HSAs ~ In A Nutshell
You save money on personal taxes since annual contributions to the Savings Account component of an HSA are tax-deductible
You save money on current and future day-to-day medical costs by using tax-free dollars to meet those expenses, and an insurance company to pay the catastrophic bills
You also save money through lower rates on your health insurance since an HSA allows you to purchase the health plan component of the plan using a lower cost, high deductible, while protecting your higher deductible exposure through the tax-deductible Savings Account component of the HSA
Your unused, Savings Account funds, grow tax-deferred – what you don’t spend you keep year after year (a lot like an Individual Retirement Account, except that you use it to pay for medical expenses).
You must be or get covered by a qualified High Deductible Health Plan (HDHP) – the Minimum & Maximum Deductibles can be found here (see charts): All About HSAs
You must not be covered by other health insurance (exceptions: vision, dental, long term care, disability, life and accident insurance are okay)
You must not be enrolled in Medicare
You must not be claimed as a dependent on another’s tax return
HSA Component 1: Health Insurance (High Deductible Health Insurance)
HSA Component 2: Savings Accounts (Equal to 100% of the Deductible)
How GROUP HSAs Work for Employers:
Employers current health insurance cost is divided into two piles of money. One is used to buy a qualified high-deductible health plan (“HDHP), the other is used to create a cash account for the employee to spend on routine day-to-day medical care expenses.
The money in the cash account is used for expenses that are below the deductible. The cash account is commonly called a Health Savings Account (HSA).
Satisfied Employees – HSAs create great employee satisfaction. Long-term savings for the employer are the real benefit. Employees become smart shoppers for medical care when they realize the money in the cash account at year’s end is theirs to keep (no so with flexible spending accounts or FSAs). Costs controlled because of cost-conscious employees. Employees feel good about the insurance coverage because you have returned to the day when the employee can pick the doctor. It’s the employee’s doctor, not the insurance company’s doctor.
How Health Savings Accounts Work For Employees (2 Components):
I. HEALTH SAVINGS ACCOUNT – (Cash Savings Account)
The Employer provides a Health Savings Account (HSA) to be used for routine health care. The cash account covers normal medical care plus medical services that traditional group health care plans don’t cover:
Dental Vision Chiropractic Psychological Acupuncture
HSAs provide first-dollar benefits, and the Employee keeps any unused money left in HSA at year’s end.
II. MAJOR MEDICAL PLAN – (High Deductible Health Plan)
Employer purchases Major Medical – High Deductible Health Plan (premiums for such plans are typically far lower than traditional low deductible or rich benefits low co-pay HMO plans).
The HSA Savings Account funds are used for expenses that are below the deductible.
When the HSA Savings Account funds are used up, and the deductible is met, the catastrophic HSA Major Medical Health Plan kicks in.
Major Medical typically provides a lifetime maximum of $1 million plus per covered person.
The only “individuals” who can take an above-the-line tax-deduction for both the HSA-HDHP premiums and Savings Account deposits they make are Sole-Proprietors, and 2% or greater Owners in an S-Corporation or Partnership.
Other persons, and especially Owners/Officer employees of traditional C-Corporations are not permitted, under current tax law, a personal tax-deduction for such HDHP premium payments.
Employee contributions can be made to HSAs on either an after-tax or pre-tax basis. If made on an after-tax basis they should be counted as an above-the-line deduction on their tax return, effectively making their contributions tax-free. If they want to make the contribution pre-tax it can be done through a Cafeteria Section 125 Plan. If your employer offers a ‘salary reduction’ plan (also known as a ‘Section 125 Plan’ or ‘Cafeteria Section 125 Plan’), you (the employee) can make contributions to your HSA-HDHP on a pre-tax basis (i.e., before income taxes and FICA taxes). If you can do so, you cannot also take the ‘above-the-line’ deduction on your personal income taxes noted above. Contributions (both from employer and/or employee) must meet the ‘non-discrimination’ rules of such plans that require the employer to ensure that contributions do not favor higher compensated employees.
When employers pay all or a percentage of either the HDHP premiums or the Savings Account deposits of their employees, such “contributions” are fully deductible to the entity, and not considered income to the employee, except in the case of traditional C-Corporation Owner/Officer employees as noted above. Therefore, the best approach for such Owners/Officer employees is to install a Cafeteria Section 125 Plan to at least move any employer contributions on their personal coverage to their HDHP from an after-tax to a pre-tax basis (resulting in greater take home pay for the employee and reduced FICA taxes and Workers Compensation Rates for the employer).
Direct deposits into one’s own personal Savings Account of an HSA by the covered person are fully tax-deductible (can be written off against AGI, or Adjusted Gross Income, on line 33 of one’s personal 1040 federal tax form as an above-the-line deduction, or deductions that allow one to reduce taxable income by the amount they contribute to their HSA), whether an individual or employee of any form of business entity. One does not have to “itemize deductions” to benefit, and contributions can also be made to your HSA-Savings Account by others (e.g., relatives; employers; etc.); however, you alone receive the benefit of the tax-deduction.
Can I claim both the ‘above-the-line’ deduction for an HSA and the itemized deduction for medical expenses?
You may be able to claim the medical expense deduction even if you contribute to an HSA; however, you cannot include any contribution to the HSA or any distribution from the HSA, including distributions taken for non-medical expenses, in the calculation for claiming the itemized deduction for medical expenses.
Can I take a tax-deduction for my HDHP premium?
Not at this time unless, as noted above, you are a Sole-Proprietor or a 2% or greater Owner in an S-Corporation or a Partnership. President Bush has proposed also allowing individuals, not covered by an employer plan, to deduct their HDHP premiums; however, this proposal will not be effective until enacted by Congress.
[Note: contributions made by a business into an employees’ HSA Savings Account, while Federally tax-deductible to the corporation, and not considered income to the HSA Savings Account owner, are nonetheless taxable by the State of CA to the employee].
Health Savings Accounts put you back in control of your health care
…and you reap the considerable rewards!
NO rationing of care and NO HMO “gatekeeper” doctor(s)!
With HMO’s closing in, we are all on the verge of losing our freedom of choice for medical care. Health Savings Accounts (HSAs) give control back to you – the way it should be. With the right HSA you decide which doctor to visit and you are free to seek the care you need, and you have the money to pay for it.
HSAs empower you to make decisions that reflect your own best interests. Personal decisions – like whether to get a second opinion – are best made by individuals, not by bureaucrats. HSAs involve you in your own health care delivery, and in turn provide long-term satisfaction for your family.
HEALTH SAVINGS ACCOUNT
MORE COVERAGE !
Please include a copy of your current plans benefits & rates and any information regarding health risks within your group (i.e. pre-existing health conditions or ongoing medical problems).
IRS Clarifies HSA Grace Periods and Cafeteria FSA Grace Period Connections – 11/22/05
The IRS provided welcome relief and clarification this week related to the intersection between Health Savings Accounts (HSAs) and Health Flexible Spending Arrangement (Health FSA) grace periods. This is good and timely news for employers taking a first-time dip in the pool of Consumer-Driven Health Care (CDHC) next year.
IRS Notice 2005-86, released on Nov. 22, 2005 actually offers guidance on two important issues:
Options available to employers who want to move from a Health FSA with a grace period to an HSA.
Clarification on several questions relating to grace periods.
HSA-Health FSA Interaction
When IRS Notice 2005-42 modified the “use-it-or-lose-it” rule, it provided Health FSA plans the ability to carry over unused account balances for a grace period of up to two months and 15 days. This created a problem for employers who wanted to offer an HSA and a Health FSA grace period at the same time.
The problem is that a general-purpose Health FSA constitutes impermissible coverage that prohibits an individual from participating in an HSA. In Tuesday’s Notice, the IRS identified three arrangements (one available for a transitional time only) in which an individual can participate in both an HSA and a Health FSA grace period:
The employer may amend its Health FSA to make it a limited-purpose FSA.
The employer may amend its Health FSA to make it a post-deductible FSA.
For plan years ending on June 4, 2006 or earlier, employers may have a general-deductible FSA and an HSA if:
The individual is covered under a High Deductible Health Plan (HDHP) and does not have any other impermissible health coverage; and
The individual has either a zero-balance on his/her Health FSA account or the employer amends the Health FSA to make the grace period unavailable for individuals who elect HDHP coverage.
If these rules are not applied, an individual who has coverage in a general-purpose Health FSA that offers a grace period will not be eligible to participate in an HSA until the first day of the month following the date that the grace period ends (e.g., for calendar-year plans extending the maximum 2½-month grace period: April 1).
Grace Period Clarifications
The IRS also confirmed its position on other issues related to the grace period. First, a grace period must be offered to all participants (including those on COBRA) who were covered by the Health FSA on the last day of the plan year. Second, an employee who terminates employment during a grace period is still eligible for the full amount of time of the grace period. Third, an employer may offer a grace period for some Cafeteria Plan benefit options (e.g., a Health FSA), but not others (e.g., a Dependent Care FSA). Finally, the maximum grace period ends on the 15th day of the third calendar month after the month in which the plan year ends.
September 21, 2005 – Comparability Rules Clarified for HSAs
The IRS and Treasury released proposed regulations on August 25, 2005, implementing comparability requirements that must be met for employer contributions to eligible employee’s Health Savings Accounts (HSAs). The proposed regulations generally follow the previously issued guidance on comparability rules along with additional clarification with respect to a few issues not previously addressed. Employers who fail to follow comparability rules could be penalized with an excise tax. These rules will not affect HSA contributions made through section 125 cafeteria plans.
An employer is not required to contribute to the HSAs of its employees, however may choose to contribute. Under the proposed rules, employers who elect to make contributions to the employees’ HSAs are required to do so comparably for all employees who:
Are eligible individuals enrolled in a high-deductible health plan (HDHP),
Are in the same category of employment, and
Have the same category of coverage
Comparability rules would apply separately for three (and only these three) categories of employees:
Current full-time employees,
Current part-time employees, and
Collectively bargained employees are not a separate group, nor are management and non-management employees. But if the employer offers separate types of HDHPs, separate comparability rules could apply for each type of HDHP. In addition, the comparability rules do not apply to amounts rolled over from an employee’s HSA or Archer Medical Savings Account.
Unlike many other employer-provided tax-advantaged benefits, HSAs do not have nondiscrimination rules restricting the amount of benefits provided to highly compensated employees. Instead, the HSA regulations requires that all employer pre-tax contributions to employee HSAs must be the same amount or the same percentage of the HDHP deductible for all employees with the same category (self or family) of HDHP coverage.
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