Frequently Asked HSA Questions

Q: What is a high-deductible health plan?

A: A high-deductible health plan contains certain minimum dollar limits on the annual deductible and maximum limits on the out-of-pocket expenses listed under the plan.

An individual health care plan would be considered high-deductible if it has an annual deductible of at least $1,200 for 2010. A plan for family coverage is considered high-deductible if it has an annual deductible of $2,400 for 2010. Out-of-pocket expenses for 2010 may not exceed $5,950 for individual coverage and $11,900 for family coverage. Out of pocket expenses include deductibles, co-payments, etc.

Q: Can a person have any other health care coverage and still be eligible for an HSA?

A: No. A person is not eligible for an HSA if he or she is covered under a health plan that is not a high-deductible plan. A person remains eligible for an HSA if, in addition to the high-deductible health plan, the type of additional coverage is for:

• accidents
• disability
• dental care
• vision care
• long-term care
• insurance for a specified disease or illness
• insurance that pays a fixed amount per day (or other period) of hospitalization
• insurance under which the majority of coverage relates to liabilities from workers’ compensation laws, torts, or ownership or use of property (such as auto insurance)

Q: If I am eligible, how do I establish an HSA?

A: Contact your nearest Heritage Bank branch to open an HSA account. Or apply online.

Q: Who can make an HSA contribution?

A: Any eligible individual may establish and contribute to an HSA. A person may be self-employed, unemployed, or employed and contribute to an HSA. The IRS has also stated an employer, a family member, or any other person or entity may make contributions to an HSA on behalf of an eligible individual.

Q: What are “catch-up contributions” for people age 55 and older?

A: Catch-up contributions are special contributions allowed for people age 55 and older and who are still eligible to contribute to an HSA. The maximum catch-up contribution for 2010 is $1,000. If both spouses are over age 55, each is eligible to make a catch-up contribution. Each spouse must make the contribution to their own HSA.

Q: How is my contribution limit determined if I am not covered for a full year under the high-deductible health savings plan?

A: Two different methods are used to determine your contribution limit for a given year. The first method is pro-rata. The second method is an exception to the pro rata rule and allows the HSA owner to make a full year’s contribution even though he or she was only eligible for part of the year.

Pro Rata Calculation

Your contribution is the sum of the monthly limitations. For example, if you are covered by the plan on the first day of each month for 2010, then you are entitled to the full annual contribution amount. If you are not covered on the first day of every month, then you are only entitled to a pro rata contribution as follows:

• If you are covered for 1 month, you are entitled to contribute 1/12 of the applicable amount.
• If you are covered for 3 months, you are entitled to contribute 3/12 of the applicable amount.

Note: If you have coverage under a high-deductible plan as of January 1, but are not covered under the same plan as of December 31, then the pro rata contribution rule applies.

The Special Calculation

A special rule applies if you become covered by a high-deductible plan on February 1, or the first day of any following month, and remain covered as of December 31. In this case, you are allowed to contribute the full annual contribution amount. This method allows you to contribute a larger sum.

Q: If both spouses have family coverage, how is the contribution limit computed?

A: If each spouse has family coverage under a separate health plan, both spouses are treated as covered under the plan with the lowest deductible. The contribution amount for a married couple is now the amount determined using either the pro rata calculation or the special calculation, as applicable. Any contribution to an MSA would need to be subtracted and then divided between the spouses. Each spouse could also contribute the catch-up amount.

Q: In what form must HSA contributions be made?

A: Contributions can by made by cash, check, or direct deposit from an employer. They may not be made in the form of stock or other property unless it is a rollover or a transfer.

Heritage Bank is able to set up a direct deposit from another financial institution to your Heritage Bank HSA account.

Q: What is the contribution deadline?

A: The deadline is the time prescribed by law for filing individual income tax returns, excluding extensions. Normally this is April 15. Like an IRA, contributions to an HSA can be made for the current year through April 15 of the next year.

Furthermore, contributions for the taxable year can be made in one or more payments. Although the annual contribution is determined monthly, the maximum contribution may be made the first day of the year. However, if a person has enrolled in Medicare benefits, then his or her deadline for making a contribution is the last day of the month preceding the enrollment.

Q: Are rollover contributions from MSAs and other HSAs permitted?

A: Rollover contributions do not need to be in cash and are not subject to the annual contribution limits. Except for the special one-time transfer discussed later, rollovers from an IRA, a health reimbursement arrangement (HRA), or a health flexible spending arrangement (FSA) to an HSA are not permitted.

Rollovers into HSAs are subject to rules similar to those for IRA rollovers. The consequence of rolling funds from an MSA or an HSA to another HSA is that the distribution will not be taxed in the income of the account owner even though the funds were not used to pay the qualified medical expenses of the account owner.

Q: Are special transfer contributions permitted?

A: Yes, they are. HSA law allows an individual with funds in a traditional IRA (and in limited cases, a Roth IRA), to make a special election once during their lifetime to transfer funds from their IRA to their HSA. The amount transferred using a direct trustee-to-trustee transfer will not be taxed. This amount cannot exceed the annual contribution limit for self or family coverage.

The one-time transfer rule allows a person to change funds, which would be taxable, to funds which will escape taxation if they are withdrawn from the HSA and used to pay medical expenses. There is also a special transfer rule allowing a person to transfer funds from a terminated FSA and/or HRA to an HSA.

Q: When can an HSA distribution occur?

A: An individual can receive a distribution from their HSA at any time, but there are tax consequences if the distribution is not used for eligible medical expenses.

Q: How is an HSA distribution taxed?

A: An HSA distribution that is used to pay qualifying medical expenses not paid or covered by insurance will generally not be included in the account owner’s gross income. Distributions that are used for non-medical purposes will be included in gross income and may be subject to a 10% excise tax. The excise tax applies to any distribution made for non-medical purposes prior to the account owner’s death, disability, or reaching age 65. A person being ineligible to contribute to his or her HSA does not change how a distribution is taxed.

Q: What type of medical expenses qualify for tax-free distributions?

A: Generally, any medical expense that could qualify as an itemized medical expense on your tax return falls in to the tax-free distribution bucket.

Note: If a distribution is made from an HSA to cover medical expenses, the expense cannot be itemized on your tax return.

Q: Who is responsible for determining if the distribution was used for qualifying medical expenses?

A: The HSA account holder bears sole responsibility. No responsibility falls on the custodian/trustee or the employer.

Q: Can HSA assets be used to pay high-deductible health plan premiums?

A: In most cases, no. However, within certain limits, the following insurance premiums may be paid from an HSA:

• A health plan during a period of continuation of coverage required under federal law (i.e. COBRA)
• A qualified long-term care insurance contract
• A health plan during a period of unemployment as evidenced by the individual receiving unemployment compensation under the law
• Any health insurance other than a Medicare supplemental policy for an account owner who has attained the specified age under section 1811 of the Social Security Act.

The above payments will qualify as if they were medical expenses eligible for tax-free treatment.

Q: Do excess contribution rules and prohibited transaction rules apply to HSAs?

A: Yes. In fact, the rules are very similar to IRA rules. A 6% excise tax will be owed if an excess contribution is made and it is not corrected within a specified time frame. If an HSA participates in a prohibited transaction, the HSA will cease to be an HSA on the first day of the year. For more information on this subject, review the IRS website at www.irs.gov.

Q: What are the tax benefits of an HSA?

A: All HSA account earnings are not taxed. In addition, distributions to the account owner from the HSA will be tax free if the funds are used exclusively to pay for medical expenses. If the withdrawn money is not used for medical expenses, the distribution will be reflected as income. An additional 10% tax will also be owed if the account owner is younger than 65 or is not disabled.

Generally, a deduction is able to be claimed by the account owner for the contribution amount. If the employer has made a contribution, it is generally excluded from the account owner’s income and not deductible.

Q: What tax rules apply when the HSA account owner dies?

A: If a surviving spouse is the beneficiary of the deceased account owner’s HSA, then that HSA is to be treated as the surviving spouse’s HSA. If a surviving spouse is not the beneficiary of the HSA, then the deceased account owner’s HSA ceases to be an HSA as of the date of death. The fair market value of HSA assets shall be included in the income of the beneficiary(ies).

Q: What is the tax treatment on an individual HSA contribution?

A: Regardless of if the eligible individual itemizes deductions, contributions are deductible in determining adjusted gross income.

Q: What is the tax treatment of contributions made by a family member or another person on behalf of the eligible individual?

A: Contributions made by any person or entity other than the HSA account owner’s employer on behalf of the eligible individual are deductible by the eligible individual in computing adjusted gross income. This deduction can be made regardless of whether or not the eligible individual itemizes deductions.

Q: What is the tax treatment of employer contributions to an employee’s HSA?

A: Employer contributions (if they are within the set 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. Employer contributions are not subject to withholding from wages for income tax or subject to the Federal Insurance Contributions ACT (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. Employer contributions are not deductible by the HSA account holder.

Q: What is the tax treatment of an HSA?

A: An HSA is generally exempt from tax. Earnings on amounts in an HSA are not includable in gross income while held in the HSA.

*Consult a tax advisor for complete information. Information provided is not intended to be legal or tax advice.