HSA Questions & Answers

HSA Questions & Answers

Inserting a coin into a piggy bank1. Why is having a High Deductible Health Plan (HDHP) a requirement for having a Health Savings Account (HSA)?
Being covered by an HDHP is to avoid the situation where the taxpayer could get a large deduction for an HSA contribution and then not need it to pay for medical expenses because they had either a low-deductible insurance or were double covered by traditional and HDHP coverage. The HSA is to cover day-to-day medical expenses while the HDHP insurance is for catastrophic events or large medical expenses.

2. Are HDHP-covered individuals that are also covered by their spouse’s traditional insurance eligible for an HSA?
No. HSAs are not eligible to those that have “other health coverage.”

3. Are counseling, disease management, and wellness Employee Assistance Programs (EAPs) considered to “provide significant benefits in the nature of medical care and treatment” and be a health plan and disqualify one from an HSA?
No. These three types of EAPs are not considered health plans so they would not disqualify you for an HSA.

4. When can an HSA be opened?
Generally people enroll during open enrollment through their employer, but an HSA can be opened at any time during the year as long as you are HSA-eligible.

5. Can an HSA owner “establish” an HSA with a zero balance?
HSAs must be funded to be considered “established,” so by just adding a small amount will accomplish this.

6. What are the ramifications when someone loses eligibility for an HSA?
Some of the reasons why people lose HSA eligibility is from changing jobs, becoming eligible for Medicare, or by switching insurance plans. Some things to consider:

  • The money belongs to the HSA owner whether or not the employee or employer contributed.
  • Use HSA for qualified medical expenses. The money still belongs to the owner regardless if they are no longer eligible for an HSA. Money just can’t be added. But the HSA is to be used for copays, deductibles, dental and other general medical expenses.
  • Use as a retirement fund. HSA accounts can grow until the owner needs it. At age 65, the owner can use the balance for any reason without penalty, but will have to pay income taxes on the amounts withdrawn for nonmedical expenses.
  • Maximize contribution or remove an excess. The owner should maximize the HSA contribution before becoming ineligible or even if no longer eligible (assuming the owner makes the HSA contribution prior to the tax due date).
  • Protect the establishment date by keeping the HSA open.

7. Are there limitations on HSA investment options?
Yes. There are few limitations on investment options, but HSAs may not be invested in collectibles such as works of art, antiques, certain metals, gems, stamps, coins, alcoholic beverages, or other tangible personal property (IRC Sec. 408(m)). HSAs may not be invested in life insurance contracts and cannot be commingled with other property except in a common investment fund.

8. Are there tax benefits to making an HSA contribution?
Yes. Look into the following:

  • Federal income tax deduction
  • State income tax deduction
  • Payroll tax avoidance
  • Tax deferred earnings growth
  • Tax-free distributions

9. What types of records do HSA owners have to save?
Receipts must show the amount paid, description of the service/item purchased, date, and name of the service/item provider. Owner records must show that:

  • The distributions were exclusively to pay or reimburse qualified medical expenses
  • The qualified medical expenses had not been previously paid or reimbursed from another source, and
  • The medical expenses had not been taken as an itemized deduction in any year.

10. How much can an HSA owner contribute to an HSA?

  • 2016 – $3,350 for HSA-eligible individuals covered by self-only HDHPs
  • 2016 – $6,750 for individuals with family HDHP coverage
  • $1,000 catch-up contribution for individuals over age 55

Those are the short answers. The long answers depend on these factors:

  • HSA maximums for the year, as the limits are adjusted each year for inflation
  • Self-only or family HDHP coverage
  • Age
  • First day of eligibility – eligibility on December 1. Individuals eligible before December 1 of the year and remain eligible on December 1 can take advantage of the “full contribution rule”
  • Last day of eligibility – not eligible on December 1. If an individual’s last day of eligibility falls in the calendar year and they are not eligible on December 1, then they will need to reduce the HSA contribution amount using the “sum-of-the months” rule
  • First day of the month is if the individual was eligible as of the first day of a month

Source: BenefitsPro | 10 easy HSA FAQs

Links: Crawford – Updates from the IRS, DOL and HHS – 2017 HSA Limits & More 

IRS – Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans

For more information contact info@apbenefitadvisors.com. The information contained in this post, and any attachments, is not intended and should not be misconstrued as legal advice. You should contact your employment, benefits or ERISA attorney for legal direction.