Health Savings Accounts Q&A Bulletin Board

Did you email CAHI an HSA question? If our HSA Working Group has an answer it will be posted here.
Updated: June 22, 2004

• Who is eligible to establish an HSA?
  
  An “eligible individual” can establish an HSA. An “eligible individual,” as defined by the IRS in bulletin 2004-2, is, with respect to any month, any individual who: 1) is covered under a high-deductible health plan (HDHP) on the first day of such month; 2) is not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing certain limited types of coverage); 3) is not entitled to benefits under Medicare (generally, has not yet reached age 65); and 4) may not be claimed as a dependent on another person’s tax return.
  
  
• What is a "high-deductible health plan" (HDHP)?
  
  Generally, an HDHP is a health plan that satisfies certain requirements with respect to deductibles and out-of-pocket expenses. Specifically, for self-only coverage, an HDHP has an annual deductible of at least $1,000 and annual out-of-pocket expenses required to be paid (deductibles, co-payments and other amounts, but not premiums) not exceeding $5,000. For family coverage, an HDHP has an annual deductible of at least $2,000 and annual out-of-pocket expenses required to be paid not exceeding $10,000. In the case of family coverage, a plan is an HDHP only if, under the terms of the plan and without regard to which family member or members incur expenses, no amounts are payable from the HDHP until the family has incurred annual covered medical expenses in excess of the minimum annual deductible. Amounts are indexed for inflation. A plan does not fail to qualify as an HDHP merely because it does not have a deductible (or has a small deductible) for preventive care (e.g., first dollar coverage for preventive care). However, except for preventive care, a plan may not provide benefits for any year until the deductible for that year is met.
  
  
• How and where do I set up an HSA?
  
  Beginning January 1, 2004, any eligible individual can establish an HSA with a qualified HSA trustee or custodian, in much the same way that individuals establish IRAs or Archer MSAs with qualified IRA or Archer MSA trustees or custodians. No permission or authorization from the Internal Revenue Service (IRS) is necessary to establish an HSA. An eligible individual who is an employee may establish an HSA with or without involvement of the employer.
  
  
• What is a qualified “HSA trustee or custodian” and what are their responsibilities?
  
  According to IRS bulletin 2004-2, any insurance company or any bank (including a similar financial institution as defined in section 408(n) of the IRS code) can be an HSA trustee or custodian. In addition, any other person already approved by the IRS to be a trustee or custodian of IRAs or Archer MSAs is automatically approved to be an HSA trustee or custodian. Other persons may request approval to be a trustee or custodian in accordance with the procedures set forth in Treas. Reg. § 1.408-2(e) (relating to IRA nonbank trustees). For additional information concerning nonbank trustees and custodians, see Announcement 2003-54, 2003-40 I.R.B. 761.
  
  HSA trustees or custodians are not required to determine whether HSA distributions are used for qualified medical expenses. Individuals who establish HSAs make that determination and should maintain records of their medical expenses sufficient to show that the distributions have been made exclusively for qualified medical expenses and are therefore excludable from gross income.
  
  In addition, information reporting for HSAs will be similar to information reporting for Archer MSAs. The IRS will release forms and instructions, similar to those required for Archer MSAs, on how to report HSA contributions, deductions, and distributions.
  
  
• Are there income limits, or indexing, that reduces the amount that can be saved each year on a tax-free basis?
  
  There are no restrictions on deposits to HSAs based on income, however, there is a maximum annual contribution limit. For details on the annual contribution limit please see IRS bulletin 2004-2, page 5, Q12.
  
  
• What types of investment vehicles are offered for HSAs?
  
  As stated above, any insurance company or bank, as well as institutions already approved by the IRS to be a trustee or custodian of IRAs, may be an HSA trustee or custodian. Therefore the type of investment vehicles available will depend on the options provided by the particular institution you choose to serve as a trustee or custodian.
  
  If your bank or brokerage house is not an HSA trustee or custodian, you may want to ask them to become one.
  
  
• What are the "qualified medical expenses" that are eligible for tax-free distributions from an HSA? Are "alternative" treatments, i.e., acupuncture, included?
  
  The term “qualified medical expenses” are those expenses paid by the account beneficiary, his or her spouse or dependents for medical care as defined in section 213(d) of the IRS code (including nonprescription drugs as described in Rev. Rul. 2003-102, 2003-38 I.R.B. 559), but only to the extent the expenses are not covered by insurance or otherwise. The qualified medical expenses must be incurred only after the HSA has been established. For purposes of determining the itemized deduction for medical expenses, medical expenses paid or reimbursed by distributions from an HSA are not treated as expenses paid for medical care under section 213. These are explained further in IRS Publication 502, "Medical and Dental Expenses."
  
  
• What preventive care benefits are permitted under the high-deductible health plan (HDHP)?
  
  According to U.S. Treasury guidance 2004-23 released March 30, 2004, section 223(c)(2)(C) of the Internal Revenue Code provides a "safe harbor" for the absence of a preventive care deductible. An HDHP may therefore provide preventive care benefits without a deductible or with a deductible below the minimum annual deductible. Preventive care for the purposes of section 223(c)(2)(C) includes, but is not limited to: (1) periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations such as annual physicals; (2) routine prenatal and well-child care; (3) child and adult immunizations; (4) tobacco cessation programs; (5) obesity weight-loss programs; and (6) screening services.
  
  However, preventive care does not generally include any service or benefit intended to treat an existing illness, injury or condition.
  
  For a list of safe harbor preventive care screening services please see Notice 2004-23 Appendix.
  
  
• Can an HSA be offered under a cafeteria plan?
  
  Yes. Both an HSA and a qualified high deductible health plan (HDHP) may be offered as options under a cafeteria plan. Thus, an employee may elect to have amounts contrtibuted as employer contributions to an HSA and an HDHP on a salary-reduction basis.
  
  
• If I already have a high deductible health policy (HDHP) will that policy qualify for an HSA or will I need to apply for a new policy?
  
  There are two criteria that must be met in order to establish an HSA: 1) an individual needs to be an “eligible individual” as defined by the HSA law; and 2) the high deductible health policy needs to fit within the parameters set by the HSA law. If both these criteria are met, then the existing policy should qualify.
  
  
• Are HSAs and high deductible health plans subject to COBRA?
  
  If the employer is offering the HSA plan/HDHP to employees then the same employment benefit would apply to the HSA for COBRA benefits.
  
  
• What discrimination rules apply to HSAs?
  
  According to IRS bulletin 2004-2, if an employer makes HSA contributions, the employer must make available comparable contributions on behalf of all "comparable participating employees" (i.e., eligible employees with comparable coverage) during the same period. Contributions are considered comparable if they are either the same amount or same percentage of the deductible under the HDHP. The comparability rule is applied separately to part-time employees (i.e., employees who are customarily employed for fewer than 30 hours per week). The comparability rule does not apply to amounts rolled over from an employee’s HSA or Archer MSA, or to contributions made through a cafeteria plan. If employer contributions do not satisfy the comparability rule during a period, the employer is subject to an excise tax equal to 35% of the aggregate amount contributed by the employer to HSAs for that period.
  
  
• What is the maximum account balance that can be carried over from year to year in an HSA?
  
  There is no maximum carryover, however there is a maximum annual contribution.
  
  
• Have any banks or brokerages indicated that they are going to offer HSAs?
  
  Although CAHI cannot recommend specific companies or financial institutions, we are confident that many existing MSA administrators will enter the HSA market. Check with your insurance agent/broker or financial institution for more details.
  
  
• May funds from Flexible Spending Accounts (FSAs) be transferred into the HSA?
  
  No. (Editor's Note: On May 12, 2004, the House of Representatives passed legislation permitting FSA owners to carryover up to $500 of unspent funds into the next calendar year. The legislation also permits transferring this money into an HSA. Similar legislation has not yet passed the Senate, therefore such a transfer is still prohibited.)
  
  
• Are individuals under age 65 who are not employed (i.e. their income is from investment income rather than earned income) and not disabled eligible to open a HSA if they have high-deductible policy?
  
  Individuals under age 65 may receive a deduction for the contribution to the HSA account as long as they have the qualified high-deductible policy.
  
  
• What does it mean when the rules state that the deductibles and “total costs” will be indexed for inflation?
  
  The federal government publishes inflation-adjusted tax items for each tax year. By factoring inflation and certain other amounts into the tax rates, the law protects taxpayers from losing the value of various benefits. In late fall the IRS issues documents detailing the results of these adjustments for the upcoming year. Such is the case with the Archer MSA and now the Health Savings Accounts.
  
  
• A parent is enrolled in an Employer Sponsored Group Plan but chooses not to enroll the children in employer’s group plan because the premium is too expensive. Instead, the parent takes out an individual high-deductible policy on the child at a much more affordable price. Is a parent able to open an HSA on behalf of the dependent child(ren) and also take the tax deduction from his or her gross income since parent is making contributions to the HSA for the child(ren)?
  
  The HSA Working Group believes that the answer is yes, but we have not seen any final IRS bulletins or guidelines, so it is speculation at this point.
  
  
  

Ask The Experts: Do you have a specific question about HSAs? Email it to us at hsainfo@cahi.org and we will submit it to our panel of MSA/HSA experts. While we cannot answer every question directly, we will post answers to as many as possible in this section of our website.

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