Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
What is it?
A plan that provides tax benefits for amounts accumulated
to pay health care expenses
Can be
– provided for employees by an employer
or
– set up by individuals or organizations
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
Major features
1. Annual individual or employer contributions to IRAlike plan to pay qualified medical expenses up to:
– $3,000 for individual (2009)
– $5,950 for family (2009)
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
Major features (cont’d)
2. High deductible health plan:
– $1,150 individual deductible (2009)
– $2,300 family deductible (2009)
Maximum annual out-of-pocket
– $ 5,600 for individual (2009)
– $11,200 for family (2009)
3. Able to accumulate “savings” because amounts not
used for medical expenses continue to grow tax-free
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
When is it Indicated?
• When desire way to save on insurance costs
• Can be used by self-employed and those not covered
by employer plans as well as those who are
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
Advantages
1. Offer tax-saving opportunities to eligible individuals
2. Unused funds not forfeited at year-end; continue to
grow tax-free inside HSA
3. No requirement that HSA be used to pay medical
expenses
4. HSA not as flexible as IRA but qualified plan
participant can contribute to HSA and not IRA
regardless of income
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
Advantages
5. Proponents of HSA
– people see cost of health care
– shop for best price
Opponents of HSA
– without first dollar coverage, people will delay medical care
until they need costly medical intervention
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
Disadvantages
1. HSAs do not appear appropriate for tailored benefit
plans nor are they likely to extend health coverage
to people currently without coverage
2. Lower income may see high deductibles as drastic
cut in benefits
3. Taxpayers in lower income brackets get less tax
benefit than other taxpayers
4. Structure may encourage adverse selection
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
Eligibility
To contribute a person must be covered under highdeductible health plan
Cannot be
– covered under non-high deductible plan (e.g. under spouse
plan)
– enrolled in Medicare
– be claimed as dependent on another’s tax return
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
Eligibility
Person must be covered under high-deductible health
plan
Can be
– covered by certain types of “permitted insurance” that
doesn’t have high deductibles
– in plan with low deductible or first dollar coverage for
preventive care
– adopted by employer or individual
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
Contributions
• Aggregate annual contribution limit
– $3,000 annually for individual (2009)
– $5,950 annually for family (2009)
• Limit is per individual or per family
• Catch-up provision of $1000 (2009) for
those 55 and older
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
Contributions
Contributions cease at age 65
Contributions may be made
– directly by individual
– through salary reductions under employer cafeteria plan
– directly by employers
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
Funding
• HSA plans must be funded; no IRS permission required
• Contributions must be in cash; investment restrictions
exist
• Trustee/custodian of HSA can also sell health insurance
• Assets in HSA can accumulate without limit
• Covered individual may withdraw funds at any time but
may face penalty if not used for medical expenses
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
Plan Benefits
Participants can use funds to pay for qualified medical
expenses for self, spouse, dependents
Distributions to pay medical expenses not taxable
“Qualified medical expense” is any expense eligible for
itemized medical expense deduction
Cannot use HSA plan funds to pay employee share of
health insurance premiums
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
Tax Implications
1. Contributions made by individual are “above the
line”; cannot also take itemized deduction
2. Employer contributions under cafeteria plan are
– tax deductible to employer
– not taxable to employee
– not subject to FICA and FUTA
3. Can make HSA contribution for eligible family
member
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
Tax Implications
4. HSA distributions tax-free IF used to pay for qualified
medical expense
5. Distributions for other than qualified medical
expenses are taxable and subject to 10% penalty
unless made after account beneficiary’s
– death
– disability
– attainment of age 65
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
ERISA Implications
• Plans offered by employers are subject to ERISA
welfare benefit plan rules
• ERISA does not apply to plans adopted by individuals
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
Alternatives
• Archer MSA
• Health Reimbursement Arrangement (HRA)
• Flexible spending arrangement (FSA)
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Health Savings Account
Chapter 47
Employee Benefit & Retirement Planning
Discussion Questions
1. Explain the difference between and HSA and an
Archer Medical Savings Account.
2. Explain the “doughnut hole” in HSA coverage.
3. How are HSAs used in partnerships?
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