How an HSA works and why
Learn the rules and regulations behind the two parts of every HSA (the high deductible health plan and the HSA bank account).
High deductible health plan
According to the IRS, high deductible heath plans (or HDHPs):
- Must have a deductible no less than $1,250 for singles or $2,500 for families ($1,200 for singles or $2,400 for families in 2012)1
- Must have an out-of-pocket maximum no higher than $6,250 for singles or $12,500 for families ($6,050 for singles or $12,100 for families in 2012 ) - most plans set them lower
- Can use any plan design: HMO, POS, PPO or traditional indemnity plan
- Require a member to meet the deductible before the health plan benefits apply - all covered medical and prescription costs count toward the deductible
- Are allowed to cover preventive care services before the deductible is met
- Can be fully funded or self-funded
- Cover standard services, such as physician services, hospital visits, preventive care, prescription drugs, etc.
- Pay all covered medical and prescription drug services in full for the rest of the year once the member meets the out-of-pocket maximum
HSA bank account
According to the IRS, HSA bank accounts:
- Limit annual contributions to $3,250 for singles and $6,450 for families ($3,100 for singles and $6,250 for families in 2012)
- Allow people aged 55 and older to contribute an additional $1,000 per year (in 2012 and 2013) to "catch up" on their contributions
- Are tax-exempt - no income tax, FICA or FUTA withholding/payments apply to contributions an employee makes directly through an employer's health plan2
- Can be used to pay for all medical, vision, dental or prescription costs; long-term care premiums; COBRA; health care for those drawing unemployment; Medicare premiums (but not Medigap); any health insurance for those 65 and over (per Section 213(d))
- Cover expenses incurred by an employee, spouse and dependents
- Must charge a 20% penalty for invalid expenses and include the amount on the employee's gross income, making it subject to taxes. The 20% penalty ends when you are 65, disabled or deceased.3
