Health Savings Accounts Frequently Asked Questions
- What is a Health Savings Account?
- Who is eligible for a Health Savings Account?
- What is an HDHP?
- Who may contribute to an HSA?
- How and when are HSA contributions made?
- How much may be contributed to an HSA in calendar year?
- What is the tax treatment of an eligible individual's HSA contribution?
- What if the total HSA contributions in a year exceed the limit?
- Are HSAs portable?
- When are HSA assets available for distribution?
- How are distributions from an HSA taxed?
- What are qualified medical expenses?
- May an HSA trust or custodial agreement restrict HSA distributions to pay or reimburse only the account holder's qualified medical expenses?
- What is the tax treatment of an HSA after the death of an account holder?
- What are the IRS reporting requirements for an HSA?
- Is an HSA distribution statement required?
What is a Health Savings Account?
A Health Savings Account (HSA) is an investment account created by the Medicare Prescription Drug and Modernization Act of 2003. The account allows for tax-deductible contributions and tax-free distributions (including earnings) when the distributions are used for qualified medical expenses and the individual is covered by a high deductible health insurance plan (HDHP). Your money can also accumulate with tax-free interest until retirement, when you can withdraw it for any purpose and pay ordinary income tax.
Who is eligible for a Health Savings Account?
In addition to being covered by an High Deductible Health Plan (HDHP), an individual:
- Must not be covered by other health insurance (exceptions include specific injury insurance and accident, disability, dental, vision, and long-term care)
- May not be enrolled in Medicare
- Can't be claimed as a dependent on someone else's tax return
What is an HDHP?
A high deductible health plan (HDHP) is a health insurance plan that meets the minimum deductible and maximum out-of-pocket expense limits for individual or family coverage. The plan won't provide benefits until the deductible for that year has been met.
Who may contribute to an HSA?
Any individual, including an employer, can contribute to an HSA. All contributions are aggregated. If the employer contributes, the amount will be excluded from income and the employer gets the benefit of the deduction.
How and when are HSA contributions made?
An HSA must be established and contributions must be made by the eligible individual's tax return due date for the year, not including extensions.
Contributions for the year can be made in one or more payments.
Contributions other than rollovers must be in cash. Assets from Archer MSAs and other HSAs may be rolled over in cash or in-kind to an HSA.
Financial organizations accepting HSA contributions must keep records of such contributions. Principal Trust Company's partners will supply contribution information for our records.
How much may be contributed to an HSA in a calendar year?
The maximum annual contribution is the deductible amount (excluding any out-of-network deductible) not to exceed the annual limits set for individual and family coverage for an eligible individual covered by the same HDHP plan for the entire calendar year.
Individuals age 55 or older (until they enroll for Medicare) may make HSA catch-up contributions.
What is the tax treatment of an eligible individual's HSA contribution?
Contributions are deductible by the eligible account holder when determining his or her adjusted gross income. They are deductible whether he or she itemizes deductions. However, the participant cannot also deduct these contributions as medical expense deductions.
What if the total HSA contributions in a year exceed the limit?
Excess contributions made by the individual cannot be deducted. In addition, an excise tax of 6% will be imposed for each tax year the excess contribution remains in the account. The excess contribution is not taxed when distributed, but the net income attributable (NIA) is included in the account holder's income for the tax year in which the distribution is withdrawn.
If the excess contribution was made by the employer, it must be included on the employee's Form W-2 as taxable wages, and the account holder is subject to the 6% excise tax for each year the excess is not corrected.
Are HSAs portable?
Yes. If the individual is an employee who later changes employers or leaves the work force, the HSA stays with the individual.
When are HSA assets available for distribution?
HSA assets are payable on demand. There are no restrictions on when or how often an HSA account holder may take distributions. Using checks and debit cards are acceptable means of withdrawing HSA assets from the account.
How are distributions from an HSA taxed?
Distributions from HSAs may be exempt from federal income tax and penalties, depending on whether or not the distribution is used to pay for qualified medical expenses.
- Qualified distributions: Distributions for qualified medical expenses of the account holder, his or her spouse, or dependents are exempt from federal income tax and penalties.
- Nonqualified distributions: Distributions that are not used for qualified medical expenses are always includable in the individual's gross income. In addition, nonqualified distributions are subject to an additional 10% penalty, unless the distribution is made after the account holder's death, disability, or reaching age 65.
The account holder is responsible for determining whether an HSA distribution is qualified or nonqualified. The account holder should maintain records of his or her medical expenses sufficient to show that the distributions were made exclusively to pay for qualified medical expenses, and are, therefore, excludable from gross income. HSA trustees or custodians, as well as employers who make contributions to an employee's HSA, are not responsible for determining whether distributions are qualified or nonqualified.
What are Qualified Medical Expenses?
Qualified medical expenses include:
- Diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function on the body
- Transportation for the essential medical care listed above
- Over-the-counter drugs
- Qualified long-term care insurance
- COBRA healthcare continuation coverage
- Healthcare coverage while an individual is receiving unemployment compensation
May an HSA trust or custodial agreement restrict HSA distributions to pay or reimburse only the account holder's qualified medical expenses?
No. The HSA trust or custodial agreement may not contain a provision that restricts HSA distributions to pay or reimburse only the account holder's qualified medical expenses. The account holder is entitled to distributions for any purpose. Distributions may be used to pay or reimburse qualified medical expenses or for other nonmedical expenditures. Only the account holder may determine how the HSA distributions will be used.
However, any amount of the distribution not used exclusively to pay for qualified medical expenses of the account holder, spouse, or dependents is includable in gross income of the account holder and is subject to an additional 10% tax on the amount includable. The exceptions: distributions made after the account holder's death, in case of disability, or reaching age 65. There are also no restrictions on the frequency or minimum amount of HSA distributions.
What is the tax treatment of an HSA after the death of an account holder?
The HSA will be treated as the surviving spouse's HSA, but only if the spouse is named the holder. The account will not be treated as an HSA after the account holder dies and there is no surviving spouse or the surviving spouse is not the beneficiary. The account will then be included in the federal gross income of the estate or the named beneficiary.
Any qualified medical expenses incurred by the decedent before death and paid by the recipient of the HSA will reduce the taxable amount. The amount of estate tax paid if the HSA was included in the estate will also reduce the amount.
What are the IRS reporting requirements for an HSA?
Employer contributions to an HSA must be reported on the employee's Form W-2. The HSA trustee or custodian is responsible for filing required forms 5498-SA and 1099-SA with the IRS.
Is an HSA distribution statement required?
Since distributions from an HSA will be reportable transactions by the trustee or custodian, obtaining a completed distribution statement is essential to ensure proper reporting. Remember, however, that HSAs are not subject to federal income tax withholding requirements.
