Health Savings Account Frequently Asked Questions
HSA General Questions
Q: What is a Health Savings Account (HSA)?
A: A Health Savings Account (HSA) is a tax-exempt trust on a custodial account in which you can save money for future qualified medical expenses. This type of account must be used in conjunction with a high deductible health plan (HDHP), and any growth is tax deferred.
Q: Why is high deductible health insurance required?
A: To get the benefits of an HSA, the law requires that the savings account be combined with high deductible health insurance. High deductible health insurance costs less than traditional $250 or $500 deductible coverage, because the insurance company doesn't have to process and pay claims for routine, low-dollar medical care.
Q: Who is eligible to establish an HSA?
A: An HSA can be established by an individual who is:
- Covered by a high deductible health plan (HDHP)
- Not yet enrolled in Medicare Part A or Part B
- Not listed as a dependent on another person's income tax return
Individuals cannot be covered by any other health plan that provides the same benefits as the high deductible health plan.
Q: What are the requirements for the high deductible health plan (HDHP)?
A: For self-only coverage, an HDHP must have a minimum deductible of $1,100 with a $5,600 cap on out-of-pocket expenses.
For family coverage, a HDHP must have a minimum deductible of $2,200 with a $11,200 cap on out-of-pocket expenses.
Q: Can funds be carried over from one year to the next?
A: Yes. Unused HSA balances may be carried from year to year during a participant's lifetime.
Q: Can Automated Clearing House (ACH) transactions be accepted?
A: Yes. ACH transfers will be accepted to fund an account.
Q: Are withdrawals for non-medical expenses allowed?
A: Yes. Funds can be withdrawn for any purpose, however, if not withdrawn for medical expenses by someone under age 65, the amount withdrawn is taxable and subject to a 10% tax penalty. Non-qualified withdrawals made after age 65, at disability, or upon death are taxable. However, there is no tax penalty.
Q: How is interest calculated and how frequently is it applied to customers HSAs?
A: Interest is compounded daily and credited to a customer's HSA on a monthly basis.
Q: What is the specific State Farm product that customers may use as a funding vehicle for HSAs?
A: The HSA funding vehicle is an interest checking account with three interest tiers. Higher account balances will earn higher interest rates.
Q: Is check writing a feature of the State Farm Bank HSA product?
A: Yes, check writing will be a feature available to HSA customers upon implementation.
Q: Are there minimum balance requirements and service fees applicable to the HSA?
A: The minimum amount required to open an HSA is $100. There are no minimum balance fees. However, there is a $25 fee charged to each account which is assessed at account opening and annually thereafter.
Q: Will the $25 annual service fee be included as part of the HSA contribution limit or will it be accounted for separately?
A: The $25 service fee (which is assessed at account opening and annually thereafter) will be considered as part of the annual contribution limit. For example, if the participant's maximum contribution is $2,900, he/she will be able to use $2,875 for distributions and $25 will be retained as the service fee. However, the entire $2,900 will still be deductible for federal income tax purposes.
Q: What happens to the HSA in the event of death?
A: Upon a participant's death, any balance remaining in the HSA becomes the property of the beneficiary on the account. If the participant's surviving spouse is the named beneficiary, the HSA becomes the HSA of the surviving spouse. The surviving spouse is subject to income tax only to the extent distributions from the HSA are not used for qualified medical expenses.
If the HSA passes to a person other than the participant's surviving spouse, the HSA ceases to be an HSA as of the date of the participant's death, and the person is required to include in gross income the fair market value of the HSA assets as of the date of death. For such a person (except the decedent's estate), the includable amount is reduced by any payments from the HSA made for the decedent's qualified medical expenses, if paid within one year after death.
Q: Can an HSA accountholder designate a Power of Attorney?
A: Yes. The Power of Attorney form must be completed and notarized.
Q: What is a Power of Attorney entitled to do on an HSA?
A: A Power of Attorney has the power to open, maintain, or close the account. They can transact any and all lawful business of whatever nature on behalf of the customer. Examples include (but are not limited to) making contributions, withdrawals, writing checks, and accessing account information.
Q: Will the POA automatically be the beneficiary of the account upon death of the account holder?
A: No. Power of Attorney expires at the death of the principal (account holder). Whomever the account holder has specified as the beneficiary on the HSA application (Section 5 Designation of Beneficiaries) will be the new account owner. If none have been specified, the account will become a part of the decedent's estate.
HSA Contributions
Q: Who may contribute to the account?
A: Contributions to an HSA may be made by any person (an employer, a family member, or any other person) on behalf of an eligible individual.
Q: What are the limits on contributions?
A: The maximum annual contribution for 2008 is $2,900 for those with single coverage, or $5,800 for those with family coverage. Eligible individuals age 55 or older may make additional "catch-up" contributions of up to $900 in 2008, increasing by $100 per year up to $1,000 annually in 2009. A married couple can make two catch-up contributions as long as both spouses are at least 55 years of age.
Q: Can an individual who is not covered by an HDHP for the whole year contribute the maximum annual limit established by the IRS?
A: Yes, beginning in 2007, an individual who is an eligible individual during the last month of the tax year is treated as an eligible individual during every month of that tax year, and can therefore make the maximum annual HSA contribution for that year. However, a recapture provision applies if the individual ceases to be an eligible individual during the “testing period.” (“Recapture” means that federal income tax deductions are recaptured (i.e., included in gross income and subject, generally, to a 10% tax penalty) for the months the individual was not an eligible individual during the tax year.) The “testing period” is the period beginning with the last month of the tax year for which the individual was an eligible individual and ending on the last day of the 12th month following that month.
Example: John Smith establishes self-only HDHP coverage on June 1, 2007 and makes the maximum annual HSA contribution of $2,850 for 2007. He must continue to be an eligible individual through December 31, 2008 to avoid recapture of the portion of his 2007 HSA deduction attributable to the months of January through May of 2007. If, during 2008, John discontinues his HDHP coverage (or has nonpermitted insurance coverage), he must, on his 2008 federal income tax return, include $1,187.50 (5 months x $237.50/month) in income and pay a 10% tax penalty ($118.75).
Q: May a husband and wife have a joint HSA?
A: No. HSAs are individual accounts. Each spouse who is an eligible individual and wants to make contributions to an HSA must open a separate HSA. In cases where catch-up contributions are involved, only the individual that meets the age requirements can contribute this amount. For example, a husband and wife are covered under an HDHP and only one HSA is opened with the husband as the account owner. If the wife qualifies for the catch-up contribution, her catch-up contribution cannot be placed into the husband's account. The wife would have to open an HSA to make her catch-up contribution.
Q: When may HSA contributions be made? Is there a deadline for contributions to an HSA for a taxable year?
A: Contributions for the taxable year can be made in one or more payments, at the convenience of the individual or the employer, at any time prior to the time prescribed by law (without extensions) for filing the eligible individual's federal income tax return for that year, but not before the beginning of that year. For calendar year taxpayers, the deadline for contributions to a HSA is generally April 15 following the year for which the contributions are made.
Q: May an individual who is covered by an HDHP and also have a discount card that enables the user to obtain discounts for health care services or products, contribute to an HSA?
A: Yes. Discount cards that entitle holders to obtain discounts for health care services or products at managed care market rates will not disqualify an individual from being an eligible individual for HSA purposes if the individual is required to pay the costs of the health care (taking into account the discount) until the deductible of the HDHP is satisfied.
HSA Tax Considerations
Q: What is the tax treatment of contributions and investment earnings?
A: An individual's contributions are deductible for federal income tax purposes, even if the account beneficiary does not itemize.
Employees' contributions to an HSA are considered wages, and therefore are subject to FICA taxes. Self-employed individuals are not subject to FICA taxes, but pay self-employment tax instead. An HSA contribution does not reduce self-employment tax.
Employer contributions are made on a pre-tax basis and are not subject to employment taxes (e.g. FICA).
Investment earnings accumulate tax-deferred, and if used for qualified medical expenses are received federally income tax-free.
Q: Is the HSA tax deduction limited by an individual's income, filing status, employment or other factors?
A: No, except the deductions are limited if the individual is not enrolled in a qualified high deductible health plan for the full 12 months of the tax year.
Q: Can HSA funds be rolled over tax-free into an IRA?
A: No.
Q: What is the latest date that an individual may make a 2007 HSA contribution?
A: The tax return due date for the individual's 2008 tax return, April 15, 2008.
Q: What types of withdrawals can be made from HSAs on a federal income tax-free basis?
A: See the following references for guidelines or consult your financial advisor.
Q. Is the tax treatment of HSAs handled the same at the state level and federal level?
A: The tax treatment of HSAs could be handled differently at the state level than at the Federal level. It is based upon the individual state and whether they've adopted the Federal provisions. Customers should consult their tax advisors for their specific situation.
Q. Are health insurance premiums qualified medical expenses?
A. Generally, health insurance premiums are not qualified medical expenses except for the following:
- COBRA insurance
- Qualified long-term care insurance (subject to the dollar limits in Publication 502)
- Health insurance premiums for individuals receiving unemployment compensation
- For individuals age 65 or older, Medicare and retiree health insurance premiums (except for Medicare Supplement policy premiums)
Generally, a distribution to pay an HDHP is not qualified medical expense.
HSA and the Medical Savings Account (MSA)
Q: What are the significant differences between Archer Medical Savings Accounts (MSAs) and HSAs?
A: HSAs are a significant expansion of the MSA program. Unlike MSAs, HSAs provide the following:
- Everyone covered by an HDHP is eligible to participate (includes all size employers, the self-employed, individual and families who are not self-employed).
- Funding by the employer, employee or both within the same taxable year.
- Permanence and portability.
- Larger contributions.
- Broader deductible ranges.
Q: Can a customer fund an MSA and HSA concurrently?
A: Yes, however, the HSA contribution limit for the year is reduced by the amount of the MSA contributions made for that year. There is no requirement that one account type be funded before the other.
Q: Can an existing MSA be rolled into an HSA?
A: Yes. Balances in MSAs can be rolled into HSAs on a federal income tax-free basis, but it is not necessary.
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