To keep it simple (and to get straight to the point) a health savings account (HSA) is an account funded to help employees save for future medical expenses. It’s a tax-exempt trust or custodial account that an individual sets up with a qualified HSA trustee.
The amounts in an HSA can be accumulated over the years or distributed on a tax-free basis to pay for (or reimburse) qualified medical expenses.
What are the Benefits of an HSA Plan?
HSAs are designed to provide the following federal tax benefits:
HSA contributions are non-taxable.
Interest and other earnings on HSA contributions accumulate tax-free.
Amounts distributed from an HSA for qualified medical expenses are tax-free.
Why are HSAs Popular?
In addition to the tax benefits described above, HSAs are a popular option because they offer potential health care cost savings to employers and employees. HDHPs tend to have lower monthly premiums and higher deductibles than traditional health plans. HSAs can be used to pay for medical expenses until the HDHP deductible is reached. HSAs can also help employees become better health care consumers by giving them more of a stake in controlling their health care costs until the HDHP deductible is met.
Other key HSA features include the following:
Unlike other types of medical savings accounts (such as health FSAs or HRAs), HSAs are controlled and owned by the employee. They are also portable, so the employee will continue to own (and have the ability to use) the HSA even if he or she switches jobs or leaves the workforce or changes medical coverage.
HSA contributions remain in the account and are carried over, without limit, from year to year until they are withdrawn. Because HSA amounts are nonforfeitable, HSAs can be used for future health care needs, even into retirement.
Even if an employee is no longer HSA-eligible (for example, because he/she is no longer covered by an HDHP), he or she can still use the accumulated HSA funds to pay for qualified medical expenses on a tax-free basis.
HSA eligibility requirements:
An individual must meet certain eligibility criteria in order to make HSA contributions (or have them made on his or her behalf), including a requirement that the individual be covered under a high deductible health plan (HDHP).
Only an eligible individual can establish an HSA and make HSA contributions (or have them made on his or her behalf). An individual’s eligibility for HSA contributions is generally determined monthly as of the first day of the month.
As a general rule, HSA contributions can only be for months in which the individual meets all of the HSA eligiblity requirements.
To be HSA-eligible for a month, an individual must:
Be covered by an HDHP on the first day of the month;
Not be covered by other health coverage that is not an HDHP (with certain exceptions);
Not be enrolled in Medicare; and,
Not be eligible to be claimed as a dependent on another person’s tax return.
Compliance tip: Although only eligible individuals can open an HSA and make contributions, individuals with an HSA can take money out at any time, even when they do not satisfy the HSA eligibility requirements.
Individuals who are HSA-eligible do not need permission or authorization from the IRS to establish an HSA. To set up an HSA, an individual must work with a trustee. A qualified HSA trustee can be a bank, an insurance company or anyone else approved by the IRS to be the trustee. Often, employers that sponsor HDHPs will select an HSA trustee for their employees to use.
Rules for Spouses
For married individuals, each spouse who is HSA-eligible and wants to make HSA contributions must open his or her own HSA. Married couples cannot have a joint HSA, even if they are covered by the same HDHP. However, distributions from one spouse’s HSA may be used to cover the other spouse’s qualified medical expenses.
Employee Status Not Necessary
An individual does not need to be an employee to be eligible for HSA contributions. Partners in a partnership, more-than-2-percent shareholders in a subchapter S corporation, sole proprietors and other self-employed individuals may be eligible for HSA contributions.
However, since these individuals are not employees, their HSA contributions are subject to different tax rules. For example, self-employed individuals cannot contribute to an HSA with pre-tax salary reductions under a cafeteria plan. IRS Notice 2005-8 provides more information about the tax treatment of HSA contributions for partners and more-than-2-percent shareholders.
Employer Eligibility Verification
When an employer makes a pre-tax contribution to an employee’s HSA, the employer should have a reasonable belief that the contribution will be excluded from the employee’s income. However, the employee, and not the employer, is primarily responsible for determining eligibility for HSA contributions.
IRS Notice 2004-50 states that an employer is only responsible for determining whether the employee is covered under an HDHP or any low deductible health plan sponsored by the employer, including health FSAs and HRAs.
HSA Employer Guide
If your company sponsors HSA-compatible health plans, you likely receive questions from your employees on HSA topics.
Download our HSA Employer Guide to help you and your employees understand the rules of HSAs and answer any question that comes your way. This comprehensive guide also provides information on HSA rules that apply to employers, including health plan design and nondiscrimination requirements.
Need help with your Group Health Insurance?
My name is Ty Reid and I’m the Director of Group Health Insurance here at O’Neill Insurance in Wadsworth, Ohio. I work with companies of all sizes across the region, offering strategies and solutions to companies like yours to help control the rising costs of their group health insurance, while still maintain a competitive benefits package for their employees.
Call me at (330) 849-5232 or email me at firstname.lastname@example.org to begin talking about your Group Health Insurance plan.