Health Savings Accounts

Since their creation as part of the 2003 Medicare Modernization Act, Health Savings Account s (HSAs) have become increasingly popular by employees who participate in High Deductible Health Plan (HDHP) arrangements as a way to pay for current out of pocket health expenses, while saving for future qualified medical and retiree health expenses, tax-free.  An annual census by America’s Health Insurance Plans (AHIP) indicates that the number of individuals covered by HSAs totaled 15.5 million in January 2013.

Health Savings Account Benefits:

Unlike Health FSAs which limit the amount of carryover from year to year to $500, or Health Reimbursement Arrangements (HRAs) which are funded and owned by employers, the HSA belongs to the employee participant and funds may carry forward from year to year limited only by the statutory account maximum established annually.    With an HSA, employees benefit from its ability to pay for both medical and non-medical expenses, , but such nonmedical distributions are included in gross income and generally are subject to an additional 20% tax - similar to early withdrawals from an IRA. This penalty does not apply to participants over the age of 65, or for payments made after death or disability.   

 

Employers like the ease of implementing and managing HSAs.  Generally once eligible employees enroll in and HSA, the designated custodian handles the administrative aspects, including expense reimbursements and annual summaries of account balances and reimbursements which participants must report to the IRS.  Unlike Health FSAs and HRAs the employer is not required to determine whether HSA distributions are used for qualified medical expenses.  It is up to the HSA account holders to make that determination and to maintain records of their medical expenses sufficient to show that the distributions were made for qualified medical expenses.  

 

State Taxes:

HSAs were set up as a federal program and individual states may choose to comply with the federal guidelines concerning tax treatment of Health Savings Accounts, or establish their own rules.  Most states conform to federal tax guidelines and a few do not tax income, but do tax dividends and interest; thus it is important to check before a plan is implemented so that plan details may be communicated accurately.  The following website maintains an up to date list: http://www.hsaforamerica.com/state-income-tax.htm

Retirement Vehicle Options:

HSAs have several similarities to IRAs. Their ability to carry-over funds from the previous year allows accounts to accumulate large amounts of funds. The portability of an HSA means that employees don’t lose the funds if switching jobs. These advantages, coupled with the lack of penalty on making non-eligible medical expense withdrawals after the age 65, positions HSAs as another strong option for retirement savings.

 

This article is intended to provide accurate and authoritative information on the subject matter covered. It is distributed with the understanding that FBMC is not rendering professional or medical advice and assumes no liability in connection with its use.

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