Health Savings Accounts, or HSAs, are another tool employers and individuals can use to help control and/or lower the costs of health care. By utilizing a High Deductible Health Plan, employers and employees can reap the benefits of lower premiums. [ HSA FAQ ]
There has been no hotter topic in past years than the increasing cost of health care. Health care spending has widely outpaced the rate of inflation. In 2004, the increase in health insurance premiums increased an average of 11.2 percent, which is almost 5 times higher than the rate of overall inflation. In 2005 costs followed this trend with an estimated 9.2 percent increase by the end of the year.
Companies are struggling to keep up with these cost increases by trying new alternatives. Consumer-Driven Health Care (CDHC) has become the latest buzz-word in today’s ongoing effort to reduce health care expenditures. More and more, companies are moving away from traditional health care arrangements and instead implementing some type of CDHC arrangement, which in many cases utilizes a High-Deductible Health Plan (HDHP) coupled with a Health Savings Account (HSA).
This FAQ will answer many questions regarding HDHPs and HSAs. Of course, this is not designed to answer all of your questions, so please contact us if you need clarification on these FAQs, need other information, or have other specific questions.
NOTE: This information is intended to provide general guidance only and should not be considered as an alternative to actual legal and/or tax advice.
HDHPs
Q. What is an HDHP & QHDHP?A. An HDHP, or High Deductible Health Plan, is a comprehensive health plan designed to cover serious injury or illness. A QHDHP, or Qualified High Deductible Health Plan, is a plan that has been approved to be used in conjuction with HSAs. Not all HDHPs are approved.
Q. What is the deductible for a QHDHP?
A. A QHDHP is mandated by law to have an annual deductible in 2007 of at least:
- $1,100 for Self-Only Coverage
- $2,200 for Family Coverage
(The above limits are indexed for inflation by the IRS. Limits change annually)
Q. When can qualified plan benefits be paid?
A. With the exception of Preventive Care, plan benefits can only be paid after the annual deductible has been met.
Q. What are the maximum out-of-pocket costs for a QHDHP in 2007?
A. The maximum out-of-pocket costs are:
- $5,500 for Self-Only Coverage
- $11,000 for Family Coverage
Q. Is a Flexible Spending Account (FSA), allowed in conjunction with a QHDHP?
A. Yes, although the scope of the FSA has to be limited to Dental and Vision only.
HSAs
Q. What is an HSA?A. An HSA, or Health Savings Account, is a tax-exempt, IRA-type account that a participant could use to pay for qualified medical expenses. This list is defined under IRS Code Section 213(d).
Q. Can anyone have an HSA?
A. No. You can establish an HSA only if you are covered by a QHDHP.
Q. How does an HSA work?
A. You open an HSA, make tax deductible contributions to it, and then pay for your qualified medical expenses with the money from your HSA.
Q. Where do I go to open an HSA?
A. Only an approved trustee or custodian may offer HSAs. Many institutions, such as Banks, Credit Unions and insurance companies are approved. You may even find that your local banks are offering HSAs.
Q. How do I set up an HSA?
A. BPC has made this process easy by partnering with several national and local HSA providers. Contact us for a list of these preferred providers.
Q. How are contributions made to an HSA?
A. Several types of contributions are permitted, including:
- Employee Contributions that are deductible “above-the-line” on the individual's tax return.
- Employer Contributions
- Salary Deductions made through an employer’s cafeteria plan
Q. What is the maximum I can contribute to an HSA?
A. You can contribute up to $2,850 for individual policies and $5,650 for family policies.
Q. Do I have to contribute the full amount to an HSA all at once, or can I make deposits over time?
A. You can do either or a combination of the two.
Q. How do I pay for qualified medical expenses out of an HSA?
A. After you set up an HSA, the HSA provider (e.g. bank) will supply you with checks, a debit card, or both. You can use these to pay for your eligible medical expenses. However, you can only pay for your expenses using the available funds from your HSA; there is no “overdraft” feature.
Q. What are qualified medical expenses?
A. The IRS has defined the list of expenses under Code Section 213(d). There are literally thousands of items and this list is constantly growing. Contact BPC for more information.
Q. Can an HSA be used to pay for nonqualified expenses, such as new furniture or a plasma screen TV?
A. Yes. However, these would be subject to regular income taxes (plus a 10% tax penalty if you are younger than 65) because they are not considered “qualified medical expenses”.
Q. Who decides if expenses incurred are qualified?
A. You are solely responsible for determining if expenses are qualified or not and therefore should keep all your receipts in case you need to defend your expenditures during an audit.
Q. Can I pay for health insurance premiums with an HSA?
A. Generally - no. However, you can if you are collecting State or Federal unemployment benefits or if you have COBRA coverage from a former employer.
Q. Will I ever lose the money in an HSA?
A. No. Once the money is deposited into your HSA, it is your money to use and it will continue to roll over from year to year. (Some accounts will incur fees and may be subject to investment risks)
To open an HSA, click on one of the providers to the right and complete the online application and mail it back to BPC. Check back often as we are updating our partner relationships on an ongoing basis. Should you have any direct questions about HSAs, please contact us.