HSAs: Costs Are on the Rise

What is an HSA? What is it used for? Who is qualified to have one?

An HSA is a Health Savings Account; it is a supplement to a high-deductible healthcare plan (HDHP). As a lot of companies, especially with the current economic conditions, are cutting back on health insurance, more and more people are finding themselves having healthcare plans with high deductibles. The HSA does not get rid of the high deductible; but it does serve as a non-taxable security fund in case of medical emergency. As the 401k is established to help squirrel away money for retirement, untouched for other purposes, the HSA is used to set money aside only for medical use. These non-taxable caches are meant to lighten the burden in case the deductible has to be filled in one fell swoop; or simply to pay for routine medical care on a tax-favored basis. The best part, though: whatever money is left over in the HSA at the end of a year will be rolled over into the next year.

So What Is New with HSAs?

The tax-deductible contribution limits have increased slightly: the contribution limit for individual plans has increased from $3,050 in 2011 to $3,100 in 2012; and for family plans from $6,150 in 2011 to $6,250 in 2012. Furthermore, the 10% penalty for using HSA funds for non-approved expenses is being raised to 20%. Finally, under the Patient Protection and Affordable Care Act (PPACA), HSA approved expenses on drugs include only doctor-prescribed medications, with the sole exception of insulin. Before PPACA, there was no requirement for OTC medications to be prescribed by a doctor in order to count as an approved expense.

How About Partial Year Eligibility for People Newly Insured by an HDHP?

A 2006 change in the HSA law allows individuals whose HDHP coverage begins part of the way into the year to make the full annual contribution amount for their first year of HSA eligibility. This change in the law was intended to help people fully fund their HSA accounts, especially since many insurance plans apply the full year deductible amount even though coverage might be in effect less than 12 full months. To take advantage of this rule, the individual’s HDHP coverage must take effect any time after January 1 but no later than December 1. Normally, less than full-year HDHP coverage would require the individual to pro-rate their HSA contribution for the year based on the number of months they had HDHP coverage. However, to avoid having to pay back any of the “extra” contribution amount, the individual must remain covered by an HDHP through December 31 of the following calendar year. If the individual does not remain covered by HDHP during this “testing period,” the extra amount must be included in the individual’s income and will be subject to additional taxation. If you are unsure or know that you’re not going to keep your HDHP coverage through December 31of the following year, you may be better off prorating your contributions for your first year of HSA eligibility.

Are HSA Contributions Tied to the HDHP Deductible?

HSA contributions are not limited by the amount of the HDHP deductible. This means that even if you are covered by an HDHP with the minimum deductible (i.e., $1,200 for individual coverage or $2,400 for family coverage), you may still contribute up to the full amount to your HSA. On the other hand, if you purchase an HDHP with a deductible higher than the annual HSA contribution limit, your 2012 HSA contribution will still be limited to $3,100 for individuals with self-only coverage or $6,250 for individuals with family coverage.

Contribution Deadlines

HSA contributions for a given year must be made on or before the due date (without extensions) for filing tax returns for that year. That means for most years contributions must be made on or before April 15 of the following calendar year.

What Else Should I Know About HSAs?

In addition to the tax favored treatment of qualified medical expenses, HSA account funds can be drawn down without penalty or taxes to pay for the following types of premium:

1)      Qualified Long Term Care Insurance;

2)      Health Insurance while receiving federal or state unemployment compensation;

3)      Continuation of Coverage plans, such as COBRA, required by federal law; and

4)      Medicare premiums.

Qualified medical expenses are defined to include unreimbursed medical expenses of the accountholder, his or her spouse, or dependents. Therefore, the HSA account can be used to pay for medical expenses incurred by family members even if they aren’t covered by the HDHP.

Until next time,

Andrew Herman