A Primer on Health Savings
Accounts for Consumers
Presented by
National Association of Health
Underwriters
Health Savings Accounts (HSAs)
 Newly available as of January 1, 2004
 Available to almost everyone if they have a qualified high
deductible health insurance plan
 Under an HSA, the health plan is paired with a savings
account to cover eligible medical expenses not covered by
the insurance policy
 Individuals who are covered under another health plan that
is not a qualified high deductible plan aren’t eligible
– Specified disease coverage, hospital indemnity, and auto insurance
do not count as other coverage
– Vision, dental, accident, and disability also do not count as other
coverage
– If you are covered by your spouse’s plan and it is not a qualified
high-deductible plan, you are not eligible, even if you have your
own qualified high-deductible plan
More on eligibility
 Individuals entitled to Medicare are not eligible to
contribute to Health Savings Accounts
– However, they can still spend money they have
previously accumulated in their Health Savings
Account
 Individuals that can be claimed as a dependent on another
person’s tax return aren’t eligible
– This means that dependent children should be covered
if possible under a family HSA and high-deductible
policy.
– If they can still be claimed as dependents on a parent’s
tax return, they can’t have their own HSA.
Qualified High-Deductible Health Plans
 The annual deductible on your insurance policy must be at
least $1,000 if you have individual coverage or $2,000 if
you have coverage on your family
 The deductible, plus your share of covered expenses, can’t
be greater than $5,000 if you have individual coverage and
$10,000 if you have family coverage
 If your plan is a PPO (Preferred Provider Organization),
your maximum share of expenses, including your
deductible, coinsurance, and co-pays, if any, is calculated
based on the use of in-network providers, not for services
you obtain outside the plan network
 Preventive care services may be covered before you meet
your deductible, but this is not required
More on Qualified High Deductible
Health Plans
 Under a qualified plan, coverage for doctor’s visits should
be subject to the annual deductible like other expenses, not
with a co-pay at the time of service
 Prescription drugs should also be covered like other
expenses, subject to the annual deductible, not with copays under a drug card that pays benefits before the
deductible is satisfied
 A qualified high-deductible plan can be obtained through
an employer plan or can be purchased by an individual on
their own
New
Treasury Department Guidance from
March 30, 2004
 Some questions have arisen as to what could be
considered preventive care
 The new guidance from Treasury creates a
beginning definition
 Includes routine health care, including:
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Prenatal care
Smoking cessation
Obesity weight-loss programs
A variety of screening services
 These services are not REQUIRED to be included
in plans but MAY be included without being
subject to the overall deductible.
New
Guidance from March 30, 2004
 Establishes transition relief for calendar year 2004
for eligible individuals who establish an HSA on
or before April 15, 2005
 Gives people who have a qualified high-deductible
plan but who have had trouble finding a trustee to
manage the funds in a health savings account more
time to find a trustee
 Allows a person who was covered by a qualified
high-deductible plan during 2004 to to use their
HSA for expenses incurred during 2004 while they
were covered by the plan as long as they open up
an HSA account on or before April 15, 2005.
New
Guidance from March 30, 2004
 Transition relief is provided for 2004 and 2005 for
health plans that would meet the definition of
qualified high-deductible plan except for a
prescription drug rider or separate drug plan that
pays benefits for prescription drugs before the
deductible is satisfied.
 Transition relief is temporary – to allow plans to
make modifications from their current form to
qualify under the regulations.
Contributions to an HSA
 Contributions must be made in cash
 Contributions can equal the amount of the insurance policy
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deductible, between $1,000 to a maximum of $2,600 for an
individual or $5,150 for a family.
Individuals 55 years of age or older can make extra
contributions to their accounts.
The amount allowed in 2004 for individuals between ages
55 and 65 is $500.
Contributions by an eligible individual or a family member
of the eligible individual are tax deductible by the eligible
individual on an “above the line” basis
This means a person doesn’t have to itemize deductions on
their tax return in order to deduct their HSA contribution.
Contributions to HSAs
 Both employers and employees can contribute to the
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account portion of the plan
Contributions by an employer are not taxable income to the
employee
Individuals own their own HSAs, not employers who may
or may not make contributions, or custodians or
administrators of the account
This means that individual owners of the account, not
employers, are responsible for ensuring that contributions
do not exceed the annual maximum allowed amount
Contributions made by an employer are not deductible by
the individual.
Contributions to an HSA
 Contributions from all sources are counted equally to
calculate the contribution maximum
 Funds in an HSA can be invested, and interest and
investment earnings on contributions are not taxable
 Contributions may be made at any time of year in one or
more payments, at the convenience of the individual or
employer.
 The deadline for contributions is April 15 of the year
following the year for which the contribution is made
Using the Money in Your HSA
 Balances remaining in an HSA at the end of a year roll
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over to the next year
A debit or credit card or a check can be used, if available
through your trustee, to spend funds in your HSA.
If you are no longer an eligible individual, for example,
you turn age 65 or no longer have a qualified high
deductible health plan, the funds remaining in your HSA
can still be used, but only for qualified medical expenses
If you are over age 65, you can use the funds for nonmedical expenses, but the funds used will be considered
taxable income
A person under age 65 can also use the funds for nonmedical expenses, but the funds will be considered taxable
income AND there will be an additional 10% tax
Using the Money in Your HSA
 When an HSA account holder dies, if the beneficiary listed
on the account is his surviving spouse, the spouse will be
the new owner of the HSA.
 If the beneficiary is other than the surviving spouse, the
amount of funds in the HSA are taxable income to the
beneficiary, except for medical expenses of the account
holder paid within one year of death.
 The taxable amount will be reduced by the amount of
estate tax paid due to inclusion of the HSA into the
deceased individual’s estate
What are Qualified Expenses?
 Prescription drugs
 Doctors visits, lab, x-ray, and other diagnostic and
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treatment services
Qualified long-term care services and long-term care
insurance
COBRA premiums, and health insurance for those on
unemployment compensation
Medicare Part A and B premiums, Medicare HMO or
Medicare Advantage premiums (but not Medigap)
Retiree health expenses for individuals age 65 and older
(but retiree health plans would not have to meet the
$1,000/$2,000 minimum deductible requirements)
Ensuring that expenses paid from the account are qualified
medical expenses is the responsibility of the account
holder.
– The account holder must keep adequate records concerning the use
of the HSA funds.
Concerns About Prescription Drug
Expenses
 Some individuals and employers are concerned about a
high-deductible and whether prescription drug expenses
will be affordable
 Many people are accustomed to a prescription drug card
with a co-pay for prescription drugs
 Employees with chronic illness who take several
medications may find that due to the actual cost of their
medications, they meet their deductible very quickly and
that the coinsurance of the high deductible plan is lower
than the copays with the drug card.
– Example: John and Mary and their son Steve take a total of eight
medications each month. They currently have a health plan with a
prescription drug card. Six of their eight medications are on their
preferred drug list and have a co-pay of $20 per month. The other
two medications are available in generic and have a co-pay of $10
per month.
Actual Drug Costs
 Here is an example of the actual cost of the Smith
family’s drugs:
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Mary
Singulair
Flonase
Zocor
Atenolol
Total
$ 95.59
$ 66.99
$ 78.77
$ 15.19
$256.54
Steve
Singulair
Allegra
Advair
Albuterol
Total
– Family Monthly Total Drug Cost
– Total Copays* Currently
$95.59
$ 68.99
$158.99
$ 19.89
$343.46
$600.00
$180.00
– *Copays do not count toward the policy out-of-pocket maximum
with this drug card
Here is another family:
The Jones Family
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Jack
Singulair
Advair
Allegra
Albuterol
Flonase
Triam
Zocor
Atenolol
Total
$ 95.59
$158.99
$ 68.99
$ 19.89
$ 66.99
$ 9.99
$ 78.77
$ 15.19
$514.40
Janice
Singulair
Triam
Synthroid
Prevacid
Pulmacort
Astelin
Inderol
Sulindac
Total
Family Monthly Total Drug Cost
– Total Copays* Currently
$ 95.59
$ 9.99
$ 15.69
$134.99
$120.00
$ 67.59
$ 29.00
$ 30.00
$502.85
$1,027.25
$ 260.00
Plan Design Considerations
 These families aren’t unusual, they are dealing
with such common ailments as allergies, asthma,
high-blood pressure, and high-cholesterol.
 As you can see, some of these “average” families
have high drug expenses.
 They may feel the security of a drug card is
important
 Depending on the actual situation of a particular
family and how many different family members
are incurring claims, families may do as well or
better without a drug card, allowing their drug
expenses to go towards their health plan deductible
Establishing an HSA
 Many insurance companies are either planning or already
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selling a packaged HSA product that will provide both the
high-deductible health plan and management of the funds
deposited into an HSA
It’s not necessary to buy a packaged product to qualify
Any qualifying high deductible plan can be used with a
Health Savings Account – they don’t need to be provided
by the same insurer
In fact a person who already has an existing high
deductible plan that meets the requirements of the law
could open an HSA account at a bank or other institution
A qualified plan can be either a group or an individual
plan
Establishing an HSA
 To find out how you can establish an HSA,
contact your health insurance agent or
broker
 To find an agent in your area, go to
www.nahu.org, or
http://www.nahu.org/consumer/HSAGuide.htm