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Health Savings Accounts (HSAs) were signed into law on December 8, 2003. HSAs are a significant expansion of the current Medical Savings Accounts MSAs. 

Q. What is a Health Savings Account?
A. An HSA works like an IRA, except that money is used to pay health care costs. Participants enroll in a relatively inexpensive high deductible insurance plan. Then, a tax-deductible savings account may be opened to cover current and future medical expenses. The money deposited, as well as the earnings, is tax-deferred. The money can then be withdrawn to cover qualified medical expenses tax-free. Unused balances roll over from year to year.

Q. Who can qualify?
A. Everyone (not just self-employed or small businesses) with a qualified high deductible insurance plan will be eligible for a tax-deductible HSA.

Q. How does and HSA Work?
A. You obtain coverage under a qualified high-deductible health insurance plan. Each year you deposit the money you saved on lower premiums into a tax-favored savings account. You use the savings account to pay for your deductible with tax-free dollars. Once you meet the deductible, the insurance starts paying for your medical expenses. Any money left over at the end of the year is yours to keep.

Q. What is the difference between a Medical Savings Account and a Health Savings Account?
A. HSAs are a significant expansion of the current MSA program. Unlike MSAs, HSAs provide the following:

  • Everyone with a qualified high deductible plan is eligible to participate (includes all size employers, the self-employed, individual and families who are not self-employed)

  • HSAs can be funded by the employer, employee or combination of both within the same calendar year

  • HSAs are permanent and portable

  • Larger tax-deferred contributions to custodial accounts

  • There are broader deductible ranges

Q. What is a high deductible insurance plan?
A. For 2004, a high deductible insurance plan is a health plan with a minimum deductible of
$1000 for self-only coverage and $2,000 for family coverage. The maximum out-of-pocket expenses for allowed costs must be no more than $5,000 for self-only coverage and no more than $10,000 for family.

Q. HSA law allows for lower deductibles than MSAs. When will those deductibles he available from insurance carriers?
A. Initially, insurers will offer their current MSA deductible plans. Expanded deductibles and coinsurance options will be available by mid-year from most carriers. 

Q. When will my health insurance carrier start offering HSAs?
A. Carriers who are currently offering MSA compatible high-deductible plans will offer Health Savings Accounts effective January 1,2004. 

Q. Will current MSA administrators offer HSA custodial accounts?
A. Yes.

Q. What will happen to Medical Savings Accounts effective January 1, 2004?
A. MSAs are scheduled to sunset (end) December 31,2003. Existing MSAs may continue under the current rules. Effective January 1, 2004, those who would have qualified for an MSA will now qualify for an HSA.

Q. Can a Medical Savings Account he rolled into a Health Savings Account?
A. Yes. MSAs can be rolled into HSAs on a tax-free basis, but it is not necessary. If, however, a client chooses to participate in the new HSA contributions limits and deductibles he/she must complete an HSA Adoption Agreement. Those clients choosing not to roll their MSA to an HSA at this time will receive information from from their plan administrator by the end of the first quarter of 2004 to facilitate a smooth migration from MSA to HSA.

Q. Can existing MSA plans participate in the new HSA program (i.e. expand the contribution amounts)? 
A. Yes. Clients can participate in the new HSA program as long as they complete the new HSA Adoption Agreement. If MSA clients do not choose to change the deductible, coinsurance limits or contribution amounts, they do not have to do anything. (See question above.)

Q. What are the new maximum contribution limits? '
A. Annual contribution limits for 2004 are capped at either the high deductible plan deductible or $2,600 for individual or $5,150 for family - whichever amount is less. 

Q. What if a client isn't sure they want an HSA? 
A. If at the time of sale, a client feels he/she may want an HSA account sometime in the future, but doesn't want to fund it right now, the best practice is to set up the account immediately. The client doesn't need to fund the account right away. In this situation, the client can complete an HSA Adoption Agreement now and decide on funding the account later.

Q. How is the contribution limit computed for an individual who begins individual coverage under an HDHP on June 1, 2004 and continues to be covered under the HDHP for the rest of the year?  

A. The contribution limit is computed each month. So, if the annual deductible is $5,000, the annual contribution limit (for 12 months) would be $2,600. The monthly contribution limit would be $216.67 ($2,600/12). Therefore, the effective annual contribution limit would be $1,516.69 (7 x $216.67).

Q. What are the catch-up contributions for individuals age 55 or older?

A. For individuals (and their spouses covered under the HDHP) between ages 55 and 65, the HSA contribution limit is increased by $500 in calendar year 2004. This catch-up amount will increase in $100 increments annually, until it reaches $1,000 in calendar year 2009.

  Typical Family Plan
3x single deductible
$1,000
HSA
Common family deductible
$5,100
Coinsurance 80%/20% 100%
Premium Paid $7,115 $3,100
Your share of medical expenses on $1,500 claim $1,000 deductible
$100 coinsurance
$550 on non-covered expenses
+$1,650
$1,500 medical expenses
$550 for dental/eyewear
+$2,050
Total expenses =$8,765 =$5,150
Tax savings on HSA deposits +$0 +$1,428
Net expenses (out-of pocket minus savings) $8,765 $3,722
Total Net Savings with HSA   =$5,043
HSA account balance   $3,050

 

* The example above assumes the following: Family coverage, husband and wife both 37 years old, 2 children, reside in Illinois. 28% federal tax bracket and $1,500 in claims.

HSA Qualified Medical Expenses:

Qualified Medical Expenses

IRS Publication 502 has a checklist of expenses that can be itemized. Most of these expenses (see below) qualify for tax-free withdrawal from your HSA/MSA, unless the expenses were reimbursed by your healthcare coverage. One expense, which cannot be reimbursed tax-free from your HSA/MSA, is the premiums for most healthcare plans, unless the insured is collecting unemployment benefits. The following list is provided as reference only and is not meant to be comprehensive. To order IRS Publication 502, call 1-800-TAX-FORM.

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