Health Savings Account Rules

 

Health Savings Account Rules 

A Health Savings Account or HSA is tax advantaged medical savings account that is owned by the individual (this means they are portable).  They are designed to be used in conjunction with a High Deductible Health Insurance Plan, which means the money you save on lower insurance premiums can fund your HSA.  The money contributed to the account is not subject to federal tax at the time of deposit, so it's pre-tax dollars for employees or tax deductible if you are self employed.  The funds in a Health Savings Account can be used to pay all eligible medical related expenses that are not covered by your Health Insurance Plan.

 


Health S
avings Account (HSA) Contribution Limits

Initially, Health Savings Account contributions were limited to the lesser of the actual deductible or specified IRS limits. Congress later eliminated the deductible based limit and set guidelines to limit maximum contributions.

These contribution limits are according to IRS Publication 969, "Health Savings Accounts and Other Tax-Favored Health Plans". You can make HSA contributions for any calendar year until April 15 of the following calendar year, (or the date your personal taxes are due), the same as IRA contributions.


2014 HSA Contribution Limits Rise Slightly From 2013.

Increases in the contribution limits are based on inflation and due to the fact that overall inflation measured by the CPI was subdued there was a small inflation adjustment.  Therefore, the 2014 HSA contribution limits rose by $50 for individuals and $100 for families over 2013. 

The 2014 HSA Contribution Limits have been announced by the IRS and will increase $50-100 from 2013.  These have been included in the table below as well as all the changest going back to 2004.

 

 Year

 Contribution Limit
(Single)

 Contribution Limit
(Family)

 Additional Catch-Up Provision
(55 or older) (Single and Family)

2004

$2,600

$5,150

$500

2005

$2,650

$5,250

$600

2006

$2,700

$5,450

$700

2007

$2,850

$5,650

$800

2008

$2,900

$5,800

$900

2009

$3,000

$5,950

$1,000

2010

$3,050

$6,150

$1,000

2011

$3,050

$6,150

$1,000

2012

$3,100

$6,250

$1,000

2013

$3,250

$6,450

$1,000

2014

$3,300

$6,550

$1,000

This means in 2014 a family may contribute $6550 ( $545.83 /mo. ) to an HSA. If the owner of the family plan is age 55 or older the catch up provision allows an additional $1000 for a total contribution of $7550.

Any money in your HSA account that is not used during a calendar year is rolled over to the following year, so this means your account balance can grow over time. This is one of the primary benefits of an HSA when compared to a Flexible Spending Account (FSA).


Health Savings Account Eligibility

In order to establish a Health Savings Account ( HSA ) you must have a High Deductible Health Plan ( HDHP ). You may choose the deductible and co-insurance combination you wish to have but they must fall within these guidelines for 2014.   Note:  There are slight increases coming for the 2014 HSA qualifying deductible.

Participant

 Minimum Deductible

 Maximum Out Of Pocket

Individual

 $1,250

 $6,350

Family

 $2,500

 $12,700

For example:  If you are an individual with more than $5000 in your HSA you may choose a HDHP that has a $5000 deductible and no co-insurance. This plan would be inexpensive and would meet the HSA Eligibilty requirements. However, a plan with a $5,000 deductible and 20% co-insurance for a maximum out of pocket of $7000 would not qualify as it is above the Maximum Out Of Pocket limit of $6,350.


Health Savings Account Investments

Your HSA account has investment options similar to an IRA account. Money market or similar cash instruments are common as people want to make sure funds are available to cover out of pocket medical expenses. If your balance grows beyond your annual maximum out of pocket expenses, then you may choose to put the excess into a stock mutual fund or other "at risk" investment option. Your HSA administrator may charge extra fees to establish brokerage services and these vary from company to company. Please consult your account representative for advise and investment options.


Health Savings Account Qualified Expenses

You can use your health savings account to pay for a wide range of medical and health related services. When you incur a medical or health related expense that is not covered by your insurance, there is a good chance that you can pay for it out of your HSA.

The IRS defines qualified expenses as: "Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.

 

Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.

Medical expenses include all out of pocket expenses for medical care and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and can include insurance premiums (Cobra) if you are unemployed." Source: IRS.Gov


Examples of HSA Qualfied Expenses Include:


Doctor Visits and Tests not covered by your insurance policy.

Surgical procedures and hospitalization related charges not covered by your insurance.

Prescription Drugs

Certain OTC Drugs qualify but now need a prescription from your doctor.

Insulin as well as Diabetic Testing Supplies

Vitamins & supplements do not qualify.

Accupuncture & Chiropractic Care

Eye Exams, Glasses and Laser Surgery

Hearing Tests and Hearing Aids

Dental Exams, Dental Work and Dentures

Alcohol and Drug Abuse Treatment

Insulin and Diabetic Testing Supplies

Long Term Care related expenses.

Wheel Chairs, hand rails or other disability related home improvements.

Your health insurance provider or HSA administrator will provide you with a complete list of goods and services that are eligible.

The complete list is also available on pages 5-14 on IRS Publication 502

Record Keeping:  Make sure you save all your HSA related receipts in case you are ever audited. Similar to a tax audit you will need proof of what you purchased using your account.


How To Open A Health Savings Account

The health insurance provider where you purchase your High Deductible Health Plan will provide you with a list of local institutions or you can choose any institution that sponsors HSA plans.   The fees do vary between institutions but are generally between $2.25 - $4.50 per month.  Several will waive the fees once your account balance reaches $2500, $3000 or $5000.  

Most HSA accounts come with a check book and debit card for paying for medical services.

You will want to choose an institution that not only has reasonable fees but also offers the investment options that suit your needs.


Here are a few examples of fees charged for HSA's by various institutions:

 Chase Wells Fargo  HSA Bank  Freedom HSA





HSA Withdrawal Rules

It is not necessary for HSA participants to obtain approval in advance of withdrawing funds, and the funds are not subject to income tax if they are used to cover for qualified medical expenses. Most HSA administrators make both checks and a debit card available for easy access to your money. Some also allow a for a reimbursement process similiar to the one used by most health insurance companies however this is uncommon.

 

Funds can be withdrawn for any reason using checks and debit cards, however any withdrawls that are not used for qualified medical expenses are subject to a 20% penalty as well as income taxes. The 20% penalty is waived for people age 65 and older or those who have become disabled. Income taxes still apply in these situations but there are no additional penatlies. These rules are very similar to the ones governing other tax sheltered accounts such as IRAs.

Any funds withdrawn for qualified medical expenses are always tax free. You must however keep documentation pertaining to all qualifed medical purchases. A lack of documentation can be grounds for the IRS to rule that funds were not used for qualified medical expenses and the account holder would be subject to additional penalties.

When an account holder dies, the funds transfer to the beneficiary designated on the account. If a surviving spouse is the beneficiary, the funds will transfer on a tax free basis.

 

Health Savings Account Contribution Limits
Health Savings Account Eligibility
Health Savings Account Investments
Health Savings Account Qualified Medical Expenses
How To Open A Health Savings Account
Health Savings Account Withdrawal Rules

Additional Information Source: US Department Of The Treasury