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Frequently-Asked Questions About Health Savings Accounts (HSAs)
Using a High Deductible Health Plan (HDHP) allows your business to keep premiums lower than that of a traditional plan. It also has advantages for your employees and gives them more control over managing their health care costs. They determine how the money is spent. Both employees and employers can contribute to an HSA fund, much like a 401(k) plan. Because HSA contributions are tax-deductible, your employees save money. Following are a few Q&As to help you understand the benefits of HSAs for your business.
- What is a high deductible health plan (HDHP)?
Generally, an HDHP is a health plan that satisfies certain requirements with respect to deductibles and out-of-pocket expenses. Specifically, for self-only coverage, an HDHP has an annual deductible of at least $1,000 and annual out-of-pocket expenses require to be paid (deductibles, co-payments and other amounts, but not premiums) not exceeding $5,000. For family coverage, an HDHP has an annual deductible of at least $2,000 and annual out-of-pocket expenses required to be paid not exceeding $10,000. In the case of family coverage, a plan is an HDHP only if, under the terms of the plan and without regard to which family member or members incur expenses, no amounts are payable from the HDHP until the family has incurred annual covered medical expense in excess of the minimum annual deductible. Amounts are indexed for inflation. A plan does not fail to qualify as an HDHP merely because it does have a deductible (or has a small deductible) for preventative care (e.g., first dollar coverage for preventative care). However, except for preventative care, a plan may not provide benefits for any year until the deductible for that year is met.
- What are the special rules for determining whether a health plan that is a network plan meets the requirements of an HDHP?
A network plan is a plan that generally provides more favorable benefits for services provided by its network of providers than for services provided outside of the network. In the case of a plan using a network of providers, the plan does not fail to be an HDHP (if it would otherwise meet the requirements of an HDHP) solely because the out-of-pocket expense limits for services provided outside the network exceeds the maximum annual out-of-pocket expense limits allowed for an HDHP. In addition, the plan’s annual deductible for out-of-network services is not taken into account in determining the annual contribution limit. Rather, the annual contribution limit is determined by reference to the deductible for services within the network.
- What kind of other health coverage makes an individual ineligible for an HSA?
Generally, an individual is ineligible for an HSA if the individual, while covered under an HDHP, is also covered under a health plan (whether as an individual, spouse, or dependent) that is not an HDHP.
- What other kinds of health coverage may an individual maintain without losing eligibility for an HSA?
An individual does not fail to be eligible for an HSA merely because in addition to an HDHP, the individual has coverage for any benefit provided by “permitted insurance.” Permitted insurance is insurance under which substantially all of the coverage provided relates to liabilities incurred under workers’ compensation laws, tort liabilities, liabilities relating to ownership or use of property (e.g., automobile insurance), insurance for a specified disease or illness, and insurance that pays a fixed amount per day (or other period) of hospitalization. In addition to permitted insurance, an individual does not fail to be eligible for an HSA merely because, in addition to an HDHP, the individual has coverage (whether provided through insurance or otherwise) for accidents, disability, dental care, vision care, or long-term care. If a plan that is intended to be an HDHP is one in which substantially all of the coverage of the plan is through permitted insurance or other coverage as described in this answer is not an HDHP.
- Can a self-insured medical reimbursement plan sponsored by an employer be an HDHP?
- In what form must contributions be made to an HSA?
Contributions to an HSA must be made in cash. For example, contributions may not be made in the form of stock or other property. Payments for the HDHP and contributions to the HSA can be made through a cafeteria plan.
- What is the tax treatment of employer contributions to an employee’s HSA?
In the case of an employee who is an eligible individual, employer contributions (provided they are within the limits) to the employee’s HSA are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from the employee’s gross income. The employer contributions are not subject to withholding from wages for income tax or subject to the Federal Insurance Contributions Ace (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act. Contributions to an employee’s HSA through a cafeteria plan are treated as employer contributions. The employee cannot deduct employer contributions on his or her federal income tax return as HSA contributions or as medical expense deductions under section 213.
- Must HSA trustees or custodians determine whether HSA distributions are used exclusively for qualified medical expenses?
No. HSA trustees or custodians are not required to determine whether HSA distributions are used for qualified medical expenses. Individuals who establish HSAs make that determination and should maintain records of their medical expenses sufficient to show that the distributions have been made exclusively for qualified medical expenses and are therefore excludable from gross income.
- Must employers who make contributions to an employee’s HSA determine whether HSA distributions are used exclusively for qualified medical expenses?
No. The same rule that applies to trustees or custodians applies to employers.
- What discrimination rules apply to HSAs?
If an employer makes HSA contributions, the employer must make available comparable contributions on behalf of all “comparable participating employees” (i.e., eligible employees with comparable coverage) during the same period. Contributions are considered comparable if they are either the same amount or same percentage of the deductible under the HDHP. The comparability rule is applied separately to part-time employees (i.e., employees who are customarily employed for fewer than 30 hours per week). The comparability rule does not apply to amounts rolled over from an employee’s HSA or Archer MSA, or to contributions made through a cafeteria plan. If employer contributions do not satisfy the comparability rule during a period, the employer is subject to an excise tax equal to 35% of the aggregate amount contributed by the employer to HSAs for that period.
- Can an HSA be offered under a cafeteria plan?
Yes. Both an HSA and an HDHP may be offered as options under a cafeteria plan. Thus, an employee may elect to have amounts contributed as employer contributions to an HSA and an HDHP on a salary-reduction basis.
- What reporting is required for an HSA?
Employer contributions to an HSA must be reported on the employee’s W-2 Form. In addition, information reporting HSAs will be similar to information reporting for Archer MSAs. The IRS will release forms and instructions, similar to those required for Archer MSAs, on how to report HSA contributions, deductions, and distributions.
- Are HSAs subject to COBRA continuation coverage under section 4980B?
No. Like Archer MSAs, HSAs are not subject to COBRA continuation coverage.
- How do the rules under section 419 affect contributions by an employer to an HSA?
Contributions by an employer to an HSA are not subject to the rules under section 419. An HSA is a trust that is exempt from tax under section 223. Thus, an HSA is not a “fund’ under section 419(e)(3) and, therefore, is not a “welfare benefit fund” under section 419(e)(1).
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