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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

The

Complete HSA

Guidebook

How to Make

Health Savings Accounts Work for You

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“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

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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

Copyright 2008 HealthEquity™.

All rights reserved. www.healthequity.com

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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

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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

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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

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Table of Contents

Foreword ...i

Contents ...iii

Intoduction Health Care worries ...vii

What is an HSA? ...vii

Is the HSA a Brand-New Concept? ... ix

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

Why Now? ... xi

How Does the HSA Improve the Situation? ... xii

What This Book Does ...xiii

Chapter 1: Health Savings Accounts—A New Approach The High Deductible Health Plan (HDHP) ...1-1 The 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 ...1-18 Choosing an HSA Provider ...1-18 The Health Savings Account (HSA) ... 1-11 Keep in Mind ...1-22 Up Next ...1-22

Chapter 2: Who Would Want an HSA?

Eligibility—Who Can Establish and Contribute to an

HSA ...2-1 Eligibility for HSA Distributions ... 2-14 Eligibility for Tax Deductions ... 2-17

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

Chapter 3: How to Set Up an HSA

HSA—Remember the Definition ...3-1 In a Nutshell.... ...3-3 How to Find out about HSAs ...3-4

Getting a Certificate of Coverage ...3-4 The Employer and the HSA ...3-5 Keep in Mind ...3-8 Up Next ...3-8

Chapter 4: How Does Your HSA/HDHP Work?

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

Chapter 5: A Consumer Guide to Paperwork and Record Keeping

Why Record Keeping Is Especially Important ...5-1 Paperwork Your HDHP and HSA Will Send You ...5-3 Paperwork to Keep the IRS Happy ...5-4 Submitting Expenses to Your Plans ...5-5 How Long to Keep HSA Receipts, Statements and

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

Chapter 6: Making an HSA Work for You

Your Cost-Benefit Analysis ...6-1 Determining the Right Amount of Money to

Contribute to Your HSA ...6-2 Case Studies ...6-4 Keep in Mind ... 6-13 Up Next... 6-14

Chapter 7: Your HSA/HDHP and Everyday Health Care Challenges

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

Chapter 8: The HSA Law

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

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Bankruptcy ...8-12 State Law ...8-12

Keep in Mind ... 8-14 Up Next ... 8-15

Appendix

Glossary of Health Care Coverage Terms ... A-1

IRS Forms ...A-13 Updates ...A-13 Publication 502 Excerpt for tax year 2003 ...A-14 How You Can Spend Your Tax-Free HSA Dollars ...A-14 How You Cannot Spend Your Tax-Free HSA Dollars ....A-44

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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.

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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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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

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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 year

Maximum HSA contribution is as listed, or the prticipant’s HDHP annual deductible whichever is less

For 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.

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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.

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

What This Book Does

This 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.

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1

Chapter

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

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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

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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 Deductible

Individual 2008 $1,100 (no change) Family 2008 $2,200 (no change) Embedded Deductibles

Some 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 cocatch-uple may make catch-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

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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.

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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

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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 Limit Individual 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

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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-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.

A t A ge 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

References

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