A health savings account (HSA) is a tax-advantaged medical savings account available to members who are enrolled in a high-deductible health plan (HDHP).
You must have a qualified high deductible health plan (HDHP) in order to maintain a health savings account (HSA).
What you need to know about HDHPs
According to the IRS, HDHPs:
- Must have a minimum deductible as set by the IRS. For 2016, it means at least a $1,300 deductible for singles and a $2,600 deductible for families.
- Must limit the maximum out-of-pocket expenses.
In 2016, the out-of-pocket max is no higher than $6,550 for singles, $13,100 for families.
- Can use any plan design: HMO, POS, or PPO
- 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
What you need to know about HSA bank accounts
According to the IRS, HSA bank accounts:
- Must have a contribution limit, set by the federal goverment. For 2016, the limit is $3,350 for singles and $6,750 for families.
- Allow people aged 55 and older to contribute an additional $1,000 per year 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 plan
- 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)) *HSAs cannot be used to cover monthly premiums.
- 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.
Contributing to an HSA
You can contribute money into your employees' HSAs using one of these three methods:
- Lump sum contributions - Contributing a lump sum at the beginning of the year helps employees pay for expensive claims incurred early in the year. The drawback is the contribution immediately belongs to the employee and can't be retrieved if the employee leaves the company.
- Pro-rated contributions - Contributions can be made quarterly, monthly, each pay period, etc. This could save you money, but would mean an employee with an expensive claim at the beginning of the contract year would have to pay high out-of-pocket costs.
- Accelerated contributions - The IRS allows employers making pro-rated contributions to accelerate contributions to employees who experience high medical claims early in the year. With this option, you would have to set a corporate policy for accelerated contributions and implement the policy equally to all employees. You can set the rules, such as allowing accelerated contributions for medical claims only (not vision, dental, etc.) or for claims over $1,000.
Example: You contribute $100 per month to each employee's HSA. With accelerated contribution, if an employee incurs a claim for $1,000 early in the plan year, you can choose to give them their entire contribution ($1,200) at that time.
Your employees receive a tax advantage from their HSA whether or not contributions are made through payroll deduction or independently.
- Pre-tax contributions (through payroll deduction) - A pre-tax contribution means the contribution amount is automatically taken from the member's paycheck via payroll deduction before income taxes are taken out. You, the employer, must amend your Cafeteria Plan (Section 125 plan) to include HSA contributions. Contact your Cafeteria Plan administrator to make this change.
- Non-payroll contributions - Members can make their own contributions to an HSA using after-tax dollars if the employer doesn't offer pre-tax deduction or if they would like to make a contribution over and above their weekly automatic deduction. Members who make their own contributions can take an "above-the-line deduction" when calculating their income taxes. This provides the same advantage as a pre-tax deduction.
More questions? Contact your licensed, independent agent or Priority Health representative.