COMMON QUESTIONS ON HSAs

What is an HSA?

A Health Savings Account is a consumer-managed, tax-favored alternative to traditional health insurance created for the purpose of paying medical expenses.

What are the benefits of an HSA?

• Your own HSA contributions are tax-deductible.
• Interest earned on your account is tax-free.
• Withdrawals for qualified medical expenses are tax-free.
• Unused funds and interest are carried over, without limit, from year to year.
• You own the HSA and it is yours to keep—even when you change plans or retire.

Who is qualified to obtain an HSA?

You must be covered by a High Deductible Health Plan (HDHP) to take advantage of HSAs. You also must: not receive coverage under another health insurance plan, not be enrolled in Medicare and not be someone else’s dependent.

How does an HSA work?

An HSA works in conjunction with high deductible health insurance. Your HSA money can be used to help pay the health insurance deductible and qualified medical expenses not covered by the health insurance, including dental and vision. Your HSA account earns tax-free interest and, in some plans, can be used for different types of investments such as mutual funds or money market accounts.

What are the benefits of high deductible health insurance?

These types of plans cost less than low deductible and copay plans. Typically, your HDHP premiums will be about 50% lower.

What are the deductible and out-of-pocket expense limits for HDHPs?

For 2009, the minimum dedctible is $1,150 for singles and $2,300 for families. For out-of-pocket expenses, the maximum is $5,800 for singles and $11,600 for families.

What expenses qualify for reimbursement from my HSA?

Most expenses for medical, dental and vision care will be reimbursed under your HSA with some exceptions such as cosmetic surgery and health club dues. A list of reimbursable expenses is available on the IRS Web site, www.irs.gov.

Does making HSA contributions through my company save me money in other ways?

If your employer offers a Section 125 plan (also known as a “cafeteria plan”) that allows you to contribute to your HSA account through payroll deductions, you will avoid paying the employee share of the federal FICA tax on the amount you contribute. You also will reduce your tax liability and payments.

What are the tax deductible contribution limits?

For 2009, federal limits annual contributions to $3,000 for singles and $5,950 for families.

How do HSAs differ from Flexible Spending Accounts?

Unlike a Flexible Spending Account, unused money in your HSA isn’t forfeited at the end of the year; it continues to grow, tax-deferred. HSA contributions are always yours to keep.

Can my HSA be used for dependents not covered by the health insurance?

Generally speaking, it can be used to pay for the unreimbursed medical expenses of your spouse or dependents.

Can I use my Health Savings Account for nonmedical expenses?

Yes, but you have to pay income tax and a 10% penalty for a nonmedical withdrawal prior to age 65.  At age 65, you only pay income tax on the amount of the nonmedical withdrawal.

Can I have an HSA and an IRA? Can my HSA account be rolled into my IRA?

You can have both an HSA and IRA, but you cannot transfer your HSA funds into the IRA without incurring tax consequences.

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Once I turn 65, what happens to the money in a Health Savings Account?

Once you hit 65, the amounts can be used for health expenses and to pay certain insurance premiums like Medicare Part A & B, Medicare HMO and the employee's share of retiree medical insurance premiums. It cannot be used to purchase a Medigap policy. It can also be used for medical expenses Medicare does not cover. If used for medical expenses, the amounts come out of the account tax free. If used for other expenses, the amount received will be taxable at ordinary income tax rates.

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