Health savings accounts (HSAs) are among the newest, most innovative feature of consumer-directed health plans (CDHPs). A marketplace solution to the problem of rising health care costs and accessibility, CDHPs help raise consumers’ awareness of the real cost of health care and provide them with opportunities for greater decision-making control over their health care spending.
As CDHPs gain in popularity, so do the many options, like HSAs, that are available alongside those plans. Recent statistics show that enrollment in consumer-directed health plans has grown to about 4.9 million, according to findings recently published by Inside Consumer Directed Care.
“HSAs can offer many advantages to both employers and employees,” says Bill Berenson, vice president of sales and service for Aetna’s North Central region. “For employers, HSAs, in concert with high-deductible health plans, promote employee engagement and accountability for health care spending, which has the potential to help lower health care costs. Employees earn tax-free interest on account dollars, and they can roll over unused dollars for future health-related expenses.”
Smart Business spoke with Berenson, who answered some general questions about HSAs and how enrolling in an HSA offers employees an opportunity to save on health care costs or build a tax-free savings account for future expenses.
What is a health savings account (HSA)?
An HSA plan is a tax-advantaged account created to pay for qualified medical expenses in conjunction with high-deductible health plans. An HSA can be used to pay health plan deductibles or qualified expenses; help pay for future medical, COBRA or certain retiree or long-term care insurance premiums; or, if allowed to grow over time, earn tax-free interest.
Is there an annual cap or maximum amount that may be contributed to an individual’s HSA?
HSA contributions are limited to a plan’s annual deductible, which is determined by an employer, or $2,700 for an individual and $5,450 for a family, whichever is less. If the employee participates for less than the entire taxable year, the limit is prorated on a monthly basis. These limits will be adjusted for inflation in future years. Individuals age 55 and over may make an additional ‘catch-up’ contribution of $700 per year in 2006. This amount increases $100 per year until 2009 when it will be $1,000.
What expenses are eligible for payment through the HSA?
HSA can be used to pay for most qualified expenses as defined by the IRS Code 213(d). These expenses include, but are not limited to, medical plan deductibles, long-term care insurance premiums, COBRA, diagnostic services covered by the employees’ plan, over-the-counter drugs and LASIK eye surgery. A copy of IRS Publication 502 to review a list of allowable expenses can be obtained by phoning (800) 829-3676 or by visiting the IRS Web site at www.irs.gov. Employers and employees should consult with their tax adviser to determine eligibility requirements and tax advantages for participating in an HSA plan.
Can an HSA be used to pay for nonhealth-related expenses?
Yes. Employees may withdraw money from their HSA for items other than qualified expenses, but it will be subject to income tax (unless they are age 65 or disabled) and an additional 10 percent penalty tax on the amount withdrawn.
How are contributions made to an HSA?
The employer’s benefit plan may allow employees to make periodic contribution to their HSA as part of their annual benefits election. Otherwise, they may contribute to their account through payroll deductions, if applicable; automatic deductions from their bank account; or by check or money order. At any time, a lump sum contribution may be made, in any amount up to the maximum limit. If employees do not fund up to their permitted limit in any year, they have until April 15 of the following year to complete their HSA contribution for that year.
How are contributions to an HSA taxed?
If contributions are made as part of an annual health benefits election and submitted as part of the employee’s payroll deduction, then those contributions may be included in their income. Other contributions made to the HSA can be deducted from their income when they file their annual federal income tax return, even if they do not itemize deductions.
What happens to any remaining money in an HSA at the end of the year?
At the end of the year, any money remaining carries over to the next year.
Does the money in the HSA earn interest?
Yes; an HSA can grow over time. Interest earned on an HSA is not included in the employees’ income for federal tax purposes. There is no minimum balance required to earn interest. In addition, once their HSA balance reaches $2,000, they may have the HSA investment service available to you.
BILL BERENSON is vice president of sales and service for Aetna’s North Central Region. Reach him at (312) 928-3323 or [email protected].
