HSA (Health Savings Account) Basics
Common Questions and Answers
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TABLE OF CONTENTS
1) What is a Health Savings Account?
2) Where does the money deposited in the account come from?
3) Why should I have a Health Saving Account for me or my family?
4) What other advantages do Health Savings Accounts have over traditional health insurance?
5) Do I have an HSA qualified health insurance plan?
6) Can I open an HSA myself?
7) Why would some one who is less healthy want a Health Savings Account?
8) Why would some one who is less healthy want a Health Savings Account?
9) Is there an IRS approved list of medical expenses that I can spend my tax free Health Savings Accounts funds on?
10) What options for deductibles and out-of-pocket maximums are insurers allowed to offer to employers or individual consumers?
11) Does the maximum out of pocket include the deductible?
12) Can a co pay prescription card be offered under a qualified high deductible plan?
13) If you purchase a HSA-compatible healthcare plan and that you incur expenses that the plan doesn't allow - such as over their "reasonable and customary" schedule. Can you pay for that amount (over the "reasonable and customary") even if it does not go towards meeting the deductible under the health insurance plan?
14) How long have HSA accounts been available?
15) Eligibility?
16) Did I have to set up the hsa by the end of 2003 (like and ira) or can I do it now to still get the tax saving benefits for last year? (Thanks for this excellent site and service.)
17) I understand co pay plans are not eligible. Do prescription drug copay riders fall under that rule?
18) Can I contribute to this plan up till April 15th, 2005 to obtain a deduction for 2004?
1. Q: What is a Health Savings Account?
Answer: Health Savings Accounts are a new option for health insurance and they have two parts.
The first part is a health insurance policy that covers large hospital bills. The second part of the
Health Savings Account is an investment account or retirement account from which you can withdraw
money tax-free for medical care. Otherwise, the money accumulates with tax-free interest until
retirement, when you can withdraw for any purpose and pay normal income taxes.
- BACK TO TOP 
2. Q: Where does the money deposited in the account come from?
Answer: The money comes from refinancing your current
health insurance.
The average cost of health insurance was $9,068.00 for a family in 2003 in the U.S., according to the Kaiser
Foundation. That is how much money on average, per family, was spent last year on family health care insurance coverage (HMOs,
PPOs, fee for service plans) in the United States.
Remember HSAs are two parts: an insurance policy and a tax-free account. So, if you
take $3,000.00 of that $9,068.00 (leaving $6,068.00 unspent) and you or your employer purchase a health insurance policy that
covers your medical expenses above $5,1,50.00, the high deductible health insurance plan is in place.
Now, according to the law,
you are allowed to deposit – tax-free – up to $5,150.00 to pay for the routine medical care. Withdrawals for medical care are tax-free.
Your insurance company may administer the account or you can open the account with an HSA administrator like FirstMSA
(www.firstmsa.com) or MSABank (www.msabank.com) or Prime Healthcare (www.webhealthsavingsaccount.com) or a local bank
that offers Health Savings Accounts.
To review, out of the $9,068.00, you spent $3,000.00 on a health insurance policy with a
$5,150.00 deductible. The insurance covers your family’s health care costs that exceed the $5,150.00 deductible.
Out of the
$6,068.00 remaining, you and your employer deposit $5,150.00 into your health savings account. It is now your money.
If you leave your employer, it is still your money. It follows you. What you do not spend out of the account rolls over, so if you
and your family only have health costs of $2,000.00 this year, you and your family would have $3,150.00 remaining in your
Health Savings Account. So, next year, you will start your Health Savings Account with $3,150.00, plus the interest you earned,
and you and your employer will add another $5,150.00 to your account, giving you ($5,150.00 + $3,150.00 = $8,300.00) to spend
next year.
So, you and your employer just saved $918.00 in health care costs in the example above.
|
Comparing Current Health Insurance Costs to Current Health Savings Accounts |
|
|
$755.67: |
Average monthly premium for average 2003 Family Health Insurance |
|
$9,068: |
Annual 2003 Cost of Family Health Insurance in the U.S. according to the Kaiser Foundation |
|
Family Medical Savings Account Offered in Florida |
|
|
$234: |
Monthly Premium for a $5,150 Deductible HSA Family Health Insurance Policy (40 to 49 yr. old primary insured) |
|
$2,808: |
Annual Premium for a $5,150 Deductible Family Health Insurance Policy |
|
$5,150: |
$5,150: Goes in your pocket, into your Health Savings Account (instead of paying the insurance company for higher premiums, you keep this money for you and your family) |
|
$7,958: |
Total cost of Premium and 100% Funded HSA |
|
Compare Costs: |
|
|
$9,068: |
Annual 2003 Cost of Family Health Insurance in the U.S. according to the Kaiser Foundation |
|
$7,958: |
Total cost of Premium and 100% Funded HSA |
|
$1,100 |
Savings a Year with a Fully Funded HSA |
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3. Q: Why should I have a Health Saving Account for me or my family?
Answer: If you or your employer are tired of sending
hundreds and hundreds of dollars each month to your health insurance company, and would prefer to keep a big chunk of that
money for yourself to spend on health expenses or save it for the future, then you need to look into a Health Savings Account.
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BACK TO TOP
4. Q: What other advantages do Health Savings Accounts have over traditional health insurance?
Answer: If you are unemployed or laid off and are
collecting unemployment insurance, then you can use funds from your Health Savings Account to pay for your health insurance
premium and for your routine health expenses -- all tax-free.
Another advantage is that you can spend tax-free money out of your Health Savings Account for long-term care insurance. - BACK TO TOP
5. Q: Do I have an HSA qualified health insurance plan?
Answer: Do I have a HSA Qualified health insurance policy?
The quickest way to find out if your health insurance plan is HSA qualified is to ask your health insurance company. If they say ‘yes,’ then you know your health plan qualifies you to open an HSA.
Or, if your insurer offers both the insurance and the HSA account for the health insurance policy you have, then the policy is clearly HSA qualified.
For those whose employer provides your health insurance, ask your employer. If they do not know, they should ask the insurer on behalf of the employees.
Some visitors to our web site (and members of the HSA Coalition) have reported – essentially – that their insurer will not tell them if their policy is HSA qualified or not.
In that case, I recommend voting with your check book, and get a new insurance policy with a company that will tell whether their insurance policy is HSA qualified. In all seriousness, find a new insurer.
If for whatever reason, you do not want to leave your insurer, here some general guidelines in the form of several questions you need to answer, to find out if your health insurance plan is an HSA qualified plan:
For family health insurance plans:
Is the annual deductible between $2,000 and $10,000? If the answer is yes, you are OK, so far. If the answer is no (either the deductible is less than $2,000 or more than $10,000) then you do not have an HSA qualified plan.
Does your family insurance plan have a comprehensive deductible? For example, if one person spends $1,000, and the other $800, and a third person has expenses of $1,200, each expenditure counts toward the $3,000 deductible, and your deductible is met when all expenditures exceed the deductible? If you answered yes, then your plan qualifies.
If on the other hand, your family plan has a deductible that fits in the HSA compatible deductible range, but allows for individual family members to be covered by the insurance if their expenditures reach a certain dollar amount below the overall deductible, then no, your plan does not qualify. For example, if your family deductible is $3,000, but if a family member incurs expenses that exceed $1,500 then that family member’s future expenses are covered by the health insurance, then no, you do not have a HSA qualified plan.
You could have another kind of plan where the deductible for the entire family is $4,000, but the insurance starts to pay benefits for each family member at $2,250. This meets the minimum family deductible (of $2,000) for an HSA qualified deductible. So this plan qualifies.
Does your maximum out-of-pocket amount per year for your family plan exceed $10,000? If yes, you do not have a HSA qualified health insurance plan.
For health insurance plans for singles:
Is your annual deductible at least $1,000 or not more than $5,000? If yes, then you are OK so far, in terms of having a HSA qualified plan.
Does your maximum out-of-pocket expenditure for your single insurance plan exceed $5,000? If so, it does not qualify as a HSA qualified health insurance plan.
For both family and single health insurance plans:
Do you pay co-pays before you reach the deductible? If yes, then you do not have a HSA qualified plan, unless the co-pay is for prescription drugs. In that case, your health insurance will qualify for an HSA until 1/1/2006 because the U.S. Treasury has issued special transition rules for such plans. However, if you pay co-pays for prescription drugs, or are otherwise insured below your deductible for prescription drugs, the drug coverage you have must be a separate plan or a rider to your plan. You can go to the U.S. Treasury section of this web site (button on the left side of the Home Page) to read the Media Release about this transition rule, or the actual HSA transition rule issued by Treasury.
If your plan meets all the requirements listed above, it is an HSA compatible plan.
Remember, the maximum HSA deposit for a family cannot exceed the deductible, or in the case of a deductible higher than $5,150, the HSA deposit cannot exceed $5,150 in 2004.
For single individuals, your maximum HSA deposit can not exceed your deductible, and in cases of a deductible higher than $2,600, your HSA deposit cannot exceed $2,600 in 2004. -
BACK TO TOP
6. Q: Can I open an HSA myself?
Answer: Some insurers will offer you the insurance
policy and the Health Savings Account, so you will not have to open a separate account. Other insurers offer just the insurance
policy, and you will have to find a bank or other trustee to open your Health Savings Account. The two largest Health Savings
Account trustees are MSABank and FirstMSA, and are located on the web at
www.msabank.com and
www.firstmsa.com.
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BACK TO TOP
7. Q: Why would some one who is less healthy want a Health Savings Account?
Answer: There are two key reasons the less healthy
should choose an Health Savings Account.
The first reason is to have control over their own health care decisions and treatments, including their prescription drugs.
With an HMO, the sick must face the rationing regime in place by HMOs to contain costs, which includes a frustrating waiting list to see a specialist and treatment and prescription drug formularies that may not have the most up-to-date treatments or brand name drugs that would make them feel the best.
The second reason is a financial incentive.
Assuming the less healthy would rather not be in an HMO or other managed care plan, then they would likely choose a fee-for-service plan. The standard fee-for-service plan has a $500 deductible, with a 20% co-pay of the next $5,000. This means the person would pay $500 for the deductible, and $1,000 for 20% of $5,000, before being covered 100%.
That is $1,500 in after-tax income to be insured 100% for someone who is less healthy in a traditional, low deductible, fee-for-service health insurance plan.
With a Health Savings Account, the same individual would pay a much smaller premium, and in most cases, the savings fund a majority of the deductible in their Health Savings Account.
With a $1,700 deductible, and, say $1,500 deposited tax-free in the Health Savings Account, the less healthy individual with an HSA would have to come up with $200 in after tax money to be covered 100%. ($1,700 deductible minus $1,500 from the Health Savings Account equals $200 to meet the deductible).
So the choice for a less healthy individual in a fee for service plan is: (1) pay $1,500 in after-tax funds to pay to be covered 100% by their insurance, or (2) with an HSA, pay $200 in after tax money to be covered 100%.
The less healthy, therefore, have a financial incentive to choose a Health Savings Account.
- BACK TO TOP
8. Q: Why would some one who is less healthy want a Health Savings Account?
Answer:
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Possible Build-Up of Savings For Families With An HSA Under Different Time and Medical Expense Scenarios |
||||
|
Account Balance After X Years |
Age of Head of Household Starting at 30 |
Health Savings Account Balances (Assumes a $4,000 Deductible and Deposit Each Yr.) |
||
|
After Family Medical Expenses of $1,000 Each Yr |
After Family Medical Expenses of $500 Each Yr |
Zero Family Medical Expenses |
||
|
5 Years |
35 |
$17,406 |
$20,307 |
$23,208 |
|
10 Years |
40 |
$39,620 |
$46,224 |
$52,827 |
|
15 Years |
45 |
$67,972 |
$79,301 |
$90,630 |
|
20 Years |
50 |
$104,158 |
$121,517 |
$138,877 |
|
25 Years |
55 |
$150,340 |
$175,397 |
$200,454 |
|
30 Years |
60 |
$209,282 |
$244,163 |
$279,043 |
|
35 Years |
65 |
$284,509 |
$331,927 |
$379,345 |
Assumes 5% interest per year, and 100% of a $4,000 deductible is deposited each year. One Medical Savings Account insurer has paid 5% interest on balances in their Medical Savings Accounts since January 1, 1997, and has not changed their interest rate since 1/1/97. Source: The HSA Coalition | ||||
|
Possible Build-Up of Savings For Individuals With An HSA Under Different Time and Medical Expense Scenarios |
||||
|
Account Balance After X Years |
Age of Head of Household Starting at 25 |
Health Savings Account Balances (Assumes a $4,000 Deductible and Deposit Each Yr.) |
||
|
After Individual Medical Expenses of $1,000 Each Yr |
After Individual Medical Expenses of $500 Each Yr |
Zero Individual Medical Expenses |
||
|
5 Years |
30 |
$5,802 |
$8,703 |
$11,604 |
|
10 Years |
35 |
$13,207 |
$19,810 |
$26,414 |
|
15 Years |
40 |
$22,657 |
$33,986 |
$45,315 |
|
20 Years |
45 |
$34,719 |
$52,079 |
$69,439 |
|
25 Years |
50 |
$50,113 |
$75,170 |
$100,227 |
|
30 Years |
55 |
$69,761 |
$104,641 |
$139,522 |
|
35 Years |
60 |
$94,836 |
$142,254 |
$189,673 |
|
40 Years |
65 |
$126,840 |
$190,260 |
$253,680 |
Assumes 5% interest per year, and 100% of a $2,000 deductible is deposited each year. One Medical Savings Account insurer has paid 5% interest on balances in their Medical Savings Accounts since January 1, 1997, and has not changed their interest rate since 1/1/97. Source: The HSA Coalition, 2004 | ||||
Note, that these charts shown above do not reflect the maximum amount of money that can be built up,
if the maximum allowable deposits into the health savings account are made each year. The maximum
allowable amounts for 2004 are $5,150.00 for a family, and $2,600.00 for an individual. The charts
assume $4,000.00 per year deposit for families, and a $2,000.00 per year deposit for an individual.
- BACK TO TOP
9. Q: Is there an IRS approved list of medical expenses that I can spend my tax free Health Savings Accounts funds on?
Answer: Yes, there is list of
allowable expenses published by the U.S. Treasury Department, actually the Internal Revenue Service,
referred generally as the ‘213 (d)’ list, since it appears in IRS regulation 213 (d). Here is a link to the list
of allowable/not allowable expenditures:
http://www.irs.gov/pub/irs-pdf/p502.pdf. In general, you can
spend tax-free from your Health Savings Account on all medical, dental (including braces for your children),
and vision expenses, chiropractic visits, and even acupuncture, but not on your insurance premium, unless
you are unemployed and are collecting Federal unemployment benefits. - BACK TO TOP
10. Q: What options for deductibles and out-of-pocket maximums are insurers allowed to offer to employers or individual consumers?
Answer: Use the handy chart
below outlining the Health Savings Account deductible and out-of-pocket maximums allowed by the Health
Savings Account law.
|
Health Saving
Accounts |
Maximum Deductible |
Maximum Out-of-Pocket |
Maximum HSA Deposit |
|
|
Single |
$1,000.00 |
$5,000.00 |
$1,000.00 |
|
|
$1,700.00 |
$5,000.00 |
$1,700.00 |
||
|
$2,600.00 |
$5,000.00 |
$2,600.00 |
||
|
$5.000,00 |
$5,000.00 |
$2,600.00 |
||
|
Family, Husband
& Wife or Parent & Children |
$2,000.00 |
$10,000.00 |
$2,000.00 |
|
|
$3,450.00 |
$10,000.00 |
$3,450.00 |
||
|
$5,150.00 |
$10,000.00 |
$5,150.00 |
||
|
$10,000.00 |
$10,000.00 |
$5,150.00 |
||
For those individuals 55 years old or older, the law allows an additional "catch up" deposit. Catch up deposits start at $500 in 2004 and go up by $100 each year, until the maximum catch up amount is reached, which is $1,000. If both the husband and wife are 55 or older, they could both use the catch up provision. |
||||
11. Q: Does the maximum out of pocket include the deductible?
Answer: Yes. - BACK TO TOP
12. Q: Can a co pay prescription card be offered under a qualified high deductible plan?
Answer: The U.S. Department
of the Treasury has recently stated that those with a health insurance plan that is in all other respects HSA
compatible, except that it provides prescription drug coverage below the deductible, can have an HSA until
1/1/2006. This is how the U.S. Department of Treasury’s media release described this recent Treasury
ruling:
http://www.hsainsider.com/treasury/treasury_7.pdf
INTERACTION OF HDHP BENEFITS WITH PRESCRIPTION BENEFITS ANDTRANSITIONAL RELIEF
Prior guidance noted that an eligible individual must be covered by an HDHP and generally no other health
plan that is not an HDHP. Guidance issued today clarifies that individuals covered by a health plan that
provides prescription drug benefits before the minimum annual deductible of an HDHP has been satisfied
may not make contributions to an HSA. However, companion guidance also issued provides transition
relief to those individuals covered by both an HDHP and by a separate health plan or rider that provides
prescription drug benefits before the deductible of the HDHP is satisfied. Under the relief, such individuals
continue to be eligible to contribute to HSAs before 2006.
If you want to read the full text of the Ruling, go to:
http://www.hsainsider.com/treasury/treasury_3.pdf -
BACK TO TOP
13. Q: If you purchase a HSA-compatible healthcare plan and that you incur expenses that the plan doesn't allow - such as over their "reasonable and customary" schedule. Can you pay for that amount (over the "reasonable and customary") even if it does not go towards meeting the deductible under the health insurance plan?
Answer: Yes. - BACK TO TOP 14. Q: How long have HSA accounts
been available? Answer: The law became
effective January 1, 2004, and was signed into law by the President in early December 2003. - BACK TO TOP 15. Q: Eligibility? Answer: Here is the U.S.
Department of Treasury's answer, which can be found at:
http://www.treas.gov/offices/public-affairs/hsa/faq2.html#hsa3
16. Q: Did I have to set up the
hsa by the end of 2003 (like and ira) or can I do it now to still get the tax saving benefits for last year?
(Thanks for this excellent site and service.) Answer: HSAs did not exist
last year. President Bush signed the law authorizing them in early December 2003. (The HSA provision
was part of the Medicare Rx bill.) The HSA section of the Medicare Rx law became effective on 1/1/04.
You would have to have had a Medical Savings Account last year to get a tax benefit for 2003. - BACK TO TOP 17. Q: I understand co pay plans
are not eligible. Do prescription drug copay riders fall under that rule? Answer: The U.S. Department
of the Treasury has recently stated that those with a health insurance plan that is in all other respects HSA
compatible, except that it provides prescription drug coverage below the deductible, then until 1/1/2006,
such persons can have an HSA. This is how the U.S. Department of Treasury’s media release described this
recent Treasury ruling: 18. Q: Can I contribute to this plan
up till April 15th, 2005 to obtain a deduction for 2004? Answer: Yes, provided, of
course you have HSA qualified insurance, and the maximum deductible amount is pro-rated based on
the first full month your high deductible health plan was in place.
Who is eligible for a Health Savings Account?
To be eligible for a Health Savings Account, an individual must be covered by a High Deductible Health
Plan (HDHP), must not be covered by other health insurance (does not apply to specific injury insurance
and accident, disability, dental care, vision care, long-term care), is not eligible for Medicare, and can’t be
claimed as a dependent on someone else’s tax return.
What Is a “High Deductible Health Plan” (HDHP)?
A HDHP is a health insurance plan with minimum deductible of $1,000 (self-only coverage)
or $2,000 (family coverage). The annual out-of-pocket (including deductibles and co-pays) cannot
exceed $5,000 (self-only coverage) or $10,000 (family coverage). HDHPs can have first dollar coverage
(no deductible) for preventive care and higher out-of-pocket (co pays & coinsurance) for non-network
services. - BACK TO TOP
http://www.hsainsider.com/treasury/treasury_7.pdf
INTERACTION OF HDHP BENEFITS WITH PRESCRIPTION BENEFITS ANDTRANSITIONAL RELIEF
Prior guidance noted that an eligible individual must be covered by an HDHP and generally no other
health plan that is not an HDHP. Guidance issued today clarifies that individuals covered by a health
plan that provides prescription drug benefits before the minimum annual deductible of an HDHP has
been satisfied may not make contributions to an HSA. However, companion guidance also issued provides
transition relief to those individuals covered by both an HDHP and by a separate health plan or rider that
provides prescription drug benefits before the deductible of the HDHP is satisfied. Under the relief, such
individuals continue to be eligible to contribute to HSAs before 2006.
If you want to read the full text of the Ruling, go to:
http://www.hsainsider.com/treasury/treasury_3.pdf -
BACK TO TOP
To answer the question "What happens if on day two of having an HSA, am hospitalized, and do not have
enough money built up in the account?" some insurers are selling a hospitalization rider (with a one time
fee) that allows individuals or employees to be paid the amount they would have deposited into the HSA
over the course of more than a year, if they are hospitalized in the initial months of having an HSA.
The way that one insurer's rider works is that if in the third month of the HSA being in force the HSA policy
holder is hospitalized for three days, the insurance company sends the insured a check for the deductible
minus an assumed amount of three months deposit into the HSA account. (The rider does not assume the
maximum allowable amount is deposited each month.)
So, in the case of this insurer, with this type of rider, the HSA insured uses this money paid to them to
meet their deductible expenses, and their high deductible health insurance covers their other hospitalization
costs, once their deductible is met.