Contributions to the Health Savings Account
HSA contributions can be made by the individual who has the account, an employer, or any other person. The employer can make the contribution, but it is not included in an employee’s income. It is exempted of federal tax if it is made by the employee.
These limits are established by the U.S. Congress via statutes, and are adjusted annually for inflation. Individuals over 55 years old can deposit an additional $800 in 2008 and $900 in 2009. The maximum amount that an individual can contribute depends on how many months he has been covered by HDHP (pro-rated basis). You are permitted an HSA contribution of $6/12, $5,800 or $2,900 if you have family HDHP coverage between January 1, 2008 and June 30, 2008. You can contribute to an HSA 6/12 x $5800 plus 6/12 of 2900 for family HDHP coverage. This is $4,350. An individual can contribute to an HSA if he/she opens an HDHP the first day of each month. If he/she creates an account on a different day than the first, he/she can contribute to HSA starting the next month. You can make contributions as late as April 15, the year following. Individuals who contribute to the HSA beyond the contribution limits must withdraw them or pay an excise duty. The excess amount withdrawn must be refunded to the HSA.
Contributions from the Employer
Under a Section 125 plan, the employer can contribute to an employee’s HAS account. It’s also known as a cafeteria program. Contributions made under the cafeteria program are pre-tax, i.e. They are not included in the employee’s income. Employers must contribute on a similar basis. Complementary contributions are those contributions made to HSAs by all employers that are either the same amount or a similar percentage of the annual contribution. Part-time employees working less than 30 hours per week can be treated separately. Employers can also classify employees as either self-only or family coverage. Unless the employee expressly chooses to not have these contributions, the employer can make automatic contributions to the HSAs.
Withdrawals from HSAs
The HSA is owned and can be used to make qualified expenses. The employee also determines the amount to be deposited, the maximum amount to withdraw for qualified expenses, the company that will keep the account, and the type of investments to be made to grow it. The funds can be transferred from one year to the next. There are no rules about how to use them or lose them. HSA participants don’t need to get approval from their HSA trustees or their medical insurance before they can withdraw funds. The funds are exempted from income tax if used for qualified medical expenses. Qualified medical expenses are expenses that are covered by the HSA, but which are subject to cost sharing, such as a co-payments or deductibles, and durable medical equipment like eyeglasses or hearing aids. Also, transportation costs related to medical care. You are also eligible for non-prescription and over-the-counter medicines. Qualified medical expenses must be incurred after the HSA was established.
You can take tax-free distributions from your HSA to cover qualified medical expenses for the spouse, HDHP member or dependent. However, you must ensure that the expenses were incurred within the last year of setting up the HSA. Keep the receipts for expenses incurred through the HSA. They may be required to prove that the HSA withdrawals were for qualified medical expenses only. To prove that the deductible was met, the individual may need to show the receipts to the insurance company. Unqualified medical expenses are not eligible for withdrawals. If so, the amount withdrawn will be considered taxable and added to the individual’s income. This can also lead to a 10 percent penalty. The money cannot normally be used to pay premiums for medical insurance. However, there are exceptions in certain situations.
These are -
1) To pay for any coverage in a health plan while you are receiving federal or state unemployment benefits.
2) COBRA continuation coverage for employees who leave a company offering health insurance coverage.
3) Qualified long-term care insurance.
4) Medicare premiums and other out-of-pocket costs, including deductibles.
However, withdrawals from the Health Savings Account can be made if an individual is disabled, dies or turns 65. In this case, withdrawals are exempted form income tax and a 10 percent penalty, regardless of the reason for being made. You can withdraw funds from your HSAs in many ways. Some HSAs offer account holders debit cards, others with cheques, and some allow for reimbursement similar to medical insurance.
The growth of HSAs
Since January 2004, the number of Health Savings Accounts has increased dramatically. The number of enrollees has increased from around 1 million in March 2005 to 6.1 million in January 2008.14 This is an increase of 1.6million since January 2007, 2.9million since January 2006, and 5.1million since March 2005. This growth is visible in all segments. The growth has been greater in large and small groups than it was in any one category. The U.S. Treasury Department projects that the number of HSA policy holder will rise to 14 million in 2010. These 14,000,000 policies will cover 25 to 30 millions U.S citizens.
As of January 2008, 1.5 million individuals were covered by HSA/HDHPs. According to the number of people covered, 27 percent of all new individual policies purchased (defined as those that were purchased within the last full month or quarter) had HSA/HDHP coverage. Enrollment in the small group market was 1.8 million at January 2008. This group had 31 percent of all new enrollments. With 2.8 million enrollees, the large group category was the most popular. Six percent of all new enrollments in this category were made up of HSA/HDHP.