Companies are always seeking opportunities to provide employee benefits at a reasonable cost. One of the more unique methods allows participation from the insured and the insured’s family—the Health Savings Account (HSA). An HSA is a special account, owned by an individual, which is used to pay for medical expenses in conjunction with a High Deductible Health Plan (HDHP).
High Deductible Health Plans are policies that do not cover 100 percent of medical expenses (except for some policy specific preventive care) and may be part of an HMO, a PPO or an indemnity plan, if the appropriate requirements are met.
Although HSAs have been in their present form since late 2003, it’s only been recently that smaller companies have taken a close look at them.
HSA s can be established by any individual that is 1) covered by a HDHP, 2) not covered by other health insurance 3) not enrolled in Medicare and 4) can’t be claimed as a dependent on someone else’s tax return. There are no income limitations on who may contribute to an HSA, and, furthermore, no requirement that the individual have any earned income in order to contribute to the HSA. There are specific exceptions allowed for dental, vision, disability and long-term care coverage, and coverage for specific disease or illness as long as it pays a specific dollar amount. Wellness programs are also permitted, so long as there are no significant medical benefits attached to the program.
The federal government sets the maximum annual out-of-pocket (deductibles and co-pays) for each year—in 2008 the amount an individual would pay is $5,600, and the amount a family would pay is $11,200. The minimum deductible for 2008 for an individual is $1,100 and for a family is $2,200. All amounts are indexed annually for inflation.
Individuals will evaluate HSA s by reviewing the particular policy’s features—just as you would with any insurance purchase. Pay close attention to such things as limits on benefits, pre-certification requirements, deductibles and co-pays, additional cost for out of network services, and prescription drug benefits to name some, but not all.
One area to pay close attention to is Preventative Care. Know what your plan will pay for these services, since they are not intended to treat an existing illness. Certain prescription drugs may fall into this category, too.
It’s not unusual for contributions to Heath Savings Accounts be made by both the employer and the individual, although either is allowed to pay the full amount. If payment is made by your employer, the contribution amount is not taxable to the employee. If the individual makes the payment, you are allowed to take a deduction for the amount paid on your tax return.
Beginning last year, qualified individuals are allowed to take an otherwise taxable distribution from an Individual Retirement Account transferred directly to your HSA without tax. The excluded amount cannot be greater than your annual H S A contribution allowed. For 2008 these an individual may contribute up to $2,900 while family contributions are up to $5,800. Again, these amounts are indexed for inflation annually. Individuals age 55 and older are allowed “catch-up” contributions, similar to 401(k) plan provisions, in the amount of $900 for 2008. Contribution rules are complicated, so review them for your specific plan and date of entry.
While the primary purpose of the HSA is to cover medical expenses, there are opportunities to withdraw funds for non-medical purposes, but these distributions could result in income tax and 10% penalty tax payments. The operation of the HSA and use of the funds requires good recordkeeping.
The HSA is a potential fringe benefit that allows the employer to provide a benefit to the company’s employee which allows the employee to spend or retain the funds—commonly known as consumer-driven health care. The employer can provide the health plan for fewer benefit dollars, because of the high deductibles, and allow funds for the HSA. This puts the employee in control of those funds.
Consider an Health Savings Account and High Deductible Health Plan as your health insurance policy comes up for renewal
<i> Gerard J. Kassouf, CPA is a director at the Birmingham, Alabama firm of L. Paul Kassouf & Co. P. C., Certified Public Accountants and Advisors. Reach him at gkassouf@kassouf.com</i>
June 2008
