HSA General Questions
Q: What is a Health Savings Account (HSA)?
A: Health Savings Account (HSA) is a tax-advantaged account established exclusively for the purpose of paying medical expenses of the account beneficiary who, is covered under a high deductible health plan.
Q: Why is high deductible health insurance required?
A: To get the benefits of an HSA, the law requires that the savings account be combined with high deductible health insurance. High deductible health insurance costs less than traditional $250 or $500 deductible coverage, because the insurance company doesn't have to process and pay claims for routine, low-dollar medical care.
Q: Who is eligible to establish an HSA?
A: An HSA can be established by an individual who is:
  • Covered by a high deductible health plan (HDHP)
  • Not yet enrolled in Medicare Part A or Part B
  • Not listed as a dependent on another person’s income tax return
Individuals cannot be covered by any other health plan that provides the same benefits as the high deductible health plan.
Q: What are the requirements for the high deductible health plan (HDHP)?
A: For self-only coverage, an HDHP must have a minimum deductible of $1,000 with a $5,100 cap on out-of-pocket expenses.

For family coverage, a HDHP must have a minimum deductible of $2,000 with a $10,200 cap on out-of-pocket expenses.

The limits outlined above will be adjusted for a cost-of-living adjustment annually in rounding increments of $50.
Q: Can funds be carried over from one year to the next?
A: Yes. Unused HSA balances may be carried from year to year during a participant’s lifetime.
Q: Are withdrawals for non-medical expenses allowed?
A: Yes. Funds can be withdrawn for any purpose, however, if not withdrawn for medical expenses by someone under age 65, the amount withdrawn is taxable and subject to a 10% tax penalty. Non-qualified withdrawals made after age 65, at disability, or upon death are taxable. However, there is no tax penalty.
Q: Is check writing a feature of most HSA products?
A: Yes, check writing will be a feature available to HSA customers.
Q: What happens to the HSA in the event of death?
A: Upon a participant's death, any balance remaining in the HSA becomes the property of the beneficiary on the account. If the participant's surviving spouse is the named beneficiary, the HSA becomes the HSA of the surviving spouse. The surviving spouse is subject to income tax only to the extent distributions from the HSA are not used for qualified medical expenses.

If the HSA passes to a person other than the participant's surviving spouse, the HSA ceases to be an HSA as of the date of the participant's death, and the person is required to include in gross income the fair market value of the HSA assets as of the date of death. For such a person (except the decedent's estate), the includable amount is reduced by any payments from the HSA made for the decedent's qualified medical expenses, if paid within one year after death.
HSA Contributions
Q: Who may contribute to the account?
A: Contributions to an HSA may be made by any person (an employer, a family member, or any other person) on behalf of an eligible individual.
Q: What are the limits on contributions?
A: Individuals may contribute up to the lesser of 100% of the HDHP annual deductible, or $2,650 for a self-only coverage and $5,250 for family coverage.

Eligible individuals age 55 or older may make additional “catch-up” contributions of up to $500 in 2004, increasing by $100 per year up to $1,000 annually in 2009. A married couple can make two catch-up contributions as long as both spouses are at least 55 years of age.

Contribution limits outlined above are indexed annually.
Q: May a husband and wife have a joint HSA?
A: No. Each spouse who is an eligible individual and wants to make contributions to an HSA must open a separate HSA.
Q: When may HSA contributions be made? Is there a deadline for contributions to an HSA for a taxable year?
A: Contributions for the taxable year can be made in one or more payments, at the convenience of the individual or the employer, at any time prior to the time prescribed by law (without extensions) for filing the eligible individual's federal income tax return for that year, but not before the beginning of that year. For calendar year taxpayers, the deadline for contributions to a HSA is generally April 15 following the year for which the contributions are made. Although the annual contribution is determined monthly, the maximum contribution may be made on the first day of the year.

Example: B has self-only coverage under a HDHP with a deductible of $1,500 and also has a HSA. B's employer contributes $200 to B's HSA at the end of every quarter in 2004 and at the end of the first quarter in 2005 (March 31, 2005). B can exclude from income in 2004 all of the employer contributions (i.e., $1,000) because B's exclusion for all contributions does not exceed B’s HSA contribution limit for 2004.
Q: May an individual who is covered by an HDHP and also have a discount card that enables the user to obtain discounts for health care services or products, contribute to an HSA?
A: Yes. Discount cards that entitle holders to obtain discounts for health care services or products at managed care market rates will not disqualify an individual from being an eligible individual for HSA purposes if the individual is required to pay the costs of the health care (taking into account the discount) until the deductible of the HDHP is satisfied.
HSA Tax Considerations
Q: What is the tax treatment of contributions and investment earnings?
A: An individual's contributions are deductible for federal income tax purposes, even if the account beneficiary does not itemize.

Employees’ contributions to an HSA are considered wages, and therefore are subject to FICA taxes. Self-employed individuals are not subject to FICA taxes, but pay self-employment tax instead. An HSA contribution does not reduce self-employment tax.

Employer contributions are made on a pre-tax basis and are not subject to employment taxes (e.g. FICA).
Investment earnings accumulate tax-deferred, and if used for qualified medical expenses are received federally income tax-free.
Q: Is the HSA tax deduction limited by an individual's income, filing status, employment or other factors?
A: No, except the deductions are limited if the individual is not enrolled in a qualified high deductible health plan for the full 12 months of the tax year.
Q: Can HSA funds be rolled over tax-free into an IRA?
A: No.
Q: What is the latest date that an individual may make a 2004 HSA contribution?
A: The tax return due date for the individual’s 2004 tax return, April 15, 2005.
Q: What types of withdrawals can be made from HSAs on a federal income tax-free basis?
A: Distributions from HSAs used to pay for the following are tax-free and penalty tax- free:
  • Qualified medical expenses as defined under Section 213 of the Internal Revenue Service Code (See IRS Publication 502: Medical and Dental Expenses). This is the same code section that defines "qualified medical expenses" for MSAs.
  • COBRA insurance
  • Qualified long-term care insurance
  • Health insurance premiums for individuals receiving unemployment compensation
  • For individuals age 65 or older, Medicare and retiree health insurance premiums (except for Medicare Supplement policy premiums)