


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HSAs and Other Plan Options

In Chapter 1 we compared HSAs with health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs). HSAs can substitute for or be used with these other accounts when employers, within limits, make them available. HSAs can also be used with employee assistance plans (EAPs) and cafeteria plans.

HSAs and FSAs

Employees use health FSAs to pay for a wide range of expenses not covered by their health plans, including dental, vision, co-payments and coinsurance. If you are covered by an HSA/HDHP, you can still use an FSA, but it has to be structured more narrowly. An FSA may be limited to paying for permitted coverage benefits (for definitions, see Chapter 1, where we introduce the basics of HSAs). In this case, it works in parallel with the HSA; both accounts may pay for benefits at the same time (see Figure 2.1, end of this chapter).

Alternatively, if the employer offers a general-purpose FSA, it can be set up to provide benefits only after the minimum annual deductible specified in the plan has been satisfied. This is called a post-deductible FSA. In this case, the FSA works in sequence with the HSA. To see how the post-deductible account works with the HSA, see Figure 2.2, end of this chapter. The FSA can also be a combination of both the limited-purpose and the post-deductible as long as the employer has it written accordingly in the plan document.

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Previously, an employee with a grace period (the additional two and one-half months to use the funds before the Use-it-or-lose-it rule is applied) on the general health FSA would be considered to have non qualifying coverage and would therefore, be ineligible to contribute to an HSA. Due to new laws enacted January 1, 2007, the individual who has one of the two following scenarios and is otherwise eligible can now contribute to an HSA.

1. The health FSA must have a zero balance at the end of the prior plan year

2. The individual makes a qualified HSA distribution at the end of the plan year to an HSA creating a zero balance in the FSA .

HSAs and HRAs

An employee may be covered by both an HRA and an HSA. The HRA may be a limited-purpose account, limited to providing permitted coverage (see Figure 2.1, end of this chapter). Like an FSA, an HRA can also be structured to pay benefits only after the deductible is met. Alternatively, the employee may elect not to receive reimbursements from the HRA during the period the employee is covered by an HSA/HDHP, other than permitted coverage and benefits; this is called a suspended HRA. Finally, the HRA can be structured to provide benefits only after the employee retires.


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Employee Assistance Programs (EAPs)

An EAP is an employee benefit that covers all or part of the cost for employees to receive counseling, referrals and advice in dealing with stressful issues in their lives. An employee covered by an EAP, a wellness program or a disease management plan may still contribute to an HSA, so long as these plans do not provide substantial medical benefits.

HSAs in Cafeteria Plans

An employer may offer an HSA as part of a cafeteria plan. A cafeteria plan is an employee benefit plan that allows employees to choose benefits from a number of different options, including 401(k)s, health insurance, other insurance and time-off. Health savings account contributions may be made through cafeteria plans.

Many of the rules governing HSAs offered as part of a cafeteria plan are different from those governing HSAs offered outside of such a plan. For example, an employer offering an HSA as part of a cafeteria plan may structure its contributions as matching contributions, which means the employee receives an employer contribution only if the employee contributes to the account as well. In such a situation, some employees might not receive any contributions to an HSA, or might receive contributions that differ in dollar terms or as a percentage of the HDHP deductible. In contrast, an employer offering an HSA that is not part of a cafeteria plan must ensure that all eligible participating employees receive a comparable contribution— either in dollar terms or as a percentage

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of the HDHP deductible—to their HSA plan (see earlier discussion in this chapter and Chapter 8 on the laws governing HSAs for more on comparable contributions).

At the same time, however, employer HSA contributions made under a cafeteria plan must meet the nondiscrimination rules applicable to cafeteria plans. These are the same rules applied for 401(k)s and flexible spending accounts. Nondiscrimination rules have a number of meanings in employee benefits law; in this case, the term refers to rules that ensure that a plan does not favor the employer’s most highly compensated employees.

Making Sure HSAs are Right for You

If you offer an HSA to your employees, are eligible for an HSA, or are thinking about it for someone else, think carefully about health care budgets. The HSA/HDHP allows consumers to be more involved in decisions on how their health care dollars are actually spent and encourages them to budget effectively and save money. In order to think in terms of a health care budget, you have to look at the type of health care for which you will need to pay.

Any time you have a choice of health plans, whether from a selection of plans offered by your employer, or as an individual purchaser, you should consider your health care use patterns.


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Do You Use Substantial Amounts of Health Care?

Do you or a family member who would be covered under your plan have a chronic condition such as diabetes, a heart problem or asthma? A chronic condition is one that lasts a long time, or recurs frequently, and can be treated but not eradicated. Some people with chronic conditions may need substantial health care on an ongoing basis. Not all chronic conditions are cost-intensive; however, they may require monitoring. And some may require medical appliances that are not usually paid by health plans, but are considered medical expenses for purposes of an HSA, and therefore, could be paid from an HSA.

Consumers need to weigh the benefits of flexibility and tax-favored HSA distributions with covered benefits under low deductible plans to determine which plan is right for them. With increasing co-payments and coinsurance in traditional plans, HSAs are often times the right choice.

Do You Need Health Care Coverage for that

Unanticipated Expense or Disaster?

You and your family may be in good health, but you still want health care coverage against that unanticipated accident or other unpredictable event. Can you set aside money in an HSA on a regular basis to cover your annual bout with the flu or your child’s ear infection? Many people don’t reach their deductibles because they don’t spend much on health care. The HSA/HDHP plan may be just right for you; since it gives you control over your

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spending and allows you to save tax-free in an account that you can use if and when your health care spending increases.

Using Your Plan’s Network

High deductible health plans typically offer networks of providers that have agreed to give special pricing to participants in plans with which they have contracts. Discounts lower the amount you may need to pay out of your HSA. Are you willing to use doctors in your plan’s network if it can lower your health care costs? If you decide to go “out-of-network”, are you willing to pay for the higher costs, possibly out of your HSA? The HSA does give you flexibility to go to an out-of-network doctor, knowing that, if the money is in your HSA, you can pay for that visit. The HSA/HDHP is anchored in making good choices, both health-wise and budget-wise.

You should also consider your job, your industry or occupation and your career stage and career plans. Do you change jobs often? People tend to change jobs more often in some fields than in others, and younger people tend to move around more than people who are more established in their careers. HDHPs can be extended under COBRA like any other plan. You can use accumulated balances in an HSA for COBRA premiums during a period when you may lack other coverage. You can continue to use your HSA for health care expenditures even if you don’t have other coverage; however, you cannot contribute to an HSA without having a qualified HDHP.


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Also Think About These Options

Should you get your HDHP and HSA from the same company? You are free to use any qualified trustee or custodian for your HSA. The insurer who offers your HDHP may offer an HSA as well--this can be a good choice as account management can then be integrated with the health plan. But if you are not happy with your account trustee or custodian, or are offered a better deal in terms of fees or services, you are free to change companies.

Since you own your HSA, it is not like other benefit plans your employer may offer. An HSA is not protected from your creditors unless it qualifies as an employer-sponsored benefit plan under ERISA (see Chapter 8: The HSA Law). ERISA (The Employee Retirement Income Security Act of 1974) is the federal law that governs the terms under which employee benefit plans are offered. According to the U.S. Department of Labor, an HSA offered by an employer is not necessarily an ERISA plan, nor is an HSA you open on your own.

Keep in Mind

You need to consider whether you are able •to establish and contribute to an HSA, have benefits paid from one, or claim the tax deduction for a contribution. Eligibility for each of these aspects of the HSA can differ.

The HSA can work with other tax-•advantaged accounts to pay for health expenses, including HRAs and FSAs, but

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HRAs and FSAs will work differently when combined with an HSA than when used on their own.

Whether an HSA/HDHP is right for •you can depend on a number of factors, including your health needs and those of your family, and how often you may expect to change jobs and/or health plans.

Up Next

This chapter has explained how you qualify to establish an HSA/HDHP and how this two-part plan will interact with other health care options your employer may offer you. In the next chapter, we look at how you can find the right HSA/HDHP for you.

Table 2.1 Who Is a Dependent? Source: Authors’ compilation based on Department of the Treasury,

Internal Revenue Service, Publication 502: Medical and Dental Expenses.

A person whom you claim as a dependent for income tax purposes must meet each of the following tests, as applicable:

1. That person lived with you for the entire year as a member of your household or is:

Your child (including a legally adopted child •or a foster child), grandchild, great-grandchild

Your stepchild or your stepchild’s •descendant;


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Your sibling, half-sibling or step-sibling, or a •descendant of these persons;

Your parent, grandparent or other direct •ancestor other than a foster parent

Your stepfather or stepmother; •

A brother or sister of your father or mother; •

A descendant of your brother or sister; or •

Your father-in-law, mother-in-law, son-in-law, •daughter-in-law, brother-in-law or sister-in-law.

2. That person was a U.S. citizen or resident, or a resident of Canada or Mexico for some part of the calendar year in which your tax year began. For individual taxpayers, the tax year is typically the calendar year.

3. You provided over half of that person’s total support for the calendar year. Special rules may apply to children in divorce and other situations.

4. You may claim a child who meets one of the tests in #1 above as your dependent if s/he lived with you in the U.S. (special rules may apply) for more than half the year and is under age 19 (or under age 24 if a full-time student). Beginning in 2005, a uniform definition of a dependent child applies for all tax purposes.

A few cautions:

Because expenses are tax-deductible • either when they are incurred or when they are paid, you may be able to deduct a dependent’s medical expenses even if you cannot claim an exemption for him or her

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on your current-year tax return.

You may pay medical expenses out of •the HSA for yourself, your spouse or a dependent only if the expenses are not covered by insurance.

Chapter 3

In previous chapters we described the basics of HSAs and HDHPs and explained to you how to figure out if you are eligible to participate. As HSAs become more commonplace, most Americans under the age of 65 can benefit from their unique advantages. It doesn’t matter if you have individual or family coverage, employer-sponsored coverage, whether your employer is large or small, if you are sponsoring the plan, whether you have retired early, or are not employed at all. If you are eligible (see Chapter 2: Who Would Want an HSA?), and have a qualified HDHP, you can set up an HSA. This chapter is about how to get an HSA.

4 HSA-Remember the Definition

4 Setting up an HSA on Your Own

4 In a Nutshell

4 How to Find out about HSAs

4 Getting a Certificate of Coverage

4 The Employer and the HSA

How to Set Up an HSA


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HSA—Remember the Definition

A health savings account (HSA) is a savings account that is combined with a qualified high deductible health plan (HDHP). The HDHP protects the insured from the cost of a catastrophic illness, prolonged hospitalization or a particularly unhealthy year. The HSA can be used for meeting expenses before the HDHP deductible is met or for other health care expenses allowed under the Internal Revenue Code.

Setting up an HSA on Your Own

A knowledgeable health insurance broker can help you find and apply for a qualifying HDHP. You can also explore health insurance websites that offer HDHPs. Make sure that the deductibles meet the required levels so that you can then qualify to open an HSA. For calendar year 2008 a qualified individual policy is $1,100 or higher; $2,200 or more for a family policy. Out-of-pocket limits can be no higher than $ 5,600 for self-only coverage and no higher than $11,200 for a family. If you are applying for a plan without employer sponsorship you might not be covered for pre-existing conditions, but

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you could still pay for health expenses out of the HSA for such conditions.

To open an HSA, you must have established your qualified HDHP plan and be otherwise eligible as of the first of the month you wish to establish your account. Your HDHP and HSA are not required to come from the same company; you may prefer the service, terms and investment opportunities of an HSA provider that is not provided through your insurance company.

Questions to Ask

It is important that your expectations are clear for the basic administration of your HSA. Make sure you get answers to the following questions so that your HSA will run smoothly:

How much should I contribute? Can I make •contributions monthly? Quarterly?

How often do I receive a statement? •

How often can I increase or decrease my •contribution?

When will I receive my debit card or •checkbook?

What should I do if I need to use the account •before I get them?

Closing the Deal

Your HSA provider will require you to sign a custodial agreement and a trust agreement, or otherwise enroll as part of your employer-based health insurance


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program. Some HSA administrators do not require “wet signatures”, or hard-copy paper forms, if the enrollment process is tied to enrolling for the HDHP. The IRS prototype forms for HSA custodial accounts (5305-C) and HSA Trust Accounts (5305-B) can be found on the IRS website at www.irs.gov. (See also Chapter 8: The HSA Law).

Once your HSA is set up, you should designate a beneficiary right away. If the beneficiary is a spouse, he or she will become the owner of the HSA if you should die. It will be included in your estate for other named beneficiaries (see page 2-16, After the Account Holder’s Death).

Once your HSA is open and you’ve got your debit card or checkbook in hand, going to the doctor is just like before—except that you may be required to pay at the time of service. If your HDHP is a network plan and you use its providers, your bill may be sent to your insurance company for re-pricing and then returned to you for payment at the discounted rate. Ask your health care provider to contact your administrator for submission information. Health savings account administrators and HDHPs can assist you.

In a Nutshell...

Your steps are:

Research and sign up for an eligible HDHP•

Research HSAs and IRS-approved trustees•

Sign up for an HSA, including executing your •

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custodial and trust account agreements

Designate a beneficiary•

Get your debit card and/or checkbook to •access your HSA

Keep track of your account as you would •your checkbook and retirement accounts

How to Find out about HSAs

There are a number of good websites that describe the basics of HSAs, give updates about changes in the HSA law and list companies that provide HSAs. Below is a starter list of some of these sites:

www.hsaguidebook.comwww.hsafinder.comwww.hsainsider.comwww.vimo.comwww.healthdecisions.orgwww.treasury.govwww.healthequity.comGoogle: health savings accounts or HSAs.

Your insurance broker should also have some experience with HSAs and be able to provide you with more information.

Getting a Certificate of Coverage

If you have had continuous health insurance coverage (see Chapter 7: Your HSA/HDHP and Everyday Health Care Challenges), any conditions that are considered pre-existing may be covered sooner than any required


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wait time. It is important to have a certificate of coverage from your last insurer as proof of your health insurance coverage. A written certificate issued by a group health plan or health insurance issuer shows your prior health coverage (creditable coverage). A certificate must be issued automatically and free of charge when you lose coverage under a plan, when you are entitled to elect COBRA continuation coverage or when you lose COBRA continuation coverage. You may need to provide this certificate to your new plan if medical advice, diagnosis, care or treatment was recommended or received for the condition within the 6-month period prior to your enrollment in the new plan.

If you become covered under another group health plan, check with the plan administrator to see if you need to provide this certificate. You may also need this certificate to buy, for yourself or your family, an insurance plan that does not exclude coverage for medical conditions that are present before you enroll in the HDHP.

The Employer and the HSA

Health savings accounts offer employers an opportunity to empower employees to be incentivized and take control of the way they consume health care services. This can lead to lowering future cost increases. If you are an employer and have not offered health benefits before, the initial choices of the type of plan, administration, and whether or how much to contribute to the HSA will make a difference in how well received your choice of health care coverage is, and whether it will meet your

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employees’ needs. As an employer, you may be experienced in offering similar accounts that require trustee and custodial agreements or investment decisions, such as section 401(k) plans. You can use that experience, and the experience of your employees, to understand the process.

You may have offered health benefits in the past and now want to make the switch to the HSA/HDHP type of plan. Benefit design is important and good employee education is key to the success of this type of program. This book will guide you in educating your employees about HSAs.

Benefit Design

There is room to customize your health care plan. For instance, the IRS allows, but does not require, a range of preventive care screenings and services for first dollar coverage in an HDHP. You can pick a qualified HDHP that meets your health and cost needs.

You can also make decisions on how to customize premiums and contributions. You can make full or partial premium payments for HDHPs, or a variation on that for individual and family coverage. You also decide how much to contribute to your employees’ HSAs—whether to make full or partial contributions or none at all. One of the key benefits to both employers and employees with an HSA-type plan is the significant cost savings on health insurance premiums for the HDHP relative to traditional


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HMO/PPO type plans. These premium savings can be used to partially fund employee HSAs. When making contributions, make sure you meet comparability rules (see Chapter 8: The HSA Law). The IRS also allows employers to offer HRAs and FSAs at the same time as the HSA/HDHP plan. However, they do have limitations on use or covering only post-deductible expenses. (See Chapter 2: Who Would Want an HSA?).

Employee Education

Education is key to a smooth transition to the HSA/HDHP health care coverage. Employees may be uncomfortable with this new type of plan, and it is likely that many won’t understand how it works. For some, who do not understand how the tax-savings and premium decreases affect the overall cost, this may look like a benefits decrease. In order to be successful, it is very important that you take the proper steps to help your employees understand how this new system works, how to contribute, and how to make payments. Help them assess how much to contribute to an HSA, how to keep records, whom to ask when they have questions, how to check HSA balances and deposits, use a network, and get good health care information. Your HSA administrator and health plan may have tools to help you perform these tasks.

Employers who provide employees with information and tools to help them make better health care decisions, especially decisions on how to use the health care system

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effectively, will find a more receptive base. You will also want an HSA provider who can help support your educational effort throughout the plan year.

Keep in Mind

A knowledgeable broker can help you find •an HSA provider and HDHP that suits you or your company.

Make sure you understand the nuts •and bolts of how the HSA you choose works—how to contribute, how often you receive account statements, designating a beneficiary, etc.

Good benefit design is key to making the •HSA/HDHP plan work for your employees. There is room to customize your plan and contributions to meet your needs.

Educating employees to be active health care •consumers is more important than ever.

Up Next

Earlier chapters introduced HSAs and HDHPs and told you how to figure out if you are eligible. This chapter told you how to find an HSA and an HDHP. In the next chapter we elaborate on how these plans work.

Chapter 4

The previous three chapters explained the basics of HSAs and HDHPs; how to figure out whether you can have an HSA and whether you should; and how to get one.

In this chapter we explore how an HSA/HDHP works and how you can manage your account to get the best benefits your money can buy. We explain:

4 Using the HDHP

4 Using the HSA

4 Knowing Who Can Provide You Treatment

4 How You Pay Your Providers

4 What is Permitted Coverage

4 Managing Your HSA

How Does Your HSA/HDHP Work?


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Using the HDHP

The HDHP is simply a standard insurance plan with a higher deductible. To comply with the HSA law, the deductible must apply to both network and non-network care. In contrast, many managed care plans don’t apply a deductible to care you obtain within your plan’s provider network.

Exactly what your plan does cover depends on your employer, your insurer, and the choices you make from the plans available to you. For example, some plans may pay for fertility treatments, others may not; some plans may pay for bariatric (weight-loss) surgery, others may not. There are many variations among HDHPs, so don’t assume your next plan covers the same things as your last. Be particularly sure you understand your new plan’s provisions. These can be found in your plan’s summary of benefits that you receive at the time of enrollment.

This section explains the types of coverage that a participant may have along with an HSA/HDHP. If a participant has coverage in addition to the HDHP that is not permitted, then the participant may not contribute to the HSA. In general, the rules exclude many types of coverage for first-dollar medical expenses.

Permitted Coverage Alongside an HDHP

Permitted coverage is the coverage an individual may maintain, in addition to an HDHP, without losing eligibility for an HSA, even though the coverage may provide first-dollar coverage for certain medical

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expenses. Coverage that is permitted includes:

Worker’s compensation insurance; •

Indemnity plans that pay a fixed amount per •day or other period of hospitalization;

Coverage limited to a specific disease or •illness (e.g. cancer, diabetes);

Accident, disability or auto insurance; •

Tort liability payments; and •

Insurance for vision care, dental care, or •long-term care.

A few important cautions:

Permitted hospitalization indemnity •plans mean just that— you must have been admitted to the hospital to qualify for a benefit. An indemnity plan is one that pays health insurance benefits in the form of cash payments rather than services. Some HSA/HDHP vendors may call these plans “gap” plans or “HSA protector” policies, because one function of such plans is to cover you against a large bill before you meet your plan’s deductible. This can serve to protect your HSA dollars, or to help pay for hospital expenses before you have had time to build your account balance. Indemnity or “gap” plans can’t cover outpatient hospital services such as medical tests that you might have in a hospital


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or hospital-related facility without being admitted to the hospital. In other words, the indemnity plan is not intended to cover relatively small expenses just because they are incurred in the hospital rather than in a freestanding facility.

Prescription or other discount •programs. Your plan may provide you with a membership card that qualifies you for a discount on prescription drugs or other health care goods or services. Such programs are permitted along with participation in an HSA/HDHP, even though they may apply to the very first eligible expenses you incur (that is, they are not subject to a deductible). They are permitted because they are not insurance.

Preventive care and the HSA/HDHP. •Generally, an HDHP may not provide benefits for any year until the deductible has been met. But preventive care has a special role in the health care system. Many plans and providers believe their first job is to prevent disease from developing, and, if a medical condition does develop, to diagnose it early enough that you have a chance for full recovery. To accommodate the importance of preventive care, there are exceptions (called, in legal terms, a safe harbor) for

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preventive care. So, an HDHP may provide first-dollar coverage for preventive care or apply a lower deductible. Chapter 1: Health Savings Accounts—A New Approach provided a list of the basic categories of treatments that are considered preventive care for the purposes of HSAs/HDHPs. Some 50 types of screening services are also included in the federal definition of preventive care (see Table 4.1, at the end of this chapter). Screening services are medical tests designed to detect treatable diseases or conditions. It is very important to remember that while an HDHP may offer coverage for preventive care benefits before the deductible is satisfied, it is not required to do so. There is no requirement that an HDHP cover preventive care on more favorable terms than available for other benefits, or that it offer any benefits for preventive care at all. Read your plan information carefully to fully understand how preventive care is treated.

State law and preventive care. • Some states have laws requiring that insurers provide certain types of health care considered preventive care without imposing a deductible that might apply to other care paid for under the plan. Such laws are called benefit mandates, and the benefits required under these laws are called mandated


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benefits. The idea behind requiring favorable treatment for preventive care is that if some people have to pay for such care with their own money (rather than benefiting from insurance coverage) they will forego care that could be important in diagnosing and/or preventing illnesses or diseases. Archer MSAs (see Introduction) relied on state law to determine the types of care that could be provided without a deductible if required by state law. Unlike Archer MSAs, the HSA law uses a federal definition of preventive care. Therefore, individuals and some employers in states whose laws require first-dollar coverage for benefits that do not fit the federal definition will be unable to participate in HSA/HDHPs (see further discussion in Chapter 8: The HSA Law). In such states, only those employers offering self-insured plans will be able to adopt HSAs/HDHPs. Self-insured plans are those under which the employer pays for medical claims as they arise rather than contracting for coverage from an insurer. Several states are in the process of changing state law to allow for HSAs by exempting HSA/HDHP plans from state benefit mandates. Please see Chapter 8: The HSA Law for more information.

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Coverage that is Not Permitted for HSA Purposes

Permitted coverage alone is not •an HDHP. If a plan provides primarily permitted coverage, and there is no general medical coverage, it is not an HDHP. Without an HDHP, the holder may not establish an HSA.

Using other tax-advantaged health •plans with your HSA/HDHP. The whole point of the consumer-driven health care revolution—and HSAs/HDHPs in particular—is to incentivize and empower the consumer to be responsible for health care spending. You cannot enroll in traditional coverage and still open and contribute to an HSA. Many people who are enrolled in traditional plans can use FSAs and HRAs to help with some of this first-dollar spending by using these accounts to pay for deductibles, co-payments and coinsurance. If you want to enroll in an HSA/HDHP, you can still participate in an FSA or HRA, but the FSA or HRA has to be more restrictive than if you were enrolled in a traditional plan (for more on this, see Chapter 2: Who Would Want an HSA?).

Student coverage.• A student in college or a graduate in a professional program may be ineligible to participate in a parent’s plan because the student has reached the plan’s age limit or is not a full-time student. Some higher education institutions make


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comprehensive medical coverage available to such students (for more on such plans, see Chapter 7: Your HSA/HDHP and Everyday Health Care Challenges). This type of coverage may meet the standards for an HDHP. If such coverage is available, a student can contribute to an HSA, assuming he or she is otherwise eligible. If the coverage does not meet the HDHP standards, the student can decline the higher education institution’s coverage and enroll in a plan that does meet the criteria. Make sure to evaluate the dependent status of your student before setting up an HSA for him or her.

Medicare.• Once enrolled in Medicare (which is not an HDHP), you are no longer eligible to make contributions to an HSA (see Chapter 7 for more detail). If you choose not to enroll in Medicare, you may continue to make HSA contributions, including catch-up contributions, as long as you continue to have an HDHP. At age 65 (the usual eligibility age for Medicare), a person can spend balances accumulated in the HSA on non-qualified expenses with no penalty, though the expenditures will be subject to income tax.

Prescription drug coverage.• First-dollar coverage subject to co-payments, such as $20 co-payment per prescription, is not permitted (see further discussion in Chapter 1, where we explain the basics ofHSAs.

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Using the HSA

You can spend the funds in your HSA on qualified medical goods and services or on certain limited types of insurance coverage.

Medical Expenses

You can use your HSA on a wide range of medical expenses—generally the same ones that you can deduct if you are eligible to deduct medical expenses on your individual income tax return (see Table 4.2). These expenses may not necessarily be covered under your HDHP. Ultimately, it is your choice how you spend your HSA dollars.

Insurance Premiums That You Can Pay from the HSA;

Those You Can’t

In general, you can’t use your HSA to pay insurance premiums. However, there are certain exceptions (see also Table 4.3, at the end of this chapter, and Chapter 7: Your HSA/HDHP and Everyday Health Care Challenges). Once you are 65 and eligible for Medicare, you can pay Medicare premiums (A, B, C & D), out-of-pocket expenses that Medicare doesn’t pay, and Medicare HMO premiums. You can’t pay Medigap premiums out of your HSA. Medigap policies are policies individuals can buy to cover out-of-pocket costs not covered by Medicare (see Chapter 7 for more detail).

If you are age 65 or older and still working, you can pay your share of premiums for employer-based coverage out


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of your HSA, though you can’t pay for these premiums before age 65. If you are age 65 or older and not working, you can also pay your share of any premiums your employer requires you to pay for employer-sponsored retiree health care coverage.

If you are unemployed, you can pay COBRA premiums if you are eligible for COBRA benefits. You may become eligible for COBRA benefits upon retirement at any age (see Chapter 7).

You may also use your HSA to pay premiums for qualified long-term care insurance. To be qualified, a long-term care insurance plan must meet criteria set out in federal law.

Restrictions Your HSA Trustee or Custodian May

Impose

You, not the trustee or custodian of your HSA, are responsible for showing you have spent your HSA in accordance with the law’s requirements. However, the trustee or custodian can limit your access to HSA distributions in certain specified ways. For example, the trustee may prohibit distributions for amounts less than $50 or may only allow a certain number of distributions per month. Different trustees or custodians may impose different restrictions—or even no restrictions at all—on distributions. So if easy access to your account is important to you, you need to consider this feature when shopping for an HSA (see also Chapter 1: Health Savings Accounts—A New Approach and Chapter 3: How to Set Up an HSA).

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Knowing Who Can Provide You Treatment

In general, the HSA/HDHP combination is the most flexible type of health care arrangement available. The money in the HSA is yours to spend and save. This means you can choose to obtain treatment from virtually any legal provider of qualified medical services, whether they are in or out of your network, as long as you are willing to pay with your HSA.

Services Not Covered under Your Plan

You can use your HSA balance to pay for health care that is not offered under your health plan, within the limits of qualified government expenses (see Table 4.2, end of this chapter). Not only does this include many dental and vision expenses, but many other less common expenses, such as removing lead-based paint in your residence. Removing lead-based paint is an expenditure that would generally not be covered by a health insurance plan. It will not be credited toward your deductible. See Table 4.2 at the end of this chapter for a list of expenses you can use your HSA to cover.

Services Covered under Your Plan

Alternatively, you could use your HSA only for health care goods and services that are covered under your plan. Then, you would generally have two choices: you could consult providers who participate in your plan’s network, or you could consult non-network providers for some or all of your care.

Using network providers. Health care providers—


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doctors, hospitals and other health care facilities— participating in your plan’s network have agreed to give members of your plan a discount from their usual charges. They hope the discount will attract plan members to their practice or facility.

Depending on your plan’s rules, to get the best benefits your plan offers you may also need to use a gatekeeper physician and obtain referrals and authorization for certain medical services or procedures. A gatekeeper physician is usually a primary care doctor, pediatrician, or internist responsible for overseeing and coordinating all aspects of a patient’s care. A referral is a recommendation of a medical professional. In many managed care plans, a referral may be necessary to see any practitioner or specialist other than your gatekeeper physician, if you want the service to be covered. An authorization is the plan’s permission to proceed with a medical or surgical procedure. Like a referral, authorization may be required if you want the plan to pay for the procedure. Conversely, without authorization, the plan may refuse to pay for the procedure even if the procedure would otherwise be covered. A managed care plan is a health plan that limits costs by limiting the reimbursement levels paid to providers by monitoring health care utilization of participants, or both.

If you use your HSA only for services covered under your plan and consult only providers who participate in your plan’s network, all your expenditures under the HSA will generally count toward your deductible and

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toward your plan’s out-of-pocket limits.

Example: Maria’s doctor charges $150 for an annual visit to check on her ongoing thyroid treatment. As a provider in her plan’s network, her doctor has agreed to accept $75 from her plan for each such visit. If she has not yet met her deductible at the time of the visit, she pays $75 out of her HSA. This amount is also credited toward her plan’s annual out-of-pocket limit, or limit on how much she can be expected to spend in a given year before the plan takes over entirely.

Even if you use network providers, you still need to understand exactly how your plan expects you to obtain care. Your plan may require you to obtain a referral to see a specialist or authorization for a medical procedure even if the specialist or the doctor recommending the procedure participates in your plan. If you fail to obtain a referral or authorization when one is required, your plan may charge you a higher co-payment, coinsurance rate, or a flat-dollar penalty. Neither the excess co-payment or coinsurance you may be required to pay, nor the penalty, will count toward your HDHP’s out-of-pocket limit for the year. As a result, failure to know and follow your plan’s rules can cost you money.

Using non-network providers Suppose Maria decides to consult a doctor who does not participate in her network. As a non-network provider, the doctor will charge her $150 for this visit. Since she has not met her deductible, she decides to pay the $150 out of her HSA. If her plan has a single limit for network


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and non-network care, the $150 will also be credited toward her plan’s annual out-of-pocket limit.

However, the HSA law permits the plan to have a separate limit for non-network care. If her plan has a separate limit for non-network care, the $150 will be credited toward that limit. In this example, if she had met her deductible for the year, the plan would pay whatever it provides for non-network care—commonly 50 percent of the allowable charge. In this example, the plan would pay $75, and the $75 Maria paid would be credited toward her out-of-pocket limit for the year.

This is a somewhat simplified example because it does not account for another type of discount health care plans often apply. If your provider has not contracted with your plan, and thus does not offer you a network discount, the plan is not obligated to accept the provider’s charges.

Plans typically count only what they consider usual, customary and reasonable (UCR) charges toward the participant’s deductible and/or out-of-pocket limits. This is the term for an insurance company’s estimate of “the going rate” to be paid in your geographical area for a given medical service or procedure.

Suppose Maria’s insurance company decides that usual and customary charges for a thyroid check-up should be $130. It would then pay half of this reduced amount, and she would pay the other half. In addition, however, the doctor may charge her the difference between his

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original charge and her insurance company’s estimate of usual and customary charges, in this case, $20. If this happens, her cost for the visit would be $85. The doctor still gets paid his usual charge of $150—$85 from Maria and $65 from her insurance company. However, because her insurance company has not allowed the full amount of her doctor’s charges to be considered, only $65 of the $85 she paid is credited toward her out-of-pocket limit for the year.

How You Pay

The basic process of paying for care is much the same as it was under any health care coverage plan you may have had in the past. We start by outlining the payment process in a traditional plan—including the parts of the process that happen away from your doctor’s or other provider’s office—then point out how the process changes in an HSA/HDHP plan.

In a Traditional Plan

In a traditional plan, you typically pay for care in one of two ways, depending on whether the doctor or other provider participates in your plan’s network.

In-network care. If the provider—suppose •it’s your family doctor—participates in your network, you typically present your health care plan membership card and pay the required co-payment or coinsurance at the time of the visit. The provider files your claim with the insurance company and gets paid the contractually agreed or re-priced


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amount.

Out-of-network care. If the provider does •not participate in your plan’s network, the process is somewhat simpler. You pay the entire bill at the time of the visit, because a non-network provider typically will not submit the claim to your plan for you. Then you may be reimbursed for part of what you paid, as in our example of the out-of-network thyroid check-up above, depending on how much of your deductible, if any, you have met for the year.

In an HSA/HDHP Plan

In an HSA/HDHP plan, the payment process at the doctor’s office (hospital, laboratory or other facility) is much the same. Your HSA provider may supply you with a membership card, along with a payment card that may function much like your bank’s debit card and/or checkbook that will allow you to write checks out of your HSA.

In-network care. If the doctor or other •provider is in your network, you might not pay anything at all at the time you receive care, depending on the structure of your plan. The provider may ask you to pay part of the bill at the time of your visit, however, do not pay the entire cost as the bill has not been re-priced and you may be overcharged. The provider submits your claim for re-pricing. Then the plan pays its

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contractually agreed amount if you have met your deductible for the plan year, taking into account the network discount, or you pay this reduced amount if you have not yet met the deductible. Depending on how your HSA is set up, you can pay the new amount out of your own bank account or with a credit card, file a claim with your HSA, or pay the amount directly out of your HSA.

Out-of-network care. If your provider does •not participate in your plan’s network, you may pay for your care at the time the care is provided. This is also what happens in a traditional plan. You can pay the charge out of your own bank account or with a credit card and file a reimbursement request with your HSA, or pay the amount directly out of your HSA. Then you may be reimbursed for part of what you paid, as in our example of the out-of-network thyroid check-up above, depending on how much of your deductible, if any, you have met for the year. If you paid directly from the HSA and get a reimbursement from the insurance company, that reimbursed amount must be returned to the HSA as a mistaken distribution (see Chapter 8: The HSA Law).

Important Differences

While the basic outlines of the payment process are pretty much the same whether you are enrolled in a


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traditional plan or in an HSA/HDHP, you may have to understand a few new terms and relearn a few of the steps in the payment process.

Cashless doctor visits? Most health care •providers—or at least most doctors’ offices—are not used to completely “cashless” visits from their patients. In a traditional plan, your co-payment or coinsurance serves as something like a “down payment” on your care, with the balance to come from your plan. To accommodate the needs of providers, some HSA/HDHP plans may provide for an “encounter fee”, or an amount you pay at the time of a visit to a network provider. While this fee may not represent your full financial responsibility to the provider, it is counted toward your financial responsibility for that visit and for your care for the year. Important: Many providers—both in-network and out-of-network—are unfamiliar with HSA/HDHP plans and will try to charge you retail price when you receive services. You should speak with your HSA provider or HDHP about the best way to obtain fair pricing when you visit your doctor.

Building up your HSA. • The law governing HSAs provides you and/or your employer with a good deal of flexibility in funding your HSA. That means you or your employer

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can make contributions to the HSA on any schedule that is convenient, so long as the total contributions made to your account in a given year do not exceed the annual maximum contribution limit (see how this works in Chapter 1, which introduces HSAs). If you have a bill that exceeds your balance, you may pay the bill out of your other resources, and then file for reimbursement from your HSA once your balance has built up sufficiently. Your HSA trustee or custodian will provide you with forms or another process that you can use for this purpose. If your HSA is offered as part of a cafeteria plan, your employer may help you build up your HSA to meet your health care spending needs. If an employee elects to make contributions to an HSA through a cafeteria plan, the employer may contribute the maximum amount elected by the employee to the HSA. This type of accelerated contribution must be equally available to all participating employees throughout the plan year, and must be provided to all participating employees on the same terms. The employee would then repay the advance or accelerated contribution through


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the regularly scheduled cafeteria plan contributions.

The Role of FSAs and HRAs. • Employers are allowed to offer FSAs and HRAs along with their HSA/HDHP plans, so long as the FSAs and HRAs meet certain requirements. For example, one option is that either account may be set up to pay benefits only after the HDHPs deductible has been met. After that point, the account would cover any co-payments or coinsurance for which you are responsible (for more detail on allowable variations of FSAs and HRAs, see Chapter 2: Who Would Want an HSA?). If your employer provides you an HSA/HDHP with a post-deductible FSA or HRA, you would submit your receipts to those accounts for reimbursement only after you have met your HDHP deductible. We will provide more detail on submitting claims to these accounts in Chapter 5: A Consumer Guide to Paperwork and Record Keeping.

Managing Your HSA

The HSA gives you a great deal of power over how you spend your health care money, how many dollars you spend on health care, and how much of your health care money you decide to save. In this section we review some of your choices and offer some advice on making the best choice for you.

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Choosing the Services to Use

Suppose you have chronic lower back pain. Your plan will pay for a visit to an orthopedist, an osteopath or a chiropractor, but your favorite chiropractor is not in your network. Your HSA gives you the flexibility to consult your chiropractor, see if that treatment helps and, if not, to go to your orthopedist for further tests and/or medication.

How to Look for Value

How do you find out which doctor or hospital is right for you? Learning about the best hospitals and doctors is not that much different from buying the right toaster, cell phone service, or car—you must do your homework. We wrote a whole book about this and other issues in finding the right health care today (The Complete Idiot’s Guide to Managed Health Care, New York: Alpha Books, 1998); you can find it in many larger libraries or on the internet.

There are other reference sources, including some that may be in your home right now. For example, many local magazines publish articles about the best local hospitals and physicians for various conditions. Your HSA provider or HDHP may also provide useful tool to help you in your search for value. The internet is also an important resource tool. There are many websites that publish reports about the cost and quality of health care providers across the country.

How to Assess Appropriateness of Care


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It never ceases to amaze us that if you find three people with the same condition—and even the same apparent degree of severity—one might get surgery, one might get prescription drugs, one might get no particular medical care at all, and all three might feel just as good. Medicine is an art as well as a science, and many conditions don’t take the same course in every person. In addition, you should remember that even now, when controlling health care costs is high on everyone’s agenda, some surgeries remain over-performed, and some drugs remain over-prescribed.

So if you are diagnosed with a disease or other condition and your doctor recommends treatment or surgery, do your homework (see the next section). If you are offered surgery, ask your doctor why, what alternatives you have, and any other questions you may have. Most doctors will welcome your questions. If your doctor doesn’t, you may be seeing the wrong one.

Where to Go for Help

Read up on it. • Many health plans give their participants reference books on basic health care. Since the flu doesn’t care which plan you are enrolled in, keep such books from any previous plans. Parents may have their own favorite child-care books.

The Internet. • Another variable source of information—if you can get it away from your kids—is your computer. Leading HSA administrators and health plans will provide

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powerful internet based tools to help you make better health care decisions. If you have a chronic condition, however common or rare it may be, there is undoubtedly a national association that serves people with that condition, providing the newest information and credible research references. An internet search using your condition as the key word will yield the right names. If you are new to net surfing, start with various government research sources such as the National Institutes of Health (www.nih.gov). Then branch out from there. Be aware that while some internet sites may have an official or professional look to them, anyone can put up a web site, and you should not act on any information you find online unless you trust the source. Always check for the URAC (Utilization Review Accreditation Commission) or HON (Health on the Net Foundation) logos (usually found in a bottom corner). If a website has been accredited by either of these organizations, the information is should be accurate and trustworthy.

Make a call. • Your first stop when you think you need medical care soon, but you don’t know what to do, should be your health plan. Many plans and HSA providers have advice lines, staffed by nurses or other medical professionals who can help you


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figure out whether you should go to the doctor tomorrow, head for the emergency room tonight, or take two aspirin and go to bed early. Your family doctor’s or pediatrician’s office may also maintain an advice line.

Use your common sense. • In an emergency, you are your own best source of help. If you are concerned that a condition or injury could lead to permanent injury or loss of life, call 9-1-1. While you should not go to the emergency room for that two-week cold just because you can’t stand it any more, a two-week cold that suddenly turns to difficulty breathing could require immediate care. Use your common sense, and feel secure in the knowledge that federal law protects your right to do so. Your plan must generally pay for emergency care if the situation was such that a prudent layperson—not a doctor—with an ordinary layperson’s understanding of medicine would have done the same thing.

Keep in Mind

Many of the rules for using your HDHP are •much like the rules you have experienced in a traditional plan. However, if you contribute to an HSA, the law limits other types of health care coverage you may have. If the plan is not considered to be an HDHP or

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permitted coverage, you cannot establish or contribute to an HSA.

You can spend your HSA on a wider range •of services than your HDHP is likely to cover. The choice is yours.

If your plan has a provider network, using it •can help make your HSA dollars go further.

The HSA/HDHP gives you more power •over your health care dollar than a traditional plan. Inform yourself, and use your power wisely.

Up Next

This chapter explained how to use your HDHP and HSA; how to know whom you can see and where you can go; how you pay for care; and how to manage your money in an HSA.

Chapter 5 covers using your plan efficiently, including understanding and submitting paperwork and keeping the right records.

Table 4.1 Preventive Care Screening Services Allowed to be provided as first dollar care—these services may or may not be paid for by your HDHP.


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Table 4.1 Preventive Care Screening Services

Allowed to be provided as first dollar care—these services may or may not be paid for by your HDHP.

Cancer ScreeningBreast CancerCervical CancerColorectal CancerProstate CancerSkin CancerOral CancerOvarian CancerTesticular CancerThyroid Cancer

Heart and Vascular Diseases ScreeningAbdominal Aortic AneurysmCarotid Artery StenosisHemoglobinopathiesHypertensionLipid Disorders

Infections Diseases ScreeningBacteriuriaChlamydial InfectionGonorrheaHepatitis B Virus InfectionHepatitis CHIV InfectionSyphilisTuberculosis Infection

Mental Health Conditions and Substance Abuse ScreeningDementiaDepressionDrug AbuseProblem DrinkingSuicide RiskFamily Violence

Metabolic, Nutritional, and Endocrine Conditions ScreeningAnemia, Iron DeficiencyDental and Periodontal DiseaseDiabetes MellitusObesity in AdultsThyroid Disease

Musculoskeletal Disorders ScreeningOsteoporosis

Obstetric and Gynecologic Conditions ScreeningBacterial Vaginosis in PregnancyNeural Tube DefectsPreeclampsiaRh IncompatibilityRubellaUltrasonography in Pregnancy

Pediatric Conditions ScreeningChild Development DelayCongenital HypothyroidismLead Levels in Childhood and PregnancyPhenyliketonuriaScoliosis, Adolescent Idiopathic

Vision and Hearing Disorders ScreeningGlaucomaHearing Impairment in Older AdultsNewborn Hearing

Source: U.S. Treasury Notice 2004-23.

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Table 4.2 What Are Qualified Medical Expenses?

Your HSA can be used for a wide range of medical goods and services in addition to the usual medical services and prescribed medications covered in the typical health plan, as well as for certain types of health insurance premiums. Please see appendix for more detailed explanations.

Qualified Medical Expenses

Acupuncture •

Alcoholism or •drug addiction treatment

Ambulance •services

Artificial limbs •

Artificial teeth •

Bandages •

Birth control •pills and other prescription contraceptives

Braille books •and magazines (excess cost)

Breast •reconstruction surgery

Car •modifications

Certain home •improvements

Chiropractor •

Christian Science •practitioner

Contact lenses •

Crutches, •purchase or rental

Dental treatment •

Diagnostic •devices

Disabled •dependent care expenses

Eye surgery •

Eyeglasses •

Fertility •enhancement

Guide dog or •other animal

Hearing aids •

Home care •

Lead-based paint •removal

Legal fees •to authorize treatment of mental illness

Legal termination •of pregnancy

Lifetime •care-advance payments


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Long-term care •

Medical •conferences concerning chronic illnesses

Nonprescription •medicines

Nursing home •

Nursing services •

Optometrist •

Over–the-•counter drugs

Oxygen •

Prescription •medications

Psychoanalysis •(other than related to training)

Smoking •cessation programs

Special education •(if prescribed by doctor)

Special home •for mentally challenged person

Sterilization •(reproductive)

Telephone or •television for hearing

Therapy •prescribed as treatment

Transplants •(costs of donor)

Transportation •and other travel costs for medical care

Weight loss •program (if prescribed by doctor)

Wheelchair •

Wig (for hair •loss if prescribed by doctor)

Babysitting, •childcare, and nursing services for a normal, healthy baby

Controlled •substances in violation of federal law

Elective cosmetic •surgery

Dancing lessons •

Diaper services, •unless they are needed to relieve the effects of a particular disease

Electrolysis or •hair removal

Expenses used •in figuring health coverage tax credit

Funeral expenses •

Non-qualified Medical Expenses

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Table 4.3 Eligible Insurance Premiums for All Participants:

Long-term care insurance •

COBRA health care continuation coverage •

Health care coverage during a period of •unemployment

Table 4.4 Eligible Insurance Premiums for Participants Age 65 or Older:

Medicare Part A or B •

Medicare HMO •

Employee share of premiums for employer •sponsored health care coverage (if HSA

Future medical •care

Hair transplant •

Health club dues •

Household help •other than that qualifying as long term care

Illegal operations •and treatments

Insurance •premiums other than those explicitly included

Liposuction •

Maternity •clothes

Medicines •imported from another country

Nutritional •supplements unless prescribed for a medically diagnosed condition

Personal use •items unless specifically included

Swimming •lessons

Teeth whitening •

Veterinary fees, •except for guide or assistance animals

Weight-loss •program


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owner remains employed)

Employee share of premiums for employer •sponsored retiree health insurance (if participant does not remain employed)

Chapter 5

Previous chapters explained what the HSA and HDHP are, how you qualify to enroll in an HSA, and how to use your account. Because the HSA is individually owned and participants are responsible for proving how the account has been spent, a full discussion of Record Keeping is provided in this chapter.

In this chapter, we discuss:

4 Why Record Keeping is Especially Important in an HSA/HDHP

4 Paperwork Your HSA and HDHP Will Send You

4 Paperwork to Keep the IRS Happy

4 Submitting Expenses to Your Plans

4 How Long To Keep HSA Receipts, Statements and Other Documentation

4 Troubleshooting

4 When You Disagree with Your HDHP

4 When You Disagree with Your HSA Statement

4 If You Are Not in an Integrated Plan

A Consumer Guide to Paperwork and Record Keeping


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Why Record Keeping Is Especially Important

We recommend keeping records related to health care spending whatever your type of plan, because disputes or questions about billing and payments can come up even a year or two after the procedure or office visit (see further discussion about slow-billing providers later in this chapter). But some features of the HSA/HDHP make it particularly important to have records that allow you to reconstruct how you have spent your money.

You Own the HSA

The HSA is funded by your contributions, not premiums, paid by you or your employer. It is both a health care coverage plan and a savings plan. The money is yours to keep.

You Can Spend Your HSA over a Considerable Amount

of Time

Because the HSA is intended to serve at least in part as a long-term savings vehicle, you can access accumulated funds over a considerable period of time. There is no time limit for claiming a reimbursement from your account, so long as you incurred the expense you are claiming after the HSA was established. That may mean you need to produce or recover records about contributions into the account, what was paid out of the account, when and why, long after the transactions have occurred.

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You Are Responsible for Documenting How You Used

Your HSA

In a traditional plan, your plan paid only for what it included. Typically, the covered services are set out more or less clearly in the plan documents you got from your insurer or the Summary Plan Description (SPD) you got from your employer. The HSA, in contrast, can be used for a wide range of expenses limited only by HSA legislation and generally what is accepted by the IRS for itemized medical deductions (see Table 4.2, What Are Qualified Medical Expenses and Appendix). You need to be able to understand what these allowable uses are and back up your claims with receipts, or you may face a 10 percent penalty (if you spend the money before you turn 65) and be required to pay taxes on the expense.

Different Rules May Apply to Network and Non-

Network Care

Most plans that include provider networks apply different out-of-pocket limits, deductibles, or both, to network and non-network care. In a traditional plan, this was probably not a matter of concern to you unless you or your family had a particularly high-expenditure year. In an HSA/HDHP, however, your deductible may be half or more of your out-of-pocket limit, so you are more likely to hit the HDHP’s out-of-pocket limit than in a traditional plan. This means you may want to keep track of your network and non-network spending, and adjust your provider choices if you are close to meeting one limit but not the other.


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Example: Suppose Roy has a self-only plan with a $1,700 out-of-pocket limit for network care and a $2,600 limit for non-network care. Network care is insured at 100 percent; non-network care at 80 percent. His plan’s deductible for the year is $1,700.

Roy has spent $1,600 so far this year for network care and $250 for non-network care. He is considering foot surgery that will cost $2,000. He can choose a network provider or one out of his network. If he chooses a network provider, he will have to pay $100, no matter what price the provider has negotiated with his plan. If he chooses a non-network provider, he will have to pay $400 ($2,000 x 20% non-network coinsurance).

Paperwork Your HDHP and HSA Will Send You

Explanation of Benefits (EOB)

The EOB is a summary of the payment made by your health plan to the medical provider. It details how much the provider originally charged you and the discount, if any, the provider is required to give based on your plan. The EOB also notes your financial responsibility for the visit or other procedure. See Table 5.1 at the end of this chapter for an example of an EOB. This EOB summarizes the cost of the services provided during the doctor’s visit and updates both the status of the HSA and the owner’s progress toward meeting the HDHP deductible. Note that the EOB also explains the participant’s rights to dispute any statements made in it.

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HSA Statement

Your HSA provider will send you a periodic statement detailing your contributions, those your employer may have made on your behalf, payments made to providers from your HSA, investment and/or interest earnings accrued to your account, and fees your account may have been charged. See Table 5.2 at the end of this chapter for an example of a periodic account statement. Keep your statements in the same way—and maybe in the same place—as you keep your bank account statements.

Paperwork to Keep the IRS Happy

Several IRS forms apply; you have seen most of them before.

Form W-2

Employers must generally file a Form W-2 for any employee to whom they paid wages, and employees must enclose a copy of this form with federal, state and local income tax returns. Your employer must report employer contributions (which include pre-tax cafeteria plan deductions to income) to your HSA in Box 12 on your Form W-2.

Form 1040

Your Form 1040 will contain a line where you can enter your post tax HSA contribution in arriving at your adjusted gross income. You must include any distributions that are not made for qualified medical expenses for you, your spouse, or dependents in your adjusted gross income and there will be a 10 percent penalty on such distributions.


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Form 1099-SA

Your HSA custodian or trustee will report any HSA distributions both to you and to the IRS on Form 1099SA. That is why you have to be prepared to justify your spending as allowable under the law.

Form 5498-SA

Your HSA trustee or custodian has to report contributions to the HSA to the IRS and to you on this form. Any amounts reported on Forms 1099-SA or 5498SA should agree with what you report on your Form 1040.

Submitting Expenses to Your Plans

Keeping track of expenses, contributions and earnings is much like sorting out expenses you will deduct on your income taxes from those that are not deductible, but you have to learn a new paradigm for sorting health expenses by category.

Submitting Expenses to the HDHP If your provider participates in your plan’s network, the provider should submit your claim to your plan. If not, you may be required to file the claim yourself, so that your expenditure gets credited toward the proper deductible and/or out-of-pocket limit. The plan should supply you with a form for filing claims, but many providers give you enough information on your “walk-out statement”—what you get as you leave the office—that you can use that statement itself to file your claim. Keep copies of your statement in case there is a dispute.

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Submitting Expenses to the HSA You can pay HSA-eligible expenses with a debit card your account administrator may provide you, or with a checkbook that draws on your HSA. Alternatively, you may pay a bill out of your own bank account or with a credit card, and then submit the bill for reimbursement from your HSA. Some HSA administrators allow account holders to electronically transfer funds to their other account to reimburse themselves from their HSA. You can only submit expenses you have incurred after you established your HSA.

Submitting Expenses to a Flexible Spending

Account (FSA) If you had an FSA in the past, and your employer converts to one consistent with having an HSA/HDHP, you won’t have a lot of new paperwork to learn. You submitted expenses to your old FSA by providing an EOB or a benefit denial from your health plan; an HSA-compatible FSA is likely to work much the same way.

Keeping Track of Deductibles The EOB you receive from your HDHP will have information that keeps track of your progress toward meeting the plan limits for the year. In the sample EOB we provide in Table 5.1, this information is in the section headed “Deductible Information”. Make sure you know how to interpret this information, and always try to work from the most recent statement so that you can make the right decisions about your care and how to pay for it.


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The Importance of the Calendar There are several reasons why it is important to keep track of when expenses occurred and were paid.

Avoiding “the shoebox effect”. Even if your HSA provider gives you a debit/credit card or a checkbook, you may wind up submitting your claims yourself. This could be because you forgot to use the HSA, or perhaps because when you first establish your HSA you might not have enough accumulated in it to pay the claims. If you stuff your receipts in the classic shoebox, intending to get to them later, you may miss out on important benefits from your account. And you may end up using post-tax dollars when HSA funds were available. Establish a clearly labeled file, and keep track of what you have already submitted, what has been paid, and what is still outstanding. See Table 5.3 for a simple system you can set up to make sure nothing slips by.

Coordinating your account management with the IRS

calendar

The HSA is a tax-favored account, so the IRS has something to say about how you spend your balance. You can wait as long as you want after the expense has been incurred to submit it to your HSA (see further discussion later in this chapter on how long to keep HSA records). However, no matter how old the expense is, you have to be prepared to document it fully in the year that you claim it.

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Coordinating your account management with the

HDHP calendar

The HSA is yours, but the HDHP may only be yours for now. Your employer may change from an HDHP offered by one company to one offered by another, or may in the future eliminate your HDHP entirely in favor of another plan design. If your current HDHP is replaced by another HDHP, be sure any expenses you accrue are paid by the correct plan, and coordinate your HSA with the new HDHP. If your employer changes plans and you can no longer be covered by an HDHP, you need to keep track of when this happens, as you can no longer contribute to an HSA as of the first day of the first month after the month in which your HDHP coverage ends. For example, if your HDHP coverage ends on June 15, 2008, you are no longer eligible to contribute as of July 1, 2008. However, you can continue to use the funds remaining in your HSA for permitted expenses.

How a slow-billing provider can complicate your life

Some busy hospitals or medical practices can lose your claims. We have seen cases where the doctor’s office filed the claim online, it came through illegible, so the office filed it again, and it came through illegible, again. Or maybe the hospital or doctor’s office changed billing systems and some claims got lost in the transition. End result: the bill goes unsubmitted for payment for many months.

Any plan is responsible for covered expenses you incurred while a member of that plan, but once the plan


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is closed out, that responsibility can expire pretty quickly. Your former plan has to keep a reserve for claims participants submit after the plan is closed, but this reserve may not be very large, and can get exhausted before a late claim is considered.

That’s the slow-billing provider’s problem, right? Not necessarily. When you came in for your office visit or hospital procedure, you signed a paper saying if your plan wouldn’t pay, you would. Always alert providers if you are changing insurance plans or have been advised that your employer is planning to do so. Encourage them to submit any outstanding bills promptly, or it could cost both of you money.

How Long to Keep HSA Receipts, Statements and Other Documentation

You are responsible for documenting that HSA distributions were made for qualified purposes. The HSA custodian or trustee, your insurer and your employer are responsible for various aspects of your account reporting, but not for this. The IRS can audit most individual taxpayers for three years after the extended due date of the return. This means if your income tax return for 2007 is due April 15, 2008, but you file for the automatic extension to August 15, the IRS can audit you until August 15, 2011. For some individual taxpayers that period is extended to five years, for example; if you have a hobby business, your 2007 return can be audited until August 15, 2013. But if the IRS alleges or suspects fraud, it can audit all your returns as far back as it wants.

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Our suggestion is that you keep records documenting the status of HSA distributions for at least the period of time your income tax return is considered “open,” or subject to audit, and preferably for as long as you maintain the account.

Troubleshooting

If you get a bill that doesn’t make sense, call your provider’s office, the customer service number provided for your plan, or both. If someone sent you an incorrect statement, it will come back again, unless you do something about it. Everybody makes mistakes, and a busy medical practice, in particular, will be dealing with a large number of plans that may be constantly changing their requirements, and patients whose plans are changing as well. Keep track and follow up.

When You Disagree with Your HDHP

Some of the same claims-processing errors that are possible under a standard insurance plan can also happen under an HSA/HDHP. A network provider’s invoice might be incorrectly processed as out-of-network, or the birth date for a participant could be incorrectly recorded, resulting in a denial of benefits. Because your progress toward meeting the year’s deductible could be affected, we recommend you follow up on errors immediately.

When You Disagree with Your HSA Statement

If you have never had an unauthorized charge appear on a credit card, you are part of a very elite club. You


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don’t have to be a victim of identity theft—just a simple processing error can put a bill on your account that belongs on someone else’s. If your HSA issues you a debit or credit-type card to use with your health care providers, you have to check charges to your account just as you do the charges on your credit card bills. You should understand your rights to have a disputed charge investigated and/or removed. If your HSA issues you checks, you should understand your rights to stop payment on a check, and what to do if you lose your checkbook.

If You Are Not in an Integrated Plan

You should always reconcile paperwork you receive from your HDHP with statements from your HSA. And if a different company from the one that provides your HDHP holds your HSA—that is, you are not in an integrated plan—the record systems may not “speak” to each other. You may have to be their “voice”. If you have had a problem with your HDHP and/or HSA, you may have to follow up with both your health plan and HSA administrator to make sure any errors are corrected in both accounts.

Keep in Mind

Your HSA is your money. Treat it and related •records as you would your retirement plan, any other savings account, or a credit card. Make sure you understand charges to your account and get explanations for any you don’t understand or don’t think you made.

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Your HSA and your HDHP can be used for •different types of health care expenditures. Make sure you know which plan covers which spending, and that each covers the spending for which it is responsible.

Keep your HSA records as long as the •account remains open, even if you have moved your account to a different bank or other company from the one where you first established your account, and even if you are no longer eligible to contribute to your account.

Up Next

This chapter and Chapter 4 told you in detail how the HSA works. Chapter 6 will give you some real-world examples for making an HSA work for you.


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Table 5.1 Explanation of Benefits Form (EOB)

#1 Money-in-the-Bank Road

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Table 5.2 Periodic HSA Statement

Responsibility to Review Statements: You should examine your HSA statement promptly. Notify HealthEquity within 30 days if you find any errors at 866-346-5800 or write us at HealthEquity Inc., 1276 South 820 East, Suite 201, American Fork, UT 84003. We will investigate your complaint and will correct any error promptly.

John Q. Doe1111 Center Street Townsville, UT 00000

ACCOUNT STATEMENTHealth Savings Account (000)

Account Number: 000000-000Period: 12/01/08–12/31/08

Date Description of Transaction

Deposit or (Withdrawal)

Account Balance

Beginning Balance $7,260.95

12/04/08 Investment 335.26 7,596.21 12/04/08 Investment 333.12 7,929.33 12/04/08 Investment 331.61 8,260.94

12/04/08HSA Card: Heritage Family Dental Inc, Townsville, UT

-181.00 8,079.94

12/11/08 Investment -495.00 7,584.94 12/11/08 Investment -495.00 7,089.94 12/11/08 Investment -510.00 6,579.94

12/19/08 Employer Contribution for 2006 454.16 7,034.10

12/31/08

Interest for Dec-06 (Annual percentage yield for period 2.53% on average collected balance of $7,175.01)

15.23 7,049.33

Ending Balance $7,049.33

12/31/08 Market Value of HSA Investments 2,052.50

Total Value of HSA $9,101.83


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Table 5.3 HSA and HDHP Records Made Easy

Here’s a simple system for keeping track of your HSA and HDHP records. You should be following most of these steps already, even if you don’t have an HSA.

We suggest a simple multi-pocket folder available in any stationery supply store, or perhaps a 3-ring binder with colorful separators. Financial reports provided by your HSA administrator or by household budget programs such as Quicken may also help you track your expenses. Original documents and receipts will be required in the event of an IRS audit. After you have picked your system, set up the following sections:

1. Bills and proofs of payment for care obtained from network providers. Include canceled checks or credit card receipts for any bills you didn’t pay directly from your HSA.

2. Bills and proofs of payment for care obtained from non-network providers. Again, include canceled checks or credit card receipts for any bills you didn’t pay directly from your HSA.

3. EOBs from network providers, arranged in reverse chronological order (most recent on top), so you can easily track your progress toward meeting HDHP limits that may apply to your network care.

4. EOBs from non-network providers, again arranged in reverse chronological order, so you can easily track your progress toward meeting any separate HDHP limits that may apply to non-network care. You may not need separate files for network and non-network

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care if your HDHP does not apply separate limits. 5. Bills and proofs of payment for health care spending

that is not covered under your plan, and thus not counted toward your deductible. Such spending could include the excess cost of Braille reading material for a blind person or transportation costs to see a specialist in another city (for more on such expenses, see Chapter 4: How Does Your HSA/HDHP Work?).

6. Periodic statements from your HSA trustee or custodian. For ease of reference, you may want to arrange this part of your file in reverse chronological order as well, so the first statement you see is the most current.

Label your file with the current year, and set up a new file every year (you already do that for your income tax records, don’t you?). This will make it easier to track bills and reimbursements as time goes on.

NOTE: Any home financial software or spreadsheet program can be customized to help you budget and keep track of your medical expenses. However, if you need to substantiate or contest a claim, you will need the original documents.

Chapter 6

HSAs offer great opportunities for consumers to

become involved with their personal health care

decisions and to benefit from making wise choices:

4 Your Cost-Benefit Analysis

4 Determining the Right Amount of Money to Contribute to Your HSA

4 Case Studies



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Your Cost-Benefit Analysis

Deductible Levels

Higher deductible levels generally come with less costly premiums than lower deductible levels. You should take this into account when deciding whether or not to choose an HDHP/HSA option. While it may seem intimidating to take on a high deductible, remember, the plan should cost significantly less and the money you save can be used in reaching that higher deductible. Take the time to think about your personal ability to balance these benefits with potentially more financial exposure in the event of a high-cost year. If you need family coverage, balance individual deductibles (if required) with the umbrella deductible (Chapter 1: Health Savings Accounts—A New Approach) to get the right savings level.

Coinsurance and Co-payment Levels

Another way for you to balance the benefits and risks of an HSA is to understand the coinsurance levels. Coinsurance or co-payments determine what you pay once you or your family reaches your plan’s deductible. Different coinsurance and co-payment levels can affect the premium price and the additional amount you may need to pay out of your HSA or out-of-pocket once the deductible is met. For example, if your coinsurance level is 100 percent, meaning your plan pays 100 percent after the deductible; your premium will most likely be higher than one with a coinsurance of 80/20, meaning the plan pays 80 percent and you pay 20 percent until you meet your out-of-pocket max.

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Out-of-Pocket Maximums

Maximum out-of-pocket costs to qualify for HSA eligibility for individuals ($5,600 for 2008) and families ($11,200 for 2008) are set by law. However, HDHP plans can vary as to whether this is for all claims or for those that are only in-network as allowed by most health plans. Your out-of-pocket maximum level can affect your exposure and your ability to go out-of-network to receive expensive care.

Determining the Right Amount of Money to Contribute to Your HSA

The short answer is you should contribute the most money the law allows, and you are financially able to contribute, on an annual basis to your HSA. Why? Because HSAs have some of the best tax benefits of any savings accounts including traditional IRAs, 401(k)s and Roth IRA accounts. Only with an HSA can the owner contribute tax-deductible deposits, enjoy tax-free growth through interest or increasing investments, and spend this money on most health related services and products without paying taxes. Furthermore, unlike most other medical spending accounts such as FSAs or HRAs, the money in your HSA is yours to keep. It can also be used for non-health related costs by paying only your income tax, with no penalties, when you reach age 65. So keep contributing!

The Longer Answer

The reality is that most people, including those who have HSAs, are on a tight budget and may not be able to fully-


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fund the account. The good news is that the government allows you to increase or decrease your contributions throughout the year up until tax-day (April 15th of the following year) and still receive the tax benefits. The HSA can also be fully-funded in advance at the beginning of the year, providing you stay covered by the qualified HDHP for the entire year.

Example: The Jensen family is expecting the birth of their second child in July and their HDHP plan year began on Jan 1, 2008. They are in a $5,000 family deductible plan with no embedded deductible. Their plan has maternity coverage and 100 percent coinsurance once the deductible is met. Expecting out-of-pocket expenses in July associated with the birth of their child, they increase their contributions to $800 per month so that by July 1 they have deposited $4,800 into their HSA for the year. For the 2008 IRS tax year, the Jensens can deposit up to $5,800 into their account, so they may still contribute $1000 over the next six months assuming that they remain eligible to contribute to the HSA for the entire year. When they receive their bills in August for the childbirth, they will have money in their HSA to satisfy these claims up to $5,000. Cost exceeding $5,000 should be paid by the HDHP.

Permitted Insurance Coverage That Protects You

Against High Expenses

The law allows you to use other types of insurance with your HDHP that can help offset the risk that comes with a higher deductible level. These policies include

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homeowner’s insurance, automobile insurance, dental and vision care plans, accidental injury insurance, workers’ compensation benefits, hospital indemnity plans that pay a fixed amount per day of hospitalization, and specific disease policies that pay a fixed amount for the designated disease. The permitted plans help preserve your HSA balances and protect you against out-of-pocket expenses.

Case Studies

As you become familiar with the covered benefits, deductibles, contributions and out-of-pocket exposure associated with your HDHP, you can begin to understand and plan how to make your HSA work for you. Please see the below examples of real-life scenarios and how HSAs can work by decreasing insurance premiums and helping to change behavior.

Jake—25-year-old healthy male •

Sadie—58-year-old woman (pre-retiree) •

Holly—35-year-old mother of 4, new-onset •diabetes

Bill—48-year-old with hypertension, high-•cholesterol

These studies will illustrate how to get the most out of your HSA by:

Understanding and selecting the best HDHP •design for your situation; and

Determining the right amount of money to •contribute into your HSA.


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Case 1

Jake is a 25-year-old healthy male who works for a small construction business. Jake makes $40,000 per year and has health benefits covered by his employer. Jake is married to Jackie; they have one child and hope to have a second child. Their health care costs are typical for a young family and include:

Occasional office visits •

Occasional prescriptions for minor illnesses •

Traditional plan: $500 family deductible plan that includes:

80/20 coinsurance once deductible is met •with out-of-pocket maximum $2,000

Office visit co-payments = $20 •

Prescription drug co-payments = $20 •

Proposed HSA plan: $5,000 family deductible HSA-qualified HDHP with:

100% coinsurance once deductible is met •

No co-payments •

No “permitted insurance” •

$300 monthly contribution to HSA by Jake •and his employer

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Year 1—Current Plan Compared to Proposed HSA Plan

Traditional Plan HSA Plan

HSA Contribution

N/A $300 x 12 months

$3,600

Office Visits4 x

$20 co-payment

$80

4 x $50 (office

visit at fair market price)

$200

Prescription Drugs

5 x $20 co-payment

$100

5 x $40 (avg. Rx price for

antibiotics)

$200

Total Expenses $180 $400

Adjusted Expenses (post-tax

effect

25% Fed, 7.5% FICA, 7.5% State

$300 All pre-tax $400

Year-End HSA

BalanceN/A $3,200

In Jake’s second year in the plan, his wife had a complicated pregnancy requiring a lengthy hospital admission and his son required a hernia repair under general anesthesia.

Complicated pregnancy—$15,000 in hospital •and physician bills

Uncomplicated hernia repair—$5,500 in •hospital bills for operating room, surgeon fees and anesthesiologist fees


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Year 2—Current Plan Compared to Proposed HSA Plan— High Expense Year

Traditional Plan HSA Plan

HSA Carry-Over from Yr 1

N/A $3,200

Yr 2 HSA Account Contributions N/A $300 x 12

months $3,600

Office Visits 12 x $20 co-payment $240

12 x $50 (office visit at fair market

price)

$600

Prescription Drugs 15 x $20 co-payment $300

15 x $40 (avg. Rx price for antibiotics

$600

Pregnancy

$500 deductible + $2,000

coinsurance

$2,500Cost met $5,000

deductible$3,800

Hernia

$500 deductible + $1,000

coinsurance

$1,500 Already met deductible $0

Total Expenses $4,540 $5,000

Adjusted Expenses (post-

tax effect

25% Fed, 7.5% FICA, 7.5% State

$7,567 All pre-tax $5,000

Year-End HSA Balance N/A $1,800*

*Had these expenses occurred in year 1, Jake would have had to pay $1,400 in addition to using all of the funds in his HSA ($3,600 pre-tax and $1,400 post-tax for a total of $5,000), compared to having post-tax, out-of-pocket expenses of $7,567 in his traditional plan. Jake could reimburse himself the additional $1,400 from his HSA when the balance rebuilt in the following year.

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Case 2

Sadie is a 58-year-old single female who is an early retiree. Her former employer offers no health benefits for retirees. Sadie is paying the entire cost of her individual policy. To save money, Sadie elects to purchase a high-deductible plan that qualifies for HSA contributions. Her premium savings allows her to put $1,500 per year in her HSA.

Previous Plan: Low deductible plan that includes:

Office visit co-payments = $15 •

Co-payments for prescriptions ($10 Generic, •$15 Brand, $20 for Non-Preferred)

Sadie suffers from high blood pressure, hyperthyroidism, and mild depression and is taking hormone replacement therapy (HRT). The actual costs for brand-name drugs and the co-payment are listed below:

Condition Actual Cost Co-payment

High Blood Pressure $48.89 $10.00

Hyperthyroidism $14.69 $10.00

Depression $72.43 $15.00

Hormone Replacement $55.42 $20.00

Total Monthly $191.43 $55.00

Total Annual $2,488.59 $660.00

The cost to the insurance company is $1,828.59 ($2,488.59 actual cost less $660 in co-payments)

New Plan: HSA/HDHP

$2,500 deductible •


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$1,500 annual contribution to the HSA •

No co-payments •

Incentive + Health Support Services

Sadie utilizes resources offered by her HSA administrator to find less expensive, equally effective alternatives for her name brand prescription medications. She is motivated to switch to the alternatives since she has $1,500 in her HSA—money she keeps if she doesn’t spend it. This money was the result of changing to a higher deductible plan. The actual costs of the generic alternatives are listed below:

Condition Actual Cost

High Blood Pressure $20.33

Hyperthyroidism $7.49

Depression $26.48

Hormone Replacement $17.36

Total Monthly $71.66

Total Annual $859.92

The Result

Sadie discussed her findings with her physician and he agreed to change her prescriptions to the less-expensive alternatives. Because she had incentive, education and access to information, Sadie was able to save money and maintain a high-level of medical care. Below is a table showing Sadie’s savings by participating in an HSA plan:

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Previous Plan HSA Plan Change with

an HSA

HSA Annual Deposit $0 $1,500.00 +$1,500.00

Sadie’s Annual Expenses $(660.00) $(859.92) -199.92

Change with an HSA $(660.00) $640.08 $1,300.08

Not only is Sadie better off by over $1,300 dollars by having an HSA, but in addition, she did not have to pay taxes on the money that went into her HSA, which could potentially save her hundreds of additional dollars in taxes as well.

The insurance company was also able to save money. Rather that paying the difference between the actual cost and the co-payment, which was $1,828.59, they didn’t have to pay anything since all the expenses were below the deductible. These savings will allow the insurance company to continue to offer HSA-qualified HDHPs for competitive prices.

Case 3

Holly is 35 years old, married and a mother of four, with newly diagnosed insulin-dependent diabetes. Holly’s husband has recently left one job that offered health benefits through a low deductible, traditional plan. His new employer offers an HSA plan.

In Holly’s own words: “In a health insurance plan with a consistent co-payment of $10, I never had a reason to ask any questions


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regarding the services rendered and their respective costs. I simply paid the co-payment and felt grateful to have insurance pay the rest— or so I thought… Under my traditional HMO insurance plan, the pharmacy simply filled the prescriptions written up by my doctor for my insulin and diabetic supplies and I felt no need to research more cost effective, competitive prices. I was happy to pay my $35 co-payment for insulin. When introduced to health savings accounts, I was worried that I would not enjoy the same benefits. I learned, however, that not only did I receive comparable care, but also I learned to be a careful “shopper” and save money. I began to ask questions about such things as lab work, blood tests and examinations. I learned how to save money by switching to generic medications, buying a less expensive blood glucose monitor and test strips. I found out that the typical blood work done at my doctor’s office cost anywhere from $55-$70. I learned that I could purchase my own hemoglobin A1C test at my local pharmacy for about $24. I did the test at home and phoned in the results to my doctor. I also learned to watch for coupons at the pharmacy and rebates on diabetic products. I have become more of a researcher for myself and for my children. Before taking them to the doctor or to the urgent care, I go first to the informative resources on-line, to learn more about diagnosis and suggested medical care. I have discovered that by being in control of my medical dollars I am much more conscientious about my health care consuming habits and my family and I have been able to save money on medical expenses.”

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Case 4

Bill is 48 years old, recently divorced and has several medical conditions. His employer is offering an HSA plan. Under his current plan, Bill has significant monthly expenses including co-payments for:

Regular office visits •

High blood pressure medication •

Diabetes medication •

Acid Reflux medication •

Annual Comparison of Previous Plan and HSA Plan

Previous Plan

HSA Plan

Beginning Balance N/A $1,200

Office Visits (10 visits x $20 co-payment) $200 (10 x $50) -$500

Prescription Drugs

(30 prescriptions x $20 co-payment) $600

(30 prescriptions x

$40)-$1,200

(10 prescriptions x $40 co-payment) -$400

(10 prescriptions x

$90)

Lab Work -$150 (met deductible) -$0

Total Expenses -$1,350 $2,600

Plus HSA Account

15% FICA, 7% State 28% Fed $0 $1,200

Ending Balance(post-tax effect) (deductible, coinsurance) -$2,700 All pre-tax -$1,400

Additional Exposure (deductible, coinsurance) $2,500 $0


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Under this scenario:

Bill saved $1,300 by using an HSA plan •versus his previous low deductible plan.

Bill has 100 percent coverage for other •medical expenses because he has already met his annual deductible and his HSA plan will pay 100 percent for all in-network expenses he accrues in any year that are above the deductible.

He has an additional $2,500 risk with a •traditional plan due to the fact that his co-payments do not apply against his previous plan’s $500 deductible or his coinsurance, which can total up to $2,000 per year if he has a higher level of care.

Keep in Mind

You need to understand the details of your •HDHP plan design including the deductible levels, coinsurance and co-payment levels and the amount you can contribute to your HSA in order to balance the risks and benefits of the plan. Much of this information is available by studying the HDHP summary of plan benefits provided by the insurance company.

You may find some benefit in purchasing •additional “permitted insurance” policies to help limit your financial exposure while gaining the benefits of a tax-advantaged

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savings account.

Careful planning and management of your •HSA is necessary to gain the most tax-free benefit. You need to become familiar with and use health support tools that can help you get the most for your HSA dollars while maintaining a high level of care.

HSA administrators should be able to •provide information on your medical claims as well as the health support tools that are necessary to make better decisions.

Up Next

This chapter has explained how to make an HSA/HDHP work for you. Chapter 7 will discuss everyday challenges you will face when using your HSA/HDHP.

Chapter 7

Previous chapters have explained how the HSA and HDHP work. This chapter examines how the HSA/HDHP can help you through various real-world and family situations:

4 You Need Elective (Non-Emergency) Surgery

4 It’s an Emergency

4 Family Matters

4 You Change Jobs or Lose Your Job

4 It’s Business

4 You Retire before You are Eligible for Medicare

4 When You Enroll in Medicare

4 Using Your Account after Disability

Your HSA/HDHP and Everyday

Health Care Challenges


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You Need Elective (Non-Emergency) Surgery

Imagine you have just been told you need surgery. If you understand your plan, you can focus on making the best choices for your long-term medical and financial well being.

Do Your Homework

Spend some time doing research on the condition, the possibilities for treatment, and the risks and benefits of these treatments. This research can be performed on the internet, at a library, and by speaking with friends and relatives who may have had a similar condition. Many HSA administrators and health plans offer powerful internet tools that come equipped with explanations, photographs and even videos of possible treatments.

Getting a Second Opinion

Medical experts agree that if you have been told you need surgery, your next step should be to get a second opinion. Second opinions differ from first opinions a surprising amount of the time—so you may even need a third opinion. Most conditions can wait until you and your doctors understand your options. If you are facing major surgery, your HSA may be worth its weight in gold to you. You can use your HSA to get a second opinion from any expert you choose, whether or not that doctor is in your plan’s network.

Even if you have not met your HDHP deductible for the year, you should understand your plan’s requirements

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concerning surgery. Many plans require that you get authorization for non-emergency surgery, and some may require a second opinion before authorization will be given. Following the rules of your HDHP can cut waste, save you money and allow you to use your HSA funds when you need them most.

Choosing Your Doctor and Hospital: The Role of

Network Providers

The HSA/HDHP gives you the freedom to use either network or non-network providers for your care. But if you are facing a major medical event such as surgery, you may want to fully explore the options in your network before proceeding. Be sure you know whether your plan has separate out-of-pocket limits for network and non-network care then decide whether you want to use a doctor or hospital in or out of your plan’s network. If your plan has separate limits, you could wind up paying thousands of dollars more for care that is no better than what you would get from your provider network.

If you don’t have much money in your HSA, those funds may initially have to come out of your after-tax money. Many hospitals and physicians will allow you to make payments over time until you retire your debt. You can use future HSA deposits to make these payments, or to reimburse yourself if you paid the expenses with other funds. You will need to balance this benefit against any interest charges that may be added by the hospital or physician on your outstanding bill. Interest charges are not allowable HSA expenses.


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If you are contemplating surgery, remember also that there will be many people involved in the procedure in addition to your principal surgeon. For example, the anesthesiologist should also be a member of your network if you want to get the best benefits your plan has to offer. Ask your doctor how many different specialists will be involved in your surgery and where your doctor has operating privileges. You then need to call the hospital and the other specialists and find out if they are part of your network. If they are not part of the network, they may be willing to give you a prompt-payment discount if you pay for your care punctually. The time taken to explore these questions could save you a lot of money.

Authorizations and Referrals

You should also make sure you know what your plan’s requirements are concerning authorizations and referrals (for more detail, see Chapter 4: How Does Your HSA/HDHP Work?). Your plan may impose financial penalties for failure to obtain required referrals and authorizations, even if your provider is a member of your network. Such penalties will not count toward meeting your out-of-pocket limit for the year, so not following the plan’s rules can cost you money.

Example: Heather is a 34-year-old mother of three who has been referred by her primary care physician to a surgeon for elective gallbladder removal for pain and polyps in her gallbladder. Heather finds out that the surgeon she has been referred to is a non-

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It’s an Emergency

Know your plan’s rules (they still apply) about who to call and when. However, use your common sense as well as your HSA/HDHP. If you are having a life-threatening emergency, call 9-1-1 and go to the nearest hospital. An emergency is the sudden onset of a condition or an accidental injury requiring immediate medical or surgical care to avoid death or permanent disability. You, or a representative such as a family member, must generally communicate with your plan within 24 to 48 hours after the onset of an emergency, but you do not have to change hospitals (if you are initially taken to a non-network facility) until your condition is stabilized. As in the case of surgery, however, treatment of an emergency is likely to be expensive, and you should consider using

network provider. She feels comfortable with this surgeon. The surgeon’s office explains that since Heather has an HSA and can pay promptly, they will offer a discount fee that is only $50 more than a network provider will charge. Heather then finds out that the non-network surgeon can perform surgery in both the non-network surgery center and the in-network hospital in her town. Heather’s surgeon agrees to schedule Heather’s surgery at the in-network hospital, realizing this will save her significant out-of-pocket expenses. Heather is willing to pay a little extra money in surgeon fees to have the gallbladder removal performed by the surgeon of her choice. However, because she is informed and selective, Heather saves potentially thousands of dollars by having her surgery performed at an in-network hospital.


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network providers once the danger period is over. If your situation is not life-threatening, you may want to call the health plan’s urgent care line or nursing hot-line before seeking care (the number is generally on the back of your card if your health plan offers this— some HSA administrators also offer these services). An urgent condition is one that needs treatment within 24 hours to prevent it from turning into a serious or life-threatening illness. Calling first can be especially important if you are out-of-town, as the urgent care line personnel may be able to direct you to an urgent care center or hospital near you that is a part of your plan’s network (remember, many plans are national in scope and have network providers all over the country). Using a network provider will save you money and stretch your HSA further. But if you are not sure whether your condition is urgent or an emergency, err on the side of caution and head for the emergency room first—call later.

Family Matters

If you get married, give birth, or adopt a child, your health care coverage needs may change. If you and your spouse have separate health care plans and one of you loses your plan, your coverage needs may change as well. Under the Health Insurance Portability and Accountability Act (HIPAA), you have the right to ask your plan to cover your family member(s) without waiting until the plan’s open enrollment season. HIPAA is a federal law that limits pre-existing condition exclusions, permits special enrollment when certain life or work

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events occur, prohibits discrimination against employees and dependents based on their health status, and guarantees availability and renewability of health coverage to certain employees and individuals. Open enrollment season is a period of time during which employees may change plans without incurring costs or penalties.

Enrolling a New Baby in Your Plan

Enroll a new child in your plan as soon as possible. If you are changing from an individual plan to family coverage plan your allowable HSA contribution will change on the first day of the month in which you become covered by a family-coverage HDHP, allowing you to contribute more to your HSA.

If You Need to Change to a Family Plan

A baby isn’t the only reason you may need to change from individual to family coverage. If you have a self-only plan and your spouse loses his or her coverage, you can generally change to a family plan without waiting for open enrollment season. As in the case of a new child, your allowable HSA contribution will also change on the first day of the month in which you become covered by a family-coverage HDHP.

Divorce or Legal Separation

Spouses do not own an HSA jointly. Each spouse must qualify to contribute to an HSA and each HSA can have only one beneficiary. In the event of a divorce, the HSA owned by one spouse, may be divided or given


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to the other spouse by court judgment. If you and your spouse divorce and you are both covered under a family plan through one of your employers, the one not employed by the plan’s sponsor may be entitled to buy COBRA continuation coverage under the plan rather than lose coverage. COBRA (for the Consolidated Omnibus Budget Reconciliation Act of 1985, the law that authorized this coverage) provides for the temporary continuation of group health plan coverage available after a qualifying event (we discuss a few more qualifying events later in this chapter) to certain employees, retirees and family members. Divorce is a qualifying event. Those who are eligible may be required to pay for COBRA continuation coverage (up to 102 percent of what the coverage costs the employer) and are entitled to coverage for a limited period of time (from 18 months to 36 months), depending on the event that prompted their eligibility. The eligibility period may in some cases be extended if another qualifying event occurs during the period of COBRA eligibility. It is the HDHP that may be subject to COBRA coverage. However, the HSA is not.

Stepchildren

You can usually cover a stepchild in your employer’s plan, even if you have not formally adopted the child. The child has to live with you in a parent-child relationship, and you have to be responsible for his or her support. Some plans require that you or your current spouse be able to claim the child as a dependent for tax purposes to allow you to enroll the child in your plan.

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As in the case of adding a newborn, adding a stepchild to your plan may allow you to increase your HSA contribution. In figuring out the best way to cover a stepchild, you should consider the options under your plan as well as under your spouse’s.

Example: Phil and Paula each have self-only coverage through their employers. Phil has an HSA/HDHP while Paula has a traditional plan with a low deductible that does not qualify as an HDHP. Paula acquires custody of her daughter, Mary, who comes to live with them. Paula wants to cover Mary under her plan. However, her plan only offers individual and family coverage, with no other options. If she elects family coverage, Phil will no longer be able to contribute to an HSA, since he will be covered under her plan. But if Phil’s plan offers different options, such as “self-plus-child”, it could make sense for him to cover Mary under his plan.

The Transition to Adulthood

As if the transition from adolescence to adulthood weren’t bumpy enough, there can be some rough spots when your child is getting through school or other important transitions. The HSA/HDHP can help you through some of those transitions.

Your child is not eligible for your plan •but is still your dependent. Most plans require that your child be younger than age 19 to be covered under your plan, though the limit may stretch to age 23 if the child


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is enrolled in school and depends solely on you for support. But your child may still be your dependent for tax purposes (see Table 2.1 Who Is a Dependent?) even if he or she does not qualify as a dependent under your health plan. You can use balances accumulated in your HSA to pay qualified medical expenses for this child, including COBRA premiums.

Your child would be eligible for your •plan but is married. Once your child is married, even if he or she would otherwise qualify for coverage under your plan (by virtue of age, student status, or both), your child’s coverage under your plan is generally terminated. Your HSA/HDHP gives you two options in this case:

•YourchildmayelectCOBRAcoverage,andyou can use balances in your HSA to pay for this coverage. However, if your married child files his or her tax return jointly with their spouse, he or she ceases to be your dependent and therefore cannot be eligible to receive distributions from your HSA.

•YoumaycontributetoanHSAforyourchild(and the child’s spouse, if you wish) if the following conditions are met: (1) the child may not be claimed as a

dependent on your tax return (2) the child (and spouse, if applicable)

is covered by an HDHP and not

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covered by any other plan that offers other than permitted coverage. Your child and/or the child’s spouse can claim the HSA contribution as an above-the-line income tax deduction. An above-the-line deduction is one that is taken when calculating adjusted gross income, and thus is available to taxpayers whether or not they itemize deductions.

You Change Jobs or Lose Your Job

COBRA and HIPAA help you carry your coverage with you through various job changes, and your HSA/HDHP can smooth these changes even further.

You Lose Your Job or Your Hours Are Reduced

A number of job changes can trigger COBRA eligibility. These include quitting your job, getting laid off, retiring or getting fired other than for gross misconduct. Gross misconduct is not specifically defined in COBRA or in regulations under COBRA, and will depend on the specific facts and circumstances. Generally, it can be assumed that being fired for most ordinary reasons, such as excessive absences or generally poor performance, does not amount to “gross misconduct”.

A reduction in your hours can also trigger COBRA eligibility if part-time employees are not covered under your plan. A strike by unionized employees can qualify as a change in hours.

If you elect COBRA benefits, you can use the HSA to pay


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COBRA premiums, and you can continue to contribute to an HSA (if you can afford both, that is).

You Get a New Job

It’s not uncommon for plans to impose a waiting period before newly hired employees can enroll. If you have a new job, but have either an individual HSA/HDHP, or qualified COBRA coverage from your last job, you can continue to make HSA contributions during this waiting period. You can also use your HSA funds to pay your COBRA premiums.

If your new employer makes an HSA/HDHP available, check on rolling over your old HSA into the new one. You are allowed one rollover per year, though you can make any number of direct trustee-to-trustee transfers (for more on this issue, see Chapter 8: The HSA Law).

Know Your State and Local Laws

COBRA is a federal law that applies only to employers with at least 20 employees. Your state, county, or city may also have a similar law with broader coverage— covering even smaller firms, for example—or more generous coverage. If the state or local law is more generous than COBRA, the state or local law is the one that applies.

It’s Business

You may not be making any job changes, but things can change at your workplace. Your HSA/HDHP can help.

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Your Employer Files for Bankruptcy

If your company closes or files for bankruptcy, there may no longer be a health plan. If there is no longer a health plan, there is no COBRA coverage available. If, however, there is another plan offered through a successor employer, you may have COBRA rights through that plan. If you are offered COBRA coverage, you may use your HSA to pay those premiums. If there is no COBRA coverage available, you can use your HSA to pay for medical expenses or other coverage you might be able to buy while you are receiving unemployment compensation.

Your Plant Is Closed

If your plant is closed but the rest of the company or a parent company remains in business, you have to be offered COBRA coverage through any surviving plan. Your HSA can be used to pay those premiums.

Your Company Is Sold

If your company is sold, the buyer of the company may be obliged to provide you with COBRA coverage. If there is COBRA coverage available, your HSA can be used to pay those premiums.

Your Employer Drops Your Plan but Stays in Business

Termination of a health plan does not trigger COBRA eligibility. You can no longer contribute to an HSA if your HDHP is terminated, but you can use your HSA for medical expenses.


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You Retire Before You Are Eligible for Medicare

Many people retire long before age 65, when they are eligible to claim Medicare benefits. If you retire from your current job before age 65, you can use your HSA for a wide range of medical expenses. You can use it to pay COBRA premiums, premiums for long-term care insurance, or non-COBRA premiums for coverage you may buy on your own if you are receiving unemployment compensation. You may also use your account balance to pay qualified medical expenses directly.

But if you retire from your job, accept a pension from your employer, then go to work for another employer, you can’t use your HSA to make any premium contributions your new employer may require unless you are at least 65 years old.

When You Enroll in Medicare

You are no longer eligible to make HSA contributions after you enroll in Medicare. Remember that enrolling in SSI (the income portion of Social Security) automatically enrolls you in Medicare Part A and causes you to be ineligible for HSA contributions. Like the early retiree, you can use the HSA after reaching age 65 to pay COBRA premiums, premiums for long-term care insurance or non-COBRA premiums for coverage you may buy on your own if you are receiving unemployment compensation. You may also use your account balance to pay qualified medical expenses directly. If you remain employed after age 65, you can use your HSA to pay your share, if any, for employer-sponsored health care coverage. If your employer offers health care coverage

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to its retirees or their survivors and requires a premium contribution from participating retirees or survivors, the HSA can be used to pay for that coverage as well.You can also use your HSA to pay Medicare premiums once you reach the age of 65. Medicare Part A covers hospital insurance that pays for inpatient hospital stays, care in a skilled nursing facility, hospice care and some home health care. Medicare Part B is medical insurance that helps pay for doctors’ services, outpatient hospital care, durable medical equipment, and some medical services that are not covered by Part A.

Also at age 65 or later, you may use your HSA funds to pay for a wide variety of premiums as a qualified expense. Refer to the Table 4.4 at the end of Chapter 4 for more information. Even after age 65, Medigap insurance, a private insurance that covers out-of-pocket costs not covered by Medicare, is not a qualified expense. Medigap is not the same thing as retiree health insurance; you buy a Medigap policy from a private insurer, while your employer provides retiree health insurance. If you have retiree health insurance, you will generally not need Medigap coverage.

Using Your Account After Disability

Since you do not need to work to make HSA contributions, you can continue to be covered by an HSA/HDHP plan after you become disabled. If you are covered by an HSA/HDHP and qualify for short-term or long-term disability benefits under an employer-sponsored plan, nothing should change if the basic health care coverage arrangement remains intact during the disability period.


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However, there are important cautions to be observed here. Your HSA has to be paired with an HDHP, so if you lose HDHP coverage under your employer’s plan because you can no longer work, you will no longer be eligible to contribute to an HSA unless you can find a qualifying HDHP as an individual buyer. You can use your HSA balance to make COBRA payments if you become eligible for COBRA coverage as a result of your disability. If you qualify for Social Security Disability Insurance (SSDI) benefits, everything changes. Qualifying for SSDI benefits is an entirely separate process from qualifying for benefits under an employer-sponsored disability plan. By law, to qualify for SSDI benefits, you must be unable to do any substantial amount of work due to your health (for 2008, “substantial” work is work that earns you more than $900 per month), and your condition must have lasted a year, be expected to last at least a year, or be expected to result in your death. Applicants have to be unable to do substantial work for at least 5 months before filing an application and there is substantial uncertainty about acceptance; about half of SSDI applications are rejected. If you are awarded SSDI benefits, you will become eligible for Medicare coverage two years after the benefit award.

You can use your HSA both during the application process and after you are awarded benefits. Prior to being awarded Social Security Disability benefits, you can use your HSA to pay COBRA premiums if you are eligible. You can also use your HSA for other medical expenses.

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Keep in Mind

Your HSA provides funds for choices you •might not have had before. But make sure you know the rules in your HDHP plan so that you can make the best informed choice and use of your HSA funds.

Changing family status—new baby, •stepchildren, college kids and new spouses—all present new coverage needs. Be sure to make the necessary enrollment changes as soon as the opportunity presents itself.

HSAs can help you with employment •changes and transitions in and out of the workforce.

Enrolling in Medicare puts an end to making •contributions to your HSA. However, the funds you have built up in your HSA can be used for a variety of expenses.

Up Next

This chapter has discussed how your HSA/HDHP can help

you through many life and workforce transitions. In the

next and final chapter of this book, we explain the basic

laws that govern HSAs.

Chapter 8

Previous chapters have covered rules of eligibility, contributions and distributions. This chapter provides a synopsis of federal and state laws that govern aspects of HSAs including:

4 The Federal HSA Law

4 Estate Treatment of HSAs

4 Employer Requirements

4 Bankruptcy

4 State Law

The HSA Law

The HSA Law

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Some legal requirements governing HSAs are specific to HSAs; others apply because HSAs are also trusts, which are governed by both federal and state law. As an employer who sponsors an HSA, or an employee who has signed up for one, you should be aware of which laws impact setting up and using your HSA.

The Federal HSA Law

Congress passed Section 1201 of the Medicare Prescription Drug Improvement and Modernization Act of 2003. This provision adds Section 223 to the Internal Revenue Code to permit eligible individuals to establish HSAs for taxable years beginning after December 2003.

The Rules Made Easy

Below is a quick summary of the tax rules governing HSAs/HDHPs. For more in-depth information on how the rules apply in various situations (see Chapter 4: How Does Your HSA/HDHP Work? and Chapter 7: Your HSA/HDHP and Everyday Health Care Challenges).

State trust laws state that an HSA becomes •established once there are funds deposited into the account. There has to be an asset in order for there to be a trust. Once there is an asset to trust the account is established.

HSAs are funded on a pre-tax basis. For an •individual, it is an above-the-line deduction, independent of whether or not you itemize.

Employer contributions are not taxable to •the employee, nor subject to employment taxes such as Social Security payroll taxes

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or the federal portion of taxes that finance unemployment benefits. The earned income tax credit (EITC) is not affected by employer contributions.

Self-employed individuals and owners of S •corporations are not considered employees. As such, they cannot receive employer contributions. However, they can make contributions on their own and claim the above-the-line deduction on their personal income taxes (See Ch. 2-13 and Table 8.1).

Employer contributions are deductible to the •employer as contributions to a health plan.

Contributions for any tax year may be made •at any time before the deadline for filing the HSA owner’s income tax return for that year (without extensions).

The maximum amount that can be •contributed and deducted is the statutory maximum contribution for that year (indexed for inflation). The individual must remain eligible the remainder of that tax year and the entire next year.

HSA Contribution LimitIndividual 2008 $2,900

Family 2008 $5,800

There are special increased contributions •for those individuals age 55 and older up to Medicare eligibility and enrollment (usually

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age 65).

2008 - $900 •

2009 - $1,000 (and years beyond 2009) •

Eligibility to make tax-deductible •contributions is calculated on a month-to-month basis based the number of months you are covered by an eligible HDHP.

A contribution can be made by another •person on behalf of an individual and deducted by that individual.

No one can receive or make a contribution •that is eligible to be claimed as a dependent on another person’s tax return.

Earnings on money invested in your account •accrue tax-free.

Rollovers from Archer MSAs and other •HSAs are permitted; those from FSAs and HRAs are permitted one time and have special rules that must be followed (see Chapter 2 – Health FSA/HRA Rollovers and IRA Transfers).

An HDHP may provide first-dollar •preventive care or apply a lower minimum deductible for such care than generally applies and still be a qualified HDHP.

If HSA funds are used for non-qualified •items, which include medical expenses incurred prior to the account being established, then that amount is subject to ordinary income taxes plus a 10 percent

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penalty. The penalty applies only if you are younger than age 65.

If you mistakenly use your HSA funds for •an expense that was not a qualified medical expense, you may repay the distribution no later than April 15 following the first year you knew (or should have known) of the mistake. Your distribution would not then be included in your gross income, nor would the 10 percent excise tax apply. However, the HSA trustee or custodian has the option to allow or deny the return of a mistaken distribution.

HSA contributions, whether made by the •employer or the employee, that exceed the legal limit for a given year are included in the employee’s adjusted income for tax purposes. The employee also pays a 6 percent excise tax on the excess amount. To avoid this result, the excess contributions for a taxable year and the investment income earned on these excess contributions may be paid to the account owner before the due date (including any extensions) for the account owner’s income tax return. If this is done, the investment income and the excess contribution is included in the account owner’s gross income for the year in which the owner receives the distribution. However, the 6 percent excise tax is not imposed on the excess contribution.

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Contributions by an individual are taken as •a deduction on Form 1040, which means you do not have to itemize to receive the tax break. Your employer will report the employer HSA contributions on your Form W-2 and your HSA trustee or custodian will report distributions to you and to the IRS on Form 1099 (see also Chapter 5: Understanding Paperwork and Record Keeping).

Table 8.1 summarizes the tax treatment of HSA contributions for various employer and employee situations.

HSA as a Trust

Health savings accounts are not considered insurance plans, while HDHPs are. With individual ownership, year-to-year accumulation of contributions and earnings, and specified uses and rules, the HSA is a trust.

A trust is a fiduciary relationship where a bank, corporation, or other entity acting as a trustee holds legal title with a legal obligation to keep and use the trust for the benefit of the equitable owner, in this case the owner of the HSA. A trustee is a party who is given legal responsibility to hold property in the best interest of or for the benefit of another entity, directing the investment of the funds in a trust account and managing it. The custodian is the person or institution that is in charge of property in terms of maintenance of an account but has

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no investment or management responsibilities. The trustee must deal with the trust property honestly, and put the beneficiary’s interest above its own. It must also closely follow the terms of the trust. Though it may have discretion in investments and day-to-day management, these functions are still governed by the trust agreement. The benefit for which the trustee holds and administers the account is for that of paying qualified medical expenses. The trustee must be a bank, insurance company or other entity that meets IRS requirements, including net worth.

Health savings accounts may be invested in the same investments approved for IRAs—e.g. bank accounts, annuities, certificates of deposit (CDs), stocks, mutual funds, or bonds. No part of the HSA trust assets can be invested in life insurance contracts, in collectibles (art, antiques etc.—other tangible personal property that the IRS specifies), and HSA assets may not be commingled with other property except for investment purposes. An individual’s interest in the balance is not forfeitable.

Account beneficiaries (the owner), HSA trustees and custodians cannot enter into a prohibited transaction with the HSA. A prohibited transaction is the sale, exchange or lease of property, borrowing or lending money, furnishing goods, services or facilities, transferring to or use by or for the benefit of the beneficiary of any assets

The HSA Law

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contained in the account. The beneficiary also may not pledge the assets of the HSA. Any amount used for such purposes is treated as a distribution, because it is not used for medical expenses, and included in the beneficiary’s gross income. The 10 percent penalty for such distributions applies.

There should be no surprises for the HSA owner. He or she should receive periodic statements on how much is in the HSA, how much it has earned in interest or investment returns, fees or administrative expenses (i.e., maintenance, check replacement) and expenses paid out of the HSA.

The IRS prototype forms for HSA custodial accounts (5305-C) and HSA Trust Accounts (5305-B) can be found on the IRS website at www.irs.gov.

HSA Owner Responsibilities

The law requires certain actions by the HSA owner. Excess contributions are subject to an excise tax. It is the responsibility of the HSA owner to determine whether contributions have exceeded the maximum annual contribution limit, notify the trustee of the excess funds and request withdrawal of the excess funds and any income attributable to them. The HSA owner is also responsible for determining whether a distribution is for payment of qualified expenses and maintaining records to substantiate that expense, not the trustee nor the HSA owner’s employer.

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Estate Treatment of HSAs

In the event of a death, if the decedent was married, and the surviving spouse is listed as the beneficiary, the surviving spouse is treated as the owner, and the account retains its character as an HSA. If no spouse survives, the account will no longer be treated as an HSA upon the death of the owner. The account is then included in the estate of the owner, and thus taxable to the recipient. However, the taxable amount will be reduced by the amount of the estate tax paid due to the inclusion of the HSA in the deceased individual’s estate, as well as any qualified medical expenses incurred by the deceased prior to death and paid by the recipient out of the HSA for up to one year.

Employer Requirements

Your employer may offer you an HSA and may contribute to the HSA on your behalf. If you do not obtain your HSA through an employer, but rather directly from an insurer or other vendor, your plan is not subject to the requirements that apply to an employer plan. However, you should still read this section to understand how your HSA differs from other tax-favored savings plans you might have.

Private Employers - Overview

Two government agencies share most of the federal regulation of private employer benefit plans: The U.S. Department of Labor and the IRS. Generally, the Department of Labor enforces participants’ benefit rights under The Employee Retirement Income Security Act

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(ERISA) and the IRS makes sure employers meet the tax code rules that allow them to sponsor and deduct the costs of benefit plans.

ERISA, the federal law that regulates employee benefit plans, generally preempts state laws as they apply to private-sector employee benefit plans. For instance, state laws can’t be enforced against an employee benefit plan even if the state law sets higher standards of benefits than available in the plan.

However, HSAs pose new challenges to define and operationalize a health savings vehicle in an employment setting. If HSAs are covered by ERISA, they are required to distribute summary plan descriptions, file Form 5500 and meet fiduciary obligations on investments particular to ERISA.

According to the Department of Labor (DOL Field Assistance Bulletin 2004-1), HSAs are not considered ERISA-covered employee benefit plans, as long as the employer’s involvement is limited. Essentially, DOL created a safe harbor for HSA plans, meaning as long as these plans meet certain criteria, they will be safe from classification as an employee benefit plan.

The HSA is considered by DOL to be a personal health care savings vehicle, rather than group insurance. DOL created a safe harbor exemption for HSAs from ERISA even if the employer makes contributions to the HSA, which must be completely voluntary, with the following caveats:

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The employer cannot limit the ability of •eligible employees to move their funds to another HSA beyond the restrictions provided in the Internal Revenue Code;

The employer cannot impose conditions on •utilization of HSA funds beyond restrictions permitted by the Code;

The employer cannot make or influence •investment decisions with respect to funds contributed to the HSA;

The employer cannot represent the HSA as •an employee welfare benefit plan established or maintained by the employer; and

The employer cannot receive any payment •or compensation in connection with the HSA.

If an HSA meets these requirements and therefore, is not considered an ERISA plan, it is subject to state law. An HSA that is not an ERISA plan—either because the employer made that choice or because you did not obtain it through an employer—lacks a key protection other ERISA savings plans have. Funds you accumulate in an employer-sponsored pension plan are shielded from your creditors in the event that you declare personal bankruptcy. Because an HSA is not an ERISA plan, your creditors can attach balances in your account in a bankruptcy.

The HDHP and ERISA

Unless another ERISA exemption applies (i.e., the plan

The HSA Law

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is sponsored by a governmental or church entity), an HDHP offered by an employer would be an ERISA plan. It would then be subject to all the fiduciary, reporting and disclosure rules imposed on employee benefit plans under federal law.

Comparability Rule

Employer contributions to employees’ HSAs must be comparable for all employees participating in the HSA. Comparability under IRS regulation requires the same dollar amount or the same percentage of the annual deductible amount for the HSA contribution. However, it is only necessary to count employees who are eligible individuals and have the same category of coverage (such as individual or family). Part-time employees (customarily those who are employed fewer than 30 hours per week) are tested separately. If the employer contributions fail the comparability test, there will be an excise tax imposed on the employer equal to 35 percent of the amount the employer contributed to the HSA.

Unless it is done through a cafeteria plan, employers may not make matching contributions that are conditioned on a contribution by the employee. For example, an employer may not offer to contribute $500 to your account on the condition that you contribute some amount as well (see chapter 2, page 2-16). With the passing of the new legislation beginning with the 2007 tax year, there is now an exception to the comparability rule. Employers may now contribute more to HSAs of non-highly compensated employees. The IRS will use the

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same definition of “highly compensated employees” for HSAs as they do with other retirement accounts.

Governmental Employer Plans

Federal, state and local government employers are not subject to ERISA. The Office of Personnel Management administers federal employee benefit law. State and local government employees should look to the agencies charged with administering their benefit plans. States and localities may vary widely on issues of reporting, comparability, eligibility, fiduciary obligations, and record-keeping.

Bankruptcy

There is no exemption in the law specifically protecting HSA balances from the reach of bankruptcy creditors. This means that if the balance in the HSA is taken and used towards the outstanding debits of other creditors, the account holder would be subject to income tax and the 10 percent penalty on the amount used for nonqualified withdrawals. However, under the 2005 federal bankruptcy law, an individual debtor may deduct any reasonably necessary health insurance, disability insurance and health savings account expenses for the debtor, the spouse of the debtor or the dependents of the debtor when determining his or her statement of monthly income.

State Law

State insurance laws often require health plans to provide certain health care benefits without regard to

The HSA Law

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the deductible or on terms no less favorable than other care provided by the health plan. In order for the HDHP to be able to offer preventive care, the IRS has defined the standards for preventive care—what can be paid for by the plan without jeopardizing the plan’s tax status—rather than adopting the characterization of preventive care that applies under state law. So a plan that meets federal law may not meet the requirements of the state law. If you live in a state whose insurance laws conflict with the federal law governing HSAs, you may not be able to enroll in an HSA unless it is combined with an employer self-insured HDHP. Self-insured plans are funded by employers and, unlike those sold by insurance companies, do not have to comply with state benefit laws. State legislatures are in the process of deciding how best to deal with HSAs, and some are enacting exemptions from state mandates for plans that meet the federal criteria for HSA/HDHPs. Your insurance company or broker will be able to help you determine whether qualified plans are available in your area.

It is also important to recognize that, while the HSA is a pre-tax savings vehicle under federal income tax law, it may not qualify for tax breaks under state or local income tax laws or under the state component of the tax that finances unemployment benefits. State tax law and state estate law may also affect how HSAs are treated.

As of January 1, 2007, the following states have some tax conflicts in regards to HSA:

Alabama – not income tax exempt•

Chapter 8

8 - 14

California - not income tax exempt•

New Hampshire – tax dividends and interest •earned on account

New Jersey - not income tax exempt•

Tennessee – tax dividends and interest •earned on account

Wisconsin - not income tax exempt•

Many states are in the process of changing their laws to comply with federal treatment of HSAs. The Council for Affordable Health Insurance periodically publishes reports on their website (www.cahi.org) on the progress of updating these state tax laws.

Keep in Mind

To get the tax benefits from an HSA, there •are certain rules of eligibility, contribution, distribution and filing that the owner must follow.

The HSA is treated as a trust, and with that •come certain responsibilities and protections for you and your beneficiaries.

The Department of Labor has provided •guidance on HSAs, noting that if certain rules are followed, they will not be considered employee benefit plans even if an employer sponsors them.

State law is evolving in terms of how tax, •estate and mandated benefit laws treat HSAs.

The HSA Law

8 - 15

Up Next

This chapter concludes the main body of this book. The remaining sections include a glossary of terms used in this book, examples of the forms you might have to fill out or receive as an HSA owner, and additional information from IRS Publication 502 regarding how you can and cannot spend your HSA dollars, tax-free.

Chapter 8

8 - 16

Table 8.1How Various Types of HSA Contributions Are Treated Under Federal and State Income and Payroll Taxes

Income and Payroll Taxes

Type of HSA Contribution

Federal Income Tax

State or Local Income Tax

Social Security (FICA)1

Unemployment Tax (FUTA)

State Federal

Employer Contribution

Non-Taxable for employer and employee

Depends on state or local

laws

Non-taxable for employer

and employee

Depends on State

Non-Taxable

Employee Contribution2

To own account •

Above-the-line deduction on employee’s returns3


lawsTaxable Not Applicable

To own account •through cafeteria plan4

Non-TaxableDepends on state or local

laws

Non-Taxable

Depends on State

Non-Taxable

To another •person’s account5

Above-the-line deduction

on account owner’s returns


laws6 Taxable Not Applicable

Contribution by self-employed person, partner, or S-corporation shareholder7

Above-the-line deduction

on account owner’s return


lawsTaxable Not Applicable

The HSA Law

8 - 17

1Or Railroad Retirement Fund, if applicable

2This table assumes that employee contributions are made out of earned

income such as salaries, wages, and self- employment earnings, or

partnership distributions. Income such as pensions or investment earnings is

not included in the payroll tax base.

3This deduction reduces the account owner’s adjusted gross income for the

tax purposes.

4Employee contributions to an HSA through a cafeteria plan are considered

employer contributions for federal income tax purposes.

5The person must not be eligible to be claimed as a dependent on another

person’s income tax return.

6This deduction reduces the account owner’s adjusted gross income for tax

purposes, but not that of the person making the contribution.

7These persons are generally not considered employees and cannot receive

an employer contribution

Appendix Appendix

4 Glossary of Health Care Coverage Terms

4 IRS Forms

4 Updates

4 How You Can Spend Your Tax-Free HSA Dollars

4 How You Cannot Spend Your Tax-Free HSA Dollars

4 Index

Glossary

A - 1

Glossary of Health Care Coverage Terms

Above-the-line deduction. For income tax filing purposes, one that is applied in arriving at adjusted gross income, and thus is available to taxpayers whether or not they itemize deductions.

Authorization. A health insurance plan’s permission to proceed with a medical or surgical procedure.

Cafeteria plan. An employee benefit plan that allows employees to choose benefits from a number of different options, including pensions and savings, health, other insurance and time off. The term “cafeteria plan” is often used interchangeably with “flexible spending account”.

Calendar year. January 1 to December 31 of the same year. The calendar year is distinguished from the plan year; the latter may be any 12-month period established by an employer or insurer for managing the plan and accounting for benefit payments.

Certificate of Coverage. Evidence of prior health coverage. It is required to be issued under HIPAA. An enrollee may need to provide this certificate to be exempt from limitations on coverage for pre-existing conditions.

Chronic condition. A condition that lasts a long time, or recurs frequently and can be treated but not eradicated.

COBRA (for the Consolidated Omnibus Budget Reconciliation Act of 1985, the law that instituted this coverage). The law that provides for the temporary

Appendix

A - 2

continuation of group health plan coverage available after a qualifying event to certain employees, retirees and family members who are qualified beneficiaries.

Coinsurance. The percentage of an insurance claim for which the patient is responsible.

Conversion coverage. After employer-sponsored or COBRA coverage ends, this coverage is purchased directly from your insurance company or managed care plan.

Co-payments. Fixed-dollar payments the patient makes per doctor visit or prescription filled. For example, many HMOs and PPOs impose a co-payment (sometimes called a “co-pay”) of $5 or $10 for an in-network physician visit.

Covered services. The medically necessary treatments your plan undertakes to pay for, at least in part.

Custodian. An entity that is responsible for the maintenance of an account but has no investment or management responsibilities.

Deductible. The amount of covered expenses that an individual must pay before any charges are paid by the medical care plan.

Eligible individual (for HSA).

The individual must be covered under an •HDHP on the first day of any month for which eligibility is claimed;

Glossary

A - 3

With the exception of permitted coverage, •the individual may not also be covered under any health plan that is not an HDHP;

The individual must not be eligible for •Medicare coverage, either by virtue of reaching age 65 or qualifying for Social Security disability benefits; and

The individual may not be claimed as a •dependent on another individual’s tax return.

Emergency. The sudden onset of a condition or an accidental injury requiring immediate medical or surgical care to avoid death or permanent disability.

Employee Assistance Plan. An employee benefit that covers all or part of the cost for employees to receive counseling, referrals and advice in dealing with stressful issues in their lives.

ERISA (Employee Retirement Income Security Act). A federal law that governs private-sector employee benefit plans.

Excess contribution. HSA contribution that is more than allowed by law.

Exclusions. Medical coverages, services, or conditions for which a particular health care plan or policy will not pay.

Appendix

A - 4

First-dollar coverage. This term may mean different things in different plans. For purposes of HSAs and HDHPs, it refers to benefits that pay the entire covered or eligible amount without the application of a deductible, or with just the application of a co-payment or coinsurance amount. An HDHP may not provide first-dollar coverage except for certain specified benefits.

Flexible spending account. An arrangement that allows employees to set aside pre-tax earnings to pay for benefits or expenses that are not paid by their insurance or benefit plans. A flexible spending account may be free-standing or part of a cafeteria plan.

Gatekeeper. The doctor, usually a primary care doctor, pediatrician, or internist, responsible for overseeing and coordinating all aspects of a patient’s care. In an HMO, the gatekeeper must preauthorize all referrals, except emergencies.

Grace period. A temporary extension of a tax law provision, or a period during which an otherwise applicable tax law provision does not apply. A grace period generally differs from a transition rule in that the latter provides for a gradual change from a prior provision to a new provision, but the two terms may also be used interchangeably.

Grandfathering. A tax law provision under which a plan feature that exists as of a certain date would be allowed to exist indefinitely, even if a new plan formed after the date of the law would not be allowed to have this

Glossary

A - 5

feature. The law and regulations governing HSA/HDHP plans do not provide for grandfathering.

Gross misconduct. Not specifically defined in COBRA or in regulations under COBRA, and will depend on the specific facts and circumstances. Generally, it can be assumed that being fired for most ordinary reasons, such as excessive absences or generally poor performance, does not amount to “gross misconduct.”

Health Insurance Portability and Accountability Act (HIPAA). A federal law that limits pre-existing condition exclusions, permits special enrollment when certain life or work events occur, prohibits discrimination against employees and dependents based on their health status, and guarantees availability and renewability of health coverage to certain employees and individuals.

HMO (Health Maintenance Organization). A corporate entity (for-profit or not-for-profit) that provides or arranges for coverage of certain health services for a fixed, prepaid premium.

Health reimbursement arrangement (HRA). An employer-funded account from which the employee is reimbursed for qualified medical expenses, such as co-payments, deductibles, vision care, prescriptions, long-term care and medical insurance and most dental expenses. Reimbursements are not taxed to the employee, and are deductible by the employer.

Appendix

A - 6

Home health care. Skilled nursing and related care supplied to a patient at home. Such care may be available only to someone who was previously hospitalized and is recovering without need of hospital care.

Hospice care. Care given to terminally ill patients, generally those with six months or less to live, that emphasizes meeting emotional needs and coping with pain. Care may be given in the patient’s home or in a separate facility.

Hospital outpatient department. A facility where a full range of non-urgent medical care is provided under the supervision of a physician.

Indemnity plan. A plan that pays health insurance benefits in the form of cash payments rather than services.

Individual retirement account. An opportunity for individuals to save for retirement on a tax-deferred basis. Individuals may contribute up to $2,000 per year in an individual account; for spousal accounts the limits are $4,000 if both spouses work and $2,250 if one spouse works. The amount that is tax deductible varies according to an individual’s pension coverage, income tax filing status and adjusted gross income. Account balances distributed from one IRA or from an employer-sponsored retirement plan may be rolled over to another IRA.

Managed care plan. A health plan that limits costs by limiting the reimbursement levels paid to providers, by

Glossary

A - 7

monitoring health care utilization by participants, or both.

Matching contributions. Employer contributions that are paid to the employee’s account only if the employee also contributes some specified amount.

Medically necessary treatments. Those treatments that are appropriate for the diagnosis, care, or treatment of a certain injury or condition involved. Check your plan’s definition. Whether or not a given service is covered may depend on where and by whom it is delivered.

Medicare. A health insurance program for people age 65 or older, the disabled and people with end-stage renal disease who require dialysis or transplantation. Medicare is part of the Social Security system.

Medicare Part A. Covers hospital insurance that pays for inpatient hospital stays, care in a skilled nursing facility, hospice care and some home health care.

Medicare Part B. Medical insurance that helps pay for doctors’ services, outpatient hospital care, durable medical equipment and some medical services that are not covered by Part A.

Medigap insurance. Private insurance that supplements Medicare. It reimburses out-of-pocket costs that are not covered by Medicare and that are the beneficiary’s share of health care costs.

Appendix

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Network plan. A plan that generally provides more favorable benefits for services provided by its network of providers than for services provided outside the network.

Nondiscriminatory contributions. Employer contributions are considered nondiscriminatory if the employer makes comparable contributions on behalf of all eligible employees with comparable coverage during the same period. Contributions are considered comparable if they are either the same dollar amount or the same percentage of the deductible under the HDHP.

Open season or open enrollment. A period of time during which employees may change health plans without incurring costs or penalties.

Out-of-pocket limits. Most health insurance plans limit the out-of-pocket expenses that you have to pay in a given plan year. Amounts you pay as deductibles, co-payments, or coinsurance, are included in your out-of-pocket expenses, which are kept as a running total. Insurance premiums are not counted toward out-of-pocket limits. Once you have reached your plan’s limit for the year, remaining eligible expenses are covered at 100 percent regardless of the plan’s usual co-payment or coinsurance arrangements. Some plans refer to this limit as the stop-loss limit.

Permitted coverage. Coverage an individual may maintain, in addition to an HDHP, without losing eligibility for an HSA, even though the coverage may provide first-dollar coverage for certain medical expenses.

Glossary

A - 9

Plan administrator. The person or firm designated by your health plan or employer to handle day-to-day details of record keeping, claims handling and filing of reports.

Plan participant or beneficiary. An employee or dependent of that employee who is participating, receiving benefits, or eligible to receive benefits from an employee benefit plan.

Plan year. The calendar year (January 1 to December 31), or some other twelve-month period your employer or insurer chooses for managing your plan and keeping track of deductibles and other limits.

Point of Service (POS). Managed care plan that allows patients to see doctors not included in the plan for an increased fee. Usually found as part of an HMO.

Portable account. One that can be carried from job to job and from group plans to individual coverage.

Pre-existing condition. In general, a mental or physical condition that began before the plan member became covered under a particular plan. However, specific plans may define pre-existing conditions differently; a common definition includes conditions for which the member received treatment during the 90 days prior to enrollment in the plan.

PPO (Preferred Provider Organization). An arrangement

Appendix

A - 10

between doctors and others who provide medical services and an insurer to offer services at a discounted rate in exchange for the insurer sending patients their way. It usually has some utilization review.

Primary payor. The health care plan that pays its share of covered expenses first, when a consumer has access to two different health plans. While the secondary payor pays some or all of the amounts left over, even if that amount is less than the secondary plan would otherwise pay. This applies to Medicare if you are still covered under an employer plan.

Prohibited transaction. The sale, exchange or lease of property, borrowing or lending money, furnishing goods, services or facilities, transferring to or use by or for the benefit of the beneficiary of any assets contained in the account. Pledging account assets—as security for a loan, for example—also constitutes a prohibited transaction.

Provider. Whoever provides health care from your health plan, including doctors, therapists, nurse-practitioners and anyone else who provides medical services.

Provider discount. A reduced rate a doctor, hospital, or other health care professional or facility agrees to accept when they enroll in a health plan’s network.

Prudent layperson standard. Under this standard, emergency care is covered in a health care plan if the decision to go to the ER was one that an average person

Glossary

A - 11

with average medical knowledge would make at the time.

Qualified medical expenses. Expenses paid by the account beneficiary or owner, his or her spouse, or dependents, for medical care as defined in section 213(d) of the Internal Revenue Code. These are generally the same expenses as those that individual taxpayers can deduct on their federal income tax returns. Certain types of health insurance premiums are also considered qualified medical expenses for purposes of HSAs. Referral. A recommendation of a medical professional. In HMOs and other managed care plans, a referral is usually necessary to see any practitioner or specialist other than your gatekeeper physician, if you want the service to be covered.

Release. Your permission for specified medical information to be released to a specific person or entity. State law limits sometimes information in a release.

Repricing. The adjustment of health care providers’ “sticker prices” to reflect discounts the providers may have negotiated with your health plan.

Rollover contribution. Transfer of an account balance from one financial institution to another or from one type of account to another.

Safe harbor. If an activity is deemed to meet certain authorized criteria, they will be safe from not being in compliance with the law or regulation

Appendix

A - 12A - 12

Screening services. Medical tests designed to detect treatable diseases or conditions.

Section 401(k) plan. A defined contribution retirement plan that allows participants to have a portion of their compensation (otherwise payable in cash) contributed pre-tax to a retirement account on their behalf. The plan is named after the section of the Internal Revenue Code that establishes the rules for the plan.

Self-insured plan. One under which the employer pays for medical claims as they arise rather than contracting for coverage from an insurer. Transition rule. Gradual change in a law that eases the impact of a change on affected taxpayers.

Trust. Legal instrument allowing one party (the trustee) to control property for the benefit of another.

Trustee. An entity that directs the investment of the funds in a trust account and has management responsibilities.

Umbrella deductible. A stated maximum amount of expenses a family could incur before receiving benefits.

Usual and customary charges. An insurance company’s estimate of “the going rate” to be paid in a geographical area for a given medical claim.

How You Can Spend Your Tax-Free HSA Dollars

A - 13A - 13

IRS Forms

Please check www.irs.gov for more details.

Relevant forms include:

W-2: the 2007 edition of this form with a block for HSA reporting is available at the following link: http://www.irs.gov/pub/irs-pdf/fw2.pdf

Form 1040/1040EZ – Individual tax return

Form 1099-SA: http://www.irs.gov/pub/irs-pdf/f1099sa.pdf

Form 5498-SA: http://www.irs.gov/pub/irs-pdf/f5498sa.pdf

Instruction for the above forms can be viewed at: http://www.irs.gov/pub/irs-pdf/i1099sa.pdf

Form 5305b: http://www.irs.gov/pub/irs-pdf/f5305b.pdf

Form 5305c: http://www.irs.gov/pub/irs-pdf/f5305c.pdf

Updates

Please see www.hsaguidebook.com for recent updates.

Appendix

A - 14A - 14

Publication 502 Excerpt for tax year 2003

The IRS will provide direction on an annual basis regarding which medical and dental expenses you can and cannot deduct from your taxes and are therefore payable from your HSA. Please refer to www.irs.gov for up-to-date versions of Publication 502.

What Medical and Dental Expenses Are Included?Following is a list of items that you can include in figuring your medical expense deduction. The items are listed in alphabetical order.

Abortion.You can include in medical expenses the amount you pay for a legal abortion.

Acupuncture. You can include in medical expenses the amount you pay for acupuncture.

Alcoholism. You can include in medical expenses amounts you pay for an inpatient’s treatment at a therapeutic center for alcohol addiction. This includes meals and lodging provided by the center during treatment.

You can also include in medical expenses amounts you pay for transportation to and from Alcoholics meetings in your community if the attendance is pursuant to medical advice that membership in Alcoholics Anonymous is necessary for the treatment of alcoholism.

Ambulance. You can include in medical expenses amounts you pay for ambulance service.


A - 15A - 15

Artificial limb. You can include in medical expenses the amount you pay for an artificial limb.

Artificial teeth. You can include in medical expenses the amount you pay for artificial teeth.

Autoette. See Wheelchair, below.

Bandages. You can include in medical expenses the cost of medical supplies such as bandages used to cover torn skin.

Breast reconstruction surgery. You can include in medical expenses the amounts you pay for breast reconstruction surgery following a mastectomy for cancer.

Birth control pills. You can include in medical expenses the amount you pay for birth control pills prescribed by a doctor.

Braille books and magazines. You can include in medical expenses the part of the cost of Braille books and magazines for use by a visually-impaired person that is more than the cost of regular printed editions.

Capital expenses. You can include in medical expenses amounts you pay for special equipment installed in a home, or for improvements, if their main purpose is medical care for you, your spouse, or your dependent.

Appendix

A - 16A - 16

The cost of permanent improvements that increase the value of your property may be partly included as a medical expense. The cost of the improvement is reduced by the increase in the value of your property. The difference is a medical expense. If the value of your property is not increased by the improvement, the entire cost is included as a medical expense.

Certain improvements made to accommodate a home to your disabled condition, or that of your spouse or your dependents who live with you, do not usually increase the value of the home and the cost can be included in full as medical expenses. These improvements include, but are not limited to, the following items.

Constructing entrance or exit ramps for •your home.

Widening doorways at entrances or exits to •your home.

Widening or otherwise modifying hallways •and interior doorways.

Installing railings, support bars, or other •modifications to bathrooms.

Lowering or modifying kitchen cabinets and •equipment.

Moving or modifying electrical outlets and •fixtures.

Installing porch lifts and other forms of lifts •(but elevators generally add value to the house).

Modifying fire alarms, smoke detectors, and •


A - 17A - 17

other warning systems.

Modifying stairways. •

Adding handrails or grab bars anywhere •(whether or not in bathrooms).

Modifying hardware on doors. •

Modifying areas in front of entrance and exit •doorways.

Grading the ground to provide access to the •residence.

Only reasonable costs to accommodate a home to a disabled condition are considered medical care. Additional costs for personal motives, such as for architectural or aesthetic reasons, are not medical expenses.

Capital expense worksheet. Use Worksheet A to figure the amount of your capital expense to include in your medical expenses.

Appendix

A - 18A - 18

Worksheet A. Capital Expense Worksheet

Example. You have a heart ailment. On your doctor’s advice, you install an elevator in your home so that you will not have to climb stairs. The elevator costs $8,000. An appraisal shows that the elevator increases the value of your home by $4,400. You figure your medical expense as shown in the filled-in example of Worksheet A.


A - 19A - 19

Worksheet B. Capital Expense Worksheet Illustrated

Operation and upkeep. Amounts you pay for operation and upkeep of a capital asset qualify as medical expenses, as long as the main reason for them is medical care. This rule applies even if none or only part of the original cost of the capital asset qualified as a medical care expense.

Example. If, in the previous example, the elevator increased the value of your home by $8,000, you would have no medical expense for the cost of the elevator.

Appendix

A - 20A - 20

However, the cost of electricity to operate the elevator and any costs to maintain it are medical expenses as long as the medical reason for the elevator exists.

Improvements to property rented by a person with a disabilityAmounts paid to buy and install special plumbing fixtures for a person with a disability, mainly for medical reasons, in a rented house are medical expenses.

Example. John has arthritis and a heart condition. He cannot climb stairs or get into a bathtub. On his doctor’s advice, he installs a bathroom with a shower stall on the first floor of his two-story rented house. The landlord did not pay any of the cost of buying and installing the special plumbing and did not lower the rent. John can include in medical expenses the entire amount he paid.

Car. You can include in medical expenses the cost of special hand controls and other special equipment installed in a car for the use of a person with a disability.

Special design. You can include in medical expenses the difference between the cost of a regular car and a car specially designed to hold a wheelchair.

Cost of operation. You cannot deduct the cost of operating a specially equipped car, except as discussed under Transportation, below.


A - 21A - 21

Chiropractor. You can include in medical expenses fees you pay to a chiropractor for medical care.

Christian Science practitioner. You can include in medical expenses fees you pay to Christian Science practitioners for medical care.

Contact lenses. You can include in medical expenses amounts you pay for contact lenses needed for medical reasons. You can also include the cost of equipment and materials required for using contact lenses, such as saline solution and enzyme cleaner. See Eyeglasses and Eye Surgery, below.

Crutches. You can include in medical expenses the amount you pay to buy or rent crutches.

Dental treatment. You can include in medical expenses the amounts you pay for dental treatment. This includes fees paid to dentists for X-rays, fillings, braces, extractions, dentures, etc. But see Teeth Whitening under What Expenses Are Not Includible, below.

Diagnostic devices. You can include in medical expenses the cost of devices used in diagnosing and treating illness and disease.

Example. You have diabetes and use a blood sugar test kit to monitor your blood sugar level. You can include the cost of the blood sugar test kit in your medical expenses.

Appendix

A - 22A - 22

Disabled dependent care expenses. Some disabled dependent care expenses may qualify as either:

Medical expenses, or •

Work-related expenses for purposes of •taking a credit for dependent care.

You can choose to apply them either way as long as you do not use the same expenses to claim both a credit and a medical expense deduction.

Drug addiction. You can include in medical expenses amounts you pay for an inpatient’s treatment at a drug treatment center. This includes meals and lodging at the center during treatment.

Drugs. See Medicines, below.

Eyeglasses. You can include in medical expenses amounts you pay for eyeglasses and contact lenses needed for medical reasons. You can also include fees paid for eye examinations.

Eye surgery. You can include in medical expenses the amount you pay for eye surgery to treat defective vision, such as laser eye surgery or radial keratotomy.

Fertility enhancement. You can include in medical expenses the cost of the following procedures to overcome an inability to have children.

Procedures such as in vitro fertilization •(including temporary storage of eggs or sperm).


A - 23A - 23

Surgery, including an operation to reverse •prior surgery that prevented the person operated on from having children.

Founder’s fee. See Lifetime care—advance payments, below.

Guide dog or other animal. You can include in medical expenses the cost of a guide dog or other animal to be used by a visually-impaired or hearing-impaired person. You can also include the cost of a dog or other animal trained to assist persons with other physical disabilities. Amounts you pay for the care of these specially trained animals are also medical expenses.

Health institute. You can include in medical expenses fees you pay for treatment at a health institute only if the treatment is prescribed by a physician and the physician issues a statement that the treatment is necessary to alleviate a physical or mental defect or illness of the individual receiving the treatment.

Health Maintenance Organization (HMO). You can include in medical expenses amounts you pay to entitle you, or your spouse or a dependent to receive medical care from a health maintenance organization. These amounts are treated as medical insurance premiums. See Insurance Premiums, below.

Hearing aids. You can include in medical expenses the cost of a hearing aid and the batteries you buy to operate it.

Appendix

A - 24A - 24

Home care. See Nursing Services, below.

Home improvements. See Capital Expenses, above.

Hospital services. You can include in medical expenses amounts you pay for the cost of inpatient care at a hospital or similar institution if a principal reason for being there is to receive medical care. This includes amounts paid for meals and lodging. Also see Lodging, below.

Insurance premiums. You can include in medical expenses insurance premiums you pay for policies that cover medical care. Policies can provide payment for:

Hospitalization, surgical fees, X-rays, etc. or •

Prescription drugs or •

Replacement of lost or damaged contact •lenses or

Membership in an association that gives •cooperative or so-called “free-choice” medical service, or group hospitalization and clinical care or

Qualified long-term care insurance contracts •(subject to additional limitations). See Qualified Long-Term Care Insurance Contracts under Long-Term Care, below

If you have a policy that provides more than one kind of payment, you can include the premiums for the medical care part of the policy if the charge for the medical part is reasonable. The cost of the medical part must be


A - 25A - 25

separately stated in the insurance contract or given to you in a separate statement.

Note. If advance payments of the health coverage tax credit were made on your behalf to your insurance company, do not include any advance payments made for you when figuring the amount you may deduct for insurance premiums. Also, if you are claiming the health coverage tax credit, subtract the amount shown on line 4 of Form 8885 (reduced by any advance payments shown on line 6 of that form) from the total insurance premiums you paid.

Employer-sponsored health insurance plan. Do not include in your medical and dental expenses on Schedule A (Form 1040) any insurance premiums paid by an employer-sponsored health insurance plan unless the premiums are included in box 1 of your Form W–2. Also, do not include on Schedule A (Form 1040) any other medical and dental expenses paid by the plan unless the amount paid is included in box 1 of your Form W–2.

Example. You are a federal employee participating in the Federal Employee Health Benefits (FEHB) program. Your share of the FEHB premium is paid with pre-tax dollars. Because you are an employee whose insurance premiums are paid with money that is never included in your gross income, you cannot deduct the premiums paid with that money.

Appendix

A - 26A - 26

Flexible spending arrangement. Contributions made by your employer to provide coverage for qualified long-term care services under a flexible spending or similar arrangement must be included in your income. This amount will be reported as wages in box 1 of your Form W–2.

Health reimbursement arrangement (HRA). If you have medical expenses that are reimbursed by a health reimbursement arrangement, you cannot include those expenses in your medical expenses. This is because an HRA is funded solely by the employer.

Medicare AIf you are covered under social security (or if you are a government employee who paid Medicare tax), you are enrolled in Medicare A. The payroll tax paid for Medicare A is not a medical expense. If you are not covered under social security (or were not a government employee who paid Medicare tax), you can voluntarily enroll in Medicare A. In this situation the premiums you paid for Medicare A can be included as a medical expense on your tax return.

Medicare B Medicare B is a supplemental medical insurance. Premiums you pay for Medicare B are a medical expense. If you applied for it at age 65 or after you became disabled, you can deduct the monthly premiums you paid. If you were over age 65 or disabled when you first enrolled, check the information you received from the Social Security Administration to find out your premium.


A - 27A - 27

Prepaid insurance premiums Premiums you pay before you are age 65 for insurance for medical care for yourself, your spouse, or your dependents after you reach age 65 are medical care expenses in the year paid if they are:

1. Payable in equal yearly installments or •more often, and

2. Payable for at least 10 years, or until you •reach age 65 (but not for less than 5 years).

Unused sick leave used to pay premiums You must include in gross income cash payments you receive at the time of retirement for unused sick leave. You must also include in gross income the value of unused sick leave that, at your option, your employer applies to the cost of your continuing participation in your employer’s health plan after you retire. You can include this cost of continuing participation in the health plan as a medical expense.If you participate in a health plan where your employer automatically applies the value of unused sick leave to the cost of your continuing participation in the health plan (and you do not have the option to receive cash), do not include the value of the unused sick leave in gross income. You cannot include this cost of continuing participation in that health plan as a medical expense.

Insurance premiums you cannot include You cannot include premiums you pay for:

Life insurance policies, •

Appendix

A - 28A - 28

Policies providing payment for loss of •earnings,

Policies for loss of life, limb, sight, etc., •

Policies that pay you a guaranteed amount •each week for a stated number of weeks if you are hospitalized for sickness or injury, or

The part of your car insurance premiums •that provides medical insurance coverage for all persons injured in or by your car because the part of the premium for you, your spouse, and your dependents is not stated separately from the part of the premium for medical care for others.

Health insurance costs for self-employed persons If you were self-employed and paid health insurance costs, see Health Insurance Costs for Self-Employed Persons, below.

Laboratory fees. You can include in medical expenses the amounts you pay for laboratory fees that are part of medical care.

Lead-based paint removal. You can include in medical expenses the cost of removing lead-based paints from surfaces in your home to prevent a child who has or has had lead poisoning from eating the paint. These surfaces must be in poor repair (peeling or cracking) or within the child’s reach. The cost of repainting the scraped area is not a medical expense.


A - 29A - 29

If, instead of removing the paint, you cover the area with wallboard or paneling, treat these items as capital expenses. See Capital Expenses, above. Do not include the cost of painting the wallboard as a medical expense.

Learning disability. See Special Education, below.

Legal fees. You can include in medical expenses legal fees you paid that are necessary to authorize treatment for mental illness. However, you cannot include in medical expenses fees for the management of a guardianship estate, fees for conducting the affairs of the person being treated, or other fees that are not necessary for medical care.

Lifetime care—advance payments. You can include in medical expenses a part of a life-care fee or “founder’s fee” you pay either monthly or as a lump sum under an agreement with a retirement home. The part of the payment you include is the amount properly allocable to medical care. The agreement must require that you pay a specific fee as a condition for the home’s promise to provide lifetime care that includes medical care. You can use a statement from the retirement home to prove the amount properly allocable to medical care. The statement must be based either on the home’s prior experience or on information from a comparable home.

Dependents with disabilities. You can include in medical expenses advance payments to a private institution for lifetime care, treatment, and training of your physically or mentally impaired child upon

Appendix

A - 30A - 30

your death or when you become unable to provide care. The payments must be a condition for the institution’s future acceptance of your child and must not be refundable.

Payments for future medical care. Generally, you cannot include in medical expenses current payments for medical care (including medical insurance) to be provided substantially beyond the end of the year. This rule does not apply in situations where the future care is purchased in connection with obtaining lifetime care of the type described above.

Lodging. You can include in medical expenses the cost of meals and lodging at a hospital or similar institution if a principal reason for being there is to receive medical care. See Nursing Home, below.

You may be able to include in medical expenses the cost of lodging not provided in a hospital or similar institution. You can include the cost of such lodging while away from home if all of the following requirements are met.

1. The lodging is primarily for and essential to medical care.

2. The medical care is provided by a doctor in a licensed hospital or in a medical care facility related to, or the equivalent of, a licensed hospital.

3. The lodging is not lavish or extravagant under


A - 31A - 31

the circumstances.

4. There is no significant element of personal pleasure, recreation, or vacation in the travel away from home.

The amount you include in medical expenses for lodging cannot be more than $50 for each night for each person. You can include lodging for a person traveling with the person receiving the medical care. For example, if a parent is traveling with a sick child, up to $100 per night can be included as a medical expense for lodging. Meals are not included.

Do not include the cost of lodging while away from home for medical treatment if that treatment is not received from a doctor in a licensed hospital or in a medical care facility related to, or the equivalent of, a licensed hospital or if that lodging is not primarily for or essential to the medical care received.

Long-term care. You can include in medical expenses amounts paid for qualified long-term care services and premiums paid for qualified long-term care insurance contracts.

Qualified long-term care services. Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services (defined below) that are:

1. Required by a chronically ill individual, and

Appendix

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2. Provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Chronically ill individual. An individual is chronically ill if, within the previous 12 months, a licensed health care practitioner has certified that the individual meets either of the following descriptions.

1. He or she is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.

2. He or she requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

Maintenance and personal care services. Maintenance or personal care services is care which has as its primary purpose the providing of a chronically ill individual with needed assistance with his or her disabilities (including protection from threats to health and safety due to severe cognitive impairment).

Qualified long-term care insurance contracts A qualified long-term care insurance contract is an insurance contract that provides only coverage of qualified long-term care services. The contract must:

1. Be guaranteed renewable

2. Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed


A - 33A - 33

3. Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract must be used only to reduce future premiums or increase future benefits

4. Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer, or the contract makes per diem or other periodic payments without regard to expenses.

The amount of qualified long-term care premiums you can include is limited. You can include the following as medical expenses on Schedule A (Form 1040).

Qualified long-term care premiums up to the amounts shown below.

a. Age 40 or under – $250. b. Age 41 to 50 – $470. c. Age 51 to 60 – $940. d. Age 61 to 70 – $2,510. e. Age 71 or over – $3,130.

Unreimbursed expenses for qualified long-term care services.

Note. The limit on premiums is for each person.

Meals. You can include in medical expenses the cost of meals at a hospital or similar institution if a principal reason for being there is to get medical care.You cannot include in medical expenses the cost of meals that are not part of inpatient care.

Appendix

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Medical conferences. You can include in medical expenses amounts paid for admission and transportation to a medical conference if the medical conference concerns the chronic illness of yourself, your spouse, or your dependent. The costs of the medical conference must be primarily for and necessary to the medical care of you, your spouse, or your dependent. The majority of the time spent at the conference must be spent attending sessions on medical information.The cost of meals and lodging while attending the conference is not deductible as a medical expense.

Medical information plan. You can include in medical expenses amounts paid to a plan that keeps medical information in a computer data bank and retrieves and furnishes the information upon request to an attending physician.

Medical services. You can include in medical expenses amounts you pay for legal medical services provided by:

Physicians•

Surgeons•

Specialists•

Other medical practitioners•

Medicines. You can include in medical expenses amounts you pay for prescribed medicines and drugs. A prescribed drug is one that requires a prescription by a doctor for its use by an individual. You can also include amounts you pay for insulin.


A - 35A - 35

Note. This rule applies only to the deduction for medical expenses. It does not limit reimbursements of medical expenses by employer-sponsored health plans that reimburse the cost of both prescription and nonprescription medicines.

Mentally challenged, special homes for. You can include in medical expenses the cost of keeping a mentally challenged person in a special home, not the home of a relative, on the recommendation of a psychiatrist to help the person adjust from life in a mental hospital to community living.

Nursing home. You can include in medical expenses the cost of medical care in a nursing home, home for the aged, or similar institution, for yourself, your spouse, or your dependents. This includes the cost of meals and lodging in the home if a principal reason for being there is to get medical care.

Do not include the cost of meals and lodging if the reason for being in the home is personal. You can, however, include in medical expenses the part of the cost that is for medical or nursing care.

Nursing services. You can include in medical expenses wages and other amounts you pay for nursing services. The services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. This includes services connected with caring for the patient’s condition, such as giving medication or

Appendix

A - 36A - 36

changing dressings, as well as bathing and grooming the patient. These services can be provided in your home or another care facility.

Generally, only the amount spent for nursing services is a medical expense. If the attendant also provides personal and household services, amounts paid to the attendant must be divided between the time spent performing household and personal services and the time spent for nursing services. However, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses. See Maintenance and personal care services under Chronically Ill Individuals, above. Additionally, certain expenses for household services or for the care of a qualifying individual incurred to allow you to work may qualify for the child and dependent care credit. See Publication 503, Child and Dependent Care Expenses.You can also include in medical expenses part of the amount you pay for that attendant’s meals. Divide the food expense among the household members to find the cost of the attendant’s food. Then divide that cost in the same manner as in the preceding paragraph. If you had to pay additional amounts for household upkeep because of the attendant, you can include the extra amounts with your medical expenses. This includes extra rent or utilities you pay because you moved to a larger apartment to provide space for the attendant.

Employment taxes. You can include as a medical expense social security tax, FUTA, Medicare tax,


A - 37A - 37

and state employment taxes you pay for a nurse, attendant, or other person who provides medical care. If the attendant also provides personal and household services, you can only include as a medical expense, the amount of employment taxes paid for medical services as explained above under Nursing Services. For information on employment tax responsibilities of household employers, see Publication 926, Household Employer’s Tax Guide.

Operations. You can include in medical expenses amounts you pay for legal operations that are not for unnecessary cosmetic surgery. See Cosmetic Surgery under What Expenses Are Not Includible, below.

Optometrist. See Eyeglasses, above.

Organ donors. See Transplants, below.

Osteopath. You can include in medical expenses amounts you pay to an osteopath for medical care.

Oxygen. You can include in medical expenses amounts you pay for oxygen and oxygen equipment to relieve breathing problems caused by a medical condition.

Prosthesis. See Artificial Limb, above.

Psychiatric care. You can include in medical expenses amounts you pay for psychiatric care. This includes the cost of supporting a mentally ill dependent at a specially equipped medical center where the dependent receives

Appendix

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medical care. See Psychoanalysis, next, and Transportation, below.

Psychoanalysis. You can include in medical expenses payments for psychoanalysis. However, you cannot include payments for psychoanalysis that is part of required training to be a psychoanalyst.

Psychologist. You can include in medical expenses amounts you pay to a psychologist for medical care.

Special education. You can include in medical expenses fees you pay on a doctor’s recommendation for a child’s tutoring by a teacher who is specially trained and qualified to work with children who have learning disabilities caused by mental or physical impairments, including nervous system disorders.

You can include in medical expenses the cost (tuition, meals, and lodging) of attending a school that furnishes special education to help a child to overcome learning disabilities. A doctor must recommend that the child attend the school. Overcoming the learning disabilities must be a principal reason for attending the school, and any ordinary education received must be incidental to the special education provided. Special education includes:

Teaching Braille to a visually impaired person •

Teaching lip reading to a hearing impaired •person

Giving remedial language training to correct •a condition caused by a birth defect


A - 39A - 39

You cannot include in medical expenses the cost of sending a problem child to a school where the course of study and the disciplinary methods have a beneficial effect on the child’s attitude if the availability of medical care in the school is not a principal reason for sending the student there.

Sterilization. You can include in medical expenses the cost of a legal sterilization (a legally performed operation to make a person unable to have children).

Stop-smoking programs. You can include in medical expenses amounts you pay for a program to stop smoking. However, you cannot include in medical expenses amounts you pay for drugs that do not require a prescription, such as nicotine gum or patches, that are designed to help stop smoking.

Surgery. See Operations, above.

Telephone. You can include in medical expenses the cost of special telephone equipment that lets a hearing-impaired person communicate over a regular telephone. You can also include the cost of repairing the equipment.

Television. You can include in medical expenses the cost of equipment that displays the audio part of television programs as subtitles for hearing-impaired persons. This may be the cost of an adapter that attaches to a regular set. It also may be the part of the cost of a specially equipped television that exceeds the cost of the same model regular television set.

Appendix

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Therapy. You can include in medical expenses amounts you pay for therapy received as medical treatment.

“Patterning” exercises. You can include in medical expenses amounts you pay to an individual for giving “patterning” exercises to a mentally retarded child. These exercises consist mainly of coordinated physical manipulation of the child’s arms and legs to imitate crawling and other normal movements.

Transplants. You can include any expenses you pay for medical care you receive because you are a donor or a possible donor of a kidney or other organ. This includes transportation.You can include any expenses you pay for the medical care of a donor in connection with the donating of an organ to you. This includes transportation.

Transportation. You can include in medical expenses amounts paid for transportation primarily for, and essential to, medical care.

You can include:

Bus, taxi, train, or plane fares or ambulance •service

Transportation expenses of a parent who •must go with a child who needs medical care

Transportation expenses of a nurse or other •person who can give injections, medications,


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or other treatment required by a patient who is traveling to get medical care and is unable to travel alone

Transportation expenses for regular visits to •see a mentally ill dependent, if these visits are recommended as a part of treatment

Car expenses. You can include out-of-pocket expenses, such as the cost of gas and oil, when you use a car for medical reasons. You cannot include depreciation, insurance, general repair, or maintenance expenses.

If you do not want to use your actual expenses, for 2008 you can use a standard rate of 12 cents a mile for use of a car for medical reasons.

You can also include parking fees and tolls. You can add these fees and tolls to your medical expenses whether you use actual expenses or use the standard mileage rate.

Example. Bill Jones drove 2,800 miles for medical reasons during the year. He spent $200 for gas, $5 for oil, and $50 for tolls and parking. He wants to figure the amount he can include in medical expenses both ways to see which gives him the greater deduction.He figures the actual expenses first. He adds the $200 for gas, the $5 for oil, and the $50 for tolls and parking for a total of $255.

Appendix

A - 42A - 42

He then figures the standard mileage amount. He multiplies the 2,800 miles by 12 cents a mile for a total of $336. He then adds the $50 tolls and parking for a total of $386.Bill includes the $386 of car expenses with his other medical expenses for the year because the $386 is more than the $255 he figured using actual expenses.

Transportation expenses you cannot include. You cannot include in medical expenses the cost of transportation in the following situations.

Going to and from work, even if your •condition requires an unusual means of transportation

Travel for purely personal reasons to another •city for an operation or other medical care

Travel that is merely for the general •improvement of one’s health

Trips. You can include in medical expenses amounts you pay for transportation to another city if the trip is primarily for, and essential to, receiving medical services. You may be able to include up to $50 per night for lodging. See Lodging, above.You cannot include in medical expenses a trip or vacation taken merely for a change in environment, improvement of morale, or general improvement of health, even if the trip is made on the advice of a doctor. However, see Medical Conferences, above.

Tuition. Under special circumstances, you can include


A - 43A - 43

charges for tuition in medical expenses. see Special Education, above.

You can include charges for a health plan included in a lump sum tuition fee if the charges are separately stated or can easily be obtained from the school.

Vasectomy. You can include in medical expenses the amount you pay for a vasectomy.

Vision correction surgery. See Eye Surgery, above.

Weight-loss program. You can include in medical expenses amounts you pay to lose weight if it is a treatment for a specific disease diagnosed by a physician (such as obesity, hypertension, or heart disease). This includes fees you pay for membership in a weight reduction group and attendance at periodic meetings. You cannot include membership dues in a gym, health club, or spa as medical expenses, but you can include separate fees charged there for weight loss activities.

You cannot include the cost of diet food or beverages in medical expenses because the diet food and beverages substitute for what is normally consumed to satisfy nutritional needs. You can include the cost of special food in medical expenses only if:

1. The food does not satisfy normal nutritional needs

2. The food alleviates or treats an illness

3. The need for the food is substantiated by a physician

Appendix

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4. The amount you can include in medical expenses is limited to the amount by which the cost of the special food exceeds the cost of a normal diet. See also Weight-Loss Program under What Expenses Are Not Includible, below

Wheelchair. You can include in medical expenses amounts you pay for an autoette or a wheelchair used mainly for the relief of sickness or disability, and not just to provide transportation to and from work. The cost of operating and keeping up the autoette or wheelchair is also a medical expense.

Wig. You can include in medical expenses the cost of a wig purchased upon the advice of a physician for the mental health of a patient who has lost all of his or her hair from disease.

X-ray. You can include in medical expenses amounts you pay for X-rays for medical reasons.

What Expenses Are Not Included?

Following is a list of some items that you cannot include in figuring your medical expense deduction. The items are listed in alphabetical order.

Baby sitting, childcare, and nursing services for a normal, healthy baby. You cannot include in medical expenses amounts you pay for the care of children, even if the expenses enable you, your spouse, or your dependent to get medical or dental treatment. Also, any expense allowed as a childcare credit cannot be treated

How You Cannot Spend Your Tax-Free HSA Dollars

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as an expense paid for medical care.

Controlled substances. You cannot include in medical expenses amounts you pay for controlled substances (such as marijuana, laetrile, etc.), in violation of federal law.

Cosmetic surgery. Generally, you cannot include in medical expenses the amount you pay for unnecessary cosmetic surgery. This includes any procedure that is directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease. You generally cannot include in medical expenses the amount you pay for procedures such as face lifts, hair transplants, hair removal (electrolysis), teeth whitening, and liposuction.

You can include in medical expenses the amount you pay for cosmetic surgery if it is necessary to improve a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease.

Example. An individual undergoes surgery that removes a breast as part of treatment for cancer. She pays a surgeon to reconstruct the breast. The surgery to reconstruct the breast corrects a deformity directly related to the disease. The cost of the surgery can be included in her medical expenses.

Dancing lessons. You cannot include the cost of

Appendix

A - 46A - 46

dancing lessons, swimming lessons, etc., even if they are recommended by a doctor, if they are only for the improvement of general health.

Diaper service. You cannot include in medical expenses the amount you pay for diapers or diaper services, unless they are needed to relieve the effects of a particular disease.

Electrolysis or hair removal. See Cosmetic Surgery, above.

Funeral expenses. You cannot include in medical expenses amounts you pay for funerals. However, funeral expenses may be deductible on the decedent’s federal estate tax return.

Future medical care. Generally, you cannot include in medical expenses current payments for medical care (including medical insurance) to be provided substantially beyond the end of the year. This rule does not apply in situations where the future care is purchased in connection with obtaining lifetime care of the type described under Long-Term Care, above.

Hair transplant. See Cosmetic Surgery, above.

Health club dues. You cannot include in medical expenses health club dues, or amounts paid to improve one’s general health or to relieve physical or mental discomfort not related to a particular medical condition.


A - 47A - 47

You cannot include in medical expenses the cost of membership in any club organized for business, pleasure, recreation, or other social purpose.

Health coverage tax credit. You cannot include in medical expenses amounts you pay for health insurance that you use in figuring your health coverage tax credit.

Household help. You cannot include in medical expenses the cost of household help, even if such help is recommended by a doctor. This is a personal expense that is not deductible. However, you may be able to include certain expenses paid to a person providing nursing-type services. For more information, see Nursing Services, above. Also, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses. For more information, see Qualified Long-Term Care Services, above.

Illegal operations and treatments. You cannot include in medical expenses amounts you pay for illegal operations, treatments, or controlled substances whether rendered or prescribed by licensed or unlicensed practitioners.

Insurance premiums. See Insurance Premiums under What Medical Expenses Are Included, above.

Maternity clothes. You cannot include in medical expenses amounts you pay for maternity clothes.

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Medical Savings Account (MSA). You cannot include in medical expenses amounts you contribute to an Archer MSA. You cannot include medical expenses you pay for with a tax-free distribution from your Archer MSA. You also cannot use other funds equal to the amount of the distribution and include the expenses. For more information on Archer MSAs, see Publication 969, Medical Savings Accounts (MSAs).

Nutritional supplements. You cannot include in medical expenses the cost of nutritional supplements, vitamins, herbal supplements, “natural medicines,” etc. unless they are recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician. Otherwise, these items are taken to maintain your ordinary good health, and are not for medical care.

Personal use items. You cannot include in medical expenses the cost of an item ordinarily used for personal, living, or family purposes unless it is used primarily to prevent or alleviate a physical or mental defect or illness. For example, the cost of a toothbrush and toothpaste is a nondeductible personal expense.

Where an item purchased in a special form primarily to alleviate a physical defect is one that in normal form is ordinarily used for personal, living, or family purposes, the excess of the cost of the special form over the cost of the normal form is a medical expense (see Braille Books and Magazines under What Medical Expenses Are Includible, above).


A - 49A - 49

Swimming lessons. See Dancing Lessons, above.

Teeth whitening. You cannot include in medical expenses amounts paid to whiten teeth that are discolored as a result of age. See Cosmetic Surgery, above.

Veterinary fees. Except for the care of guide dogs for the seeing-impaired or hearing-impaired, or for other animals specially trained to assist persons with physical disabilities, you cannot include veterinary fees in your medical expenses.

Weight-loss program.You cannot include in medical expenses the cost of a weight-loss program if the purpose of the weight loss is the improvement of appearance, general health, or sense of well-being. You cannot include amounts you pay to lose weight unless the weight loss is a treatment for a specific disease diagnosed by a physician (such as obesity, hypertension, or heart disease). This includes fees you pay for membership in a weight reduction group and attendance at periodic meetings. Also, you cannot include membership dues in a gym, health club, or spa.

You cannot include the cost of diet food or beverages in medical expenses because the diet food and beverages substitute for what is normally consumed to satisfy nutritional needs. You cannot include the cost of special food in medical expenses unless all three of the following requirements are met.

1. The food does not satisfy normal nutritional needs.

Appendix

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2. The food alleviates or treats an illness.

3. The need for the food is substantiated by a physician.

The amount you can include in medical expenses is limited to the amount by which the cost of the special food exceeds the cost of a normal diet.

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Index

A - 51A - 51A - 51

Index of Terms Used in This Guidebook

Above-the-line deduction 2-18, 2-19, 7-10, 8-1, 8-2, 8-16, A-1

Adjusted gross income 2-18, 5-4, 7-10, 8-17 A-1, A-6

Administrator xii, 1-7, 3-3, 3-5, 3-7, 5-6, 5-11, 5-16, 6-9, A-9

Authorization(s) 4-11, 4-12, 7-2, A-1

Bankruptcy 1-12, 1-20, 7-12, 8-10, 8-12

Beneficiary 1-9, 2-7, 2-11, 2-13, 3-3, 3-7, 7-6, 8-5 to 8-7

Cafeteria Plan 2-2, 2-18, 2-20, 2-21, 2-23, 2-24, 4-18, 4-19, 5-4, 8-11, 8-16, 8-17, A-1, A-4

Catch-up contributions 1-15, 2-4, 2-12, 2-13, 4-7

Certificate of coverage 3-4, 3-5, A-1

Checkbook 3-2, 3-3, 3-4, 4-15, 5-6, 5-7, 5-11

Children / Child 1-6, 1-9, 2-13, 2-28, 2-29, 4-21, 4-25, 6-3, 6-5, 6-11, 7-5, 7-6, 7-7, 7-8, 7-9, 7-10, A-22, A-23, A-28, A-29, A-30, A-31, A-36, A-38, A-39, A-40, A-44

Appendix

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COBRA viii, 2-26, 3-5, 4-9, 4-28, 7-7, 7-9, 7-10, 7-11, 7-12, 7-13, 7-15, A-1, A-2, A-5

Coinsurance 1-4, 1-5, 1-8, 1-9, 2-21, 2-25, 4-6, 4-12, 4-14, 4-17, 4-19, 5-3, 6-1, 6-3, 6-5, 6-7, 6-12, 6-13, A-2, A-4, A-8

Comparability rules 2-20, 3-7, 8-11, 8-12

Comparable contributions (see also Comparability rules) 2-14, 2-20, 2-23, 2-24, 8-11, A-8

Consumer Price Index (CPI) x, 1-2

Contributions, defined (see also Catch-up contributions, Comparable contributions, Excess contributions, Matching contributions, and Rollover contributions)

vii, x, 1-11 to 1-16, 1-18, 1-22, 2-1 to 2-21, 2-23, 2-24, 2-27, 3-2, 3-6, 3-7, 3-8, 4-7, 4-18, 5-19, 5-1, 5-4, 5-5, 5-14, 6-3 to

6-9, 7-6, 7-8, 7-10, 7-11, 7-13, 7-14, 7-16, 8-1 to 8-5, 8-9, 8-11, 8-14, 8-16, 8-17, A-8, A-12, A-26

Co-payments xii, 1-5, 1-8, 1-16, 2-15, 2-21, 2-25, 4-6, 4-7, 4-12, 4-14, 4-17, 4-19, 6-1, 6-5, 6-6 to 6-13, A-2,

A-4, A-5, A-8

Custodian vii, 1-18, 1-19, 1-21, 2-8 to 2-10, 2-27, 4-9, 4-18, 5-5, 5-9, 5-16, 8-4 to 8-6, A-2

Death 2-16, 2-17, 3-3, 7-4, 7-15, 8-8, A-3, A-30, A-33

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Index

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Debit card 3-2 to 3-4, 4-15, 5-6, 5-7, 5-11

Deductibles, defined (see also Embedded deductibles and Umbrella deductibles)

vii, x, xii, 1-1 to 1-8, 1-10 to 1-14, 1-16, 2-12 to 2-14, 2-20 to 2-25, 3-1, 3-7, 4-1 4-6, 4-10 to 4-13, 4-15, 4-16, 4-19, 5-2,

5-3, 5-5, 5-6, 5-10, 5-16, 6-1, 6-3 to 6-5, 6-7 to 6-10, 6-12, 6-13, 7-1, 7-8, 8-3, 8-11, 8-13, A-2, A-4, A-5, A-8, A-9

Dental coverage -see permitted coverage

Dependent 1-11, 2-2, 2-14, 2-28 to 2-30, 4-7, 5-4, 7-6 to 7-9, 8-3, 8-12, 8-17, A-3, A-5, A-9, A-11, A-15, A-16, A-22,

A-23, A-27 to A-29, A-34 A-37, A-41, A-44

Disability xiii, 1-10, 2-1, 2-5, 4-2, 7-4, 7-14, 7-15, 8-12, A-3, A-20, A-29, A-44

Discount cards 1-10

Distributions 1-18, 1-21, 2-10, 2-14, 2-15, 2-22, 2-25, 4-9, 4-16, 5-4, 5-5, 5-9, 5-10, 7-9, 8-4, 8-5, 8-7, 8-14, A-48

Divorce 2-29, 6-12, 7-6, 7-7

Eligibility x, 2-1 to 2-6, 2-14, 2-16, 2-17, 2-27, 4-1, 4-7, 6-2, 7-7, 7-10, 7-12, 8-2, 8-3, 8-12, 8-14, A-2, A-8

Embedded deductibles 1-2, 6-3

Emergency 4-23, 7-4, 7-5, A-3, A-10

Appendix

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Employee assistance programs (EAPs) 2-23

Employee Retirement Income Security Act (ERISA) 2-27, 8-8 to 8-12, A-3

Excess Contributions 1-13 to 1-15, 2-6, 2-10, 8-4, 8-7, A-3

Explanation of benefits (EOBs) 5-3, 5-6, 5-13, 5-15

First-Dollar coverage 1-8 to 1-10, 4-1, 4-4, 4-5, 4-7, 8-3, A-4, A-8

Flexible spending accounts (FSAs) ix, 1-14 to 1-18, 2- 9 to 2-11, 2-21, 2-22, 2-24, 2-27, 2-28, 3-7, 4-6, 4-19,

5-6, 6-2, 8-3, A-1, A-4

Forms 1-19, 2-19, 3-3, 4-18, 5-4, 5-5, 5-13, 8-5, 8-7, 8-9, 8-15, A-13, A-25, A-26, A-33

Fund / funding (see also contributions) 1-14 to 1-16, 1-22, 2-2, 2-3, 2-9, 2-11, 3-7, 4-17, 5-1, 6-3, 8-1, 8-13, A-26

Grace periods 2-22, A-4

Health plan riders 1-10

Health reimbursement arrangements (HRAs) ix, 1-14-1-17, 2-9 to 2-11, 2-21, 2-22, 2-27, 2-28, 3-7, 4-6,

4-19, 6-2, 8-3, A-5, A-26

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Index

A - 55

High-risk pools 1-11

Health care providers 1-6, 1-7, 1-19, 3-3, 4-10, 4-20, 5-11, A-11

HSA providers 1-18 to 1-21, 3-2, 3-8, 4-15, 4-17, 4-20, 4-22, 5-4, 5-7

Individual retirement accounts (IRAs) viii, ix, 1-14 to 1-16, 1-18, 2-8, 2-11, 6-2, 8-3, 8-6, A-6

Insurance i, vii, xi to xiii, 1-1 to 1-5, 1-7 to 1-11, 1-16 to 1-19, 2-5, 2-16, 2-18, 2-23, 2-30, 3-1 to 3-6, 4-1 to 4-3, 4-5, 4-8 to 4-10, 4-13, 4-14, 4-16, 4-26, 4-28, 4-29, 5-9, 5-10, 6-3 to 6-5, 6-8, 6-10, 6-11, 6-13, 7-5, 7-13 to 7-15, 8-5, 8-6, 8-9, 8-12 to 8-14, A-1, A-2, A-4 to A-8, A-11, A-23 to A-28, A-30

to A-32, A-41, A-46, A-47

Internal Revenue Service (IRS) ii, x, 1-1 to 1-3, 1-9, 1-12 1-14, 1-18, 2-13 to 2-15, 2-19, 2-20, 3-3, 3-6, 3-7, 5-2,

5-4, 5-5, 5-7, 5-9, 5-15, 6-3, 8-5 to 8-8, 8-11, 8-13, 8-15, A-13, A-14

Investments i, vii, ix, 1-16 to 1-21, 3-2, 3-6, 5-4, 5-14, 6-2, 8-4 and 8-7, 8-9, 8-10, 8-17, A-2, A-12

Long-term care viii, 1-10, 1-16, 2-16, 4-2, 4-9, 4-27, 4-28, 5-1, 7-13, A-5, A-24, A-26, A-31 to A-33, A-36, A-47

Matching contributions 2-20, 2-23, 8-11, A-7

Appendix

A - 56A - 56

Medical Expenses (see also distributions) 1-2, 1-4, 1-11, 1-12, 1-16, 2-1, 2-13 to 2-18, 2-25, 2-29, 2-30, 4-1, 4-8,

4-26, 4-27, 5-2, 5-4, 5-16, 6-11, 6-13, 7-9, 7-12, 7-13, 7-15, 8-3, 8-4, 8-6 to 8-8, A-8, A-11, A-14 to A-50

Qualified Expenses, listing 4-26, A14 to A44

Non qualified Expenses, listing 4-27, A-44 to A-50

Medicare viii, x, 1-15, 1-16, 2-2, 2-4, 2-5, 2-13, 2-16, 4-7, 4-8, 4-28, 7-13 to 7-16, 8-1, 8-2, A-7, A-10, A-26, A-33, A-36

Medigap 2-16, 4-8, 7-14, A-7

Out-of-pocket 1-1, 1-4 to 1-8, 3-1, 4-8, 4-12 to 4-14, 5-2, 5-3, 5-5, 6-1 to 6-7, 7-2 to 7-4, 7-14, A-7, A-8, A-41

Permitted coverage 1-8 to 1-10, 2-1, 2-8, 2-15, 2-21, 2-22, 4-1 to 4-3, 4-6, 4-7, 4-24, 6-3, 7-10, A-3, A-8

Post-deductible 1-4, 2-21, 3-7, 4-19

Pre-existing condition 3-1, 3-4, 7-5, A-1, A-5, A-9

Premiums viii, xii, xiii, 1-5, 1-11, 1-22, 2-13, 2-16, 2-26, 3-6, 3-7, 4-8, 4-9, 4-26, 4-28, 4-29, 5-1, 6-1, 6-4, 6-8, 7-9,

7-11 to 7-15, A-5, A-8, A-11, A-23 to A-28, A-31, A-33, A-47

Prescription drug x, 1-8 to 1-11, 1-16, 4-3, 4-7, 4-21, 4-26, 4-27, 6-5 to 6-9, 6-11, 6-12, 8-1, A-2, A-5, A-24, A-34, A-39

Preventive care 1-8 to 1-10, 2-5, 3-6, 4-3 to 4-5, 4-24, 4-25, 8-3, 8-13

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Index

A - 57

Providers - see HSA providers and Health care providers

Records / record keeping 1-18, 1-19, 3-7, 4-19, 4-24, 5-1, 5-7, 5-8, 5-10 to 5-13, 5-15, 5-16, 8-7, 8-12, A-9

Referral 2-23, 4-11, 4-12, 7-3, A-3, A-4, A-11

Reimbursement (see also distributions) 1-8, 1-16, 2-4, 2-22, 4-11, 4-16, 4-18, 4-19, 5-1, 5-6, 5-16, A-5, A-6, A-35

Retire, retiree, retirement viii, ix, xi, 2-4, 2-5, 2-16, 2-20, 2-22, 3-4, 4-9, 4-29, 5-11, 6-8, 7-7, 7-13, 7-14,

8-12, A-2, A-6, A-12, A-27, A-29

Rollover / rollover contributions ix, 1-14 to 1-16, 1-21, 2-9 to 2-11, 7-11, 8-3, A-11

Safe Harbor 4-3, 8-9, A-11

Screening services (see also Preventive care) 1-9, 1-10, 3-6, 4-4, 4-24, 4-25, A-12

Self-employed ix, x, 2-2, 2-12, 2-19, 8-2, 8-16, A-28

Self-Insured plans 4-5, 8-13, A-12

Spouse 1-11, 1-15, 2-8, 2-11 to 2-15, 2-17, 2-30, 3-3, 5-4, 7-5 to 7-10, 7-16, 8-8, 8-12, A-6, A-11, A-15, A-16,

A-23A-27, A-28, A-34, A-35, A-44

Appendix

A - 58A - 58

Statements 1-19, 3-2, 3-8, 5-4 to 5-6, 5-9 to 5-11, 5-14, 5-16, 8-7, A-25, A-29

Students 2-3, 2-29, 4-6, 4-7, 7-9, A-39

Surgery 1-7, 4-1, 4-21, 4-26, 4-27, 5-3, 7-1 to 7-4, A-15, A-21 to A-23, A-37, A-39, A-43, A-45, A-46, A-49

Tax deduction / Tax deductible xii, 1-11, 1-12, 1-17, 2-1, 2-3, 2-17 to 2-20, 2-27, 2-29, 4-8, 5-4 to 5-6, 6-2, 7-10, 8-1 to 8-3, 8-5, 8-9, 8-12, 8-16, 8-17, A-1, A-5, A-6, A-11, A-14, A-20,

A-22, A-25, A-26, A-34, A-35, A-41, A-44, A-46 to A-48

Transition rules 1-8, 1-14, 1-18 to 1-20, A-11

Trustee vii, 1-18, 1-21, 2-8 to 2-11, 2-15, 2-27, 3-3, 3-6, 4-9, 4-18, 5-5, 5-9, 5-16, 7-11, 8-4 to 8-7, A-12

Umbrella deductibles 1-2, 6-1, A-12

Unemployment xiii, 4-28, 7-12, 7-13, 8-13

Usual and customary charges 4-13, 4-14, A-12

Vision coverage - see permitted coverage

Aboutthe

Authors About

theAuthors

About the Authors

A - 61

Stephen Neeleman, MD is a board certified physician and former assistant professor of surgery at the University of Arizona. Dr. Neeleman is a cofounder of HealthEquity, Inc. (www.healthequity.com), an HSA and personal health care financial services company dedicated to helping people manage the financial side of health care. HealthEquity provides services for thousands of employers and consumers nationwide. Dr. Neeleman currently chairs the Council for Affordable Health Insurance HSA Working Group and serves on the National Health Care Reform Coalition. Dr. Neeleman completed his surgical training at the University of Arizona, received a Medical Doctor degree from the University of Utah School of Medicine and a Bachelor of Arts degree from Utah State University. Dr. Neeleman is married to Christine Lamb Neeleman and they have five children.

About the Authors

A - 62

Sophie M. Korczyk, Ph.D. is an economist and consultant with a national consulting practice specializing in research and analysis on employee compensation and benefits, with special attention to pensions, health care, and government budget policies in the U.S. and overseas. Some of her clients include AARP, the World Bank, the International Monetary Fund, and a number of not-for-profit associations dealing with employee benefits and with insurance issues. She has published extensively and is a frequent speaker on compensation, benefits, and insurance issues, as well as on Social Security reform. She has testified on these issues before the U.S. Congress and several state legislatures and has served as a consultant and expert witness in court cases dealing with employee benefits and compensation. She has discussed managed health care issues on The Montel Show, PBS, and a number of radio stations. She is an elected member of the National Academy on Social Insurance, a nonprofit, nonpartisan organization made up of the nation’s leading experts on social insurance; a Fellow of the Employee Benefit Research Institute; and a former officer of the Washington, D.C.-based National Economists Club.

About the Authors

A - 63

Hazel A. Witte, J.D. is an attorney and consultant specializing in health science, pension and benefit issues in the U.S. and overseas. Her clients have included The US Department of Labor, The US Department of Health and Human Services, and the US Small Business Administration, the International Monetary Fund, health care companies, universities and not-for-profit organizations. Ms. Witte has actively contributed to health-related judicial education conducted by the Einstein Institute for Science, Health and the Courts for federal and state courts and international judicial forums. She has published extensively and is a frequent speaker on health and benefit issues. In addition to client reports, she has published articles in a number of professional publications, including Benefits Quarterly, Quality Review Bulletin, and Journal of Labor Economics. She is a member of the District of Columbia Bar; a fellow of the Employee Benefit Research Institute; a member of the board of directors of the Einstein Institute for Science, Health and the Courts; and the Vice President of ASTAboard, a judicial science and education standards and accreditation agency.

Sophie Korczyk and Hazel Witte have extensive experience as consumer educators and authors, particularly on health issues. They are coauthors of

About the Authors

A - 64

The Complete Idiot’s Guide To Managed Health Care (New York: Alpha Books, 1998). Recommended by The Washington Post as “… well worth a day’s read-through…” for its consumer-friendly information, the book is included in many consumer health education lists. Their publication HIV/AIDS and Health Insurance was featured in the Centers for Disease Control “Business Responds to AIDS” Campaign. Their 2000 Executive Compensation Deskbook (San Diego, CA: Harcourt Brace Professional Publishing, 2000) is a comprehensive source of information on data and analysis dealing with executive compensation. In Managed Care Plans in Rural Areas (Washington, D.C.: National Rural Electric Cooperative Association, 1991), they compiled a series of case studies detailing the challenges and opportunities health plans face in rural communities.

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