More and more employers are offering employees a High Deductible Health Plan (HDHP) medical plan option, with or without a health savings account. Employees may have questions about their ability to participate in an HSA. The Q&As below may be helpful for explaining a HDHP/HSA arrangement to an employee.
What is a High Deductible Health Plan?
A HDHP is health insurance coverage with a higher annual deductible than typical health plans. The deductible is the amount of money a participant must pay before the insurance company will pay a claim.
The HDHP has a maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses (not including premiums). There may be different limits for in-network and out-of-network services.
The HDHP provides preventive care benefits without a deductible or with a deductible less than the minimum annual deductible. Refer to the specific plan documents, but preventive care typically includes items such as
- Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals
- Routine prenatal and well child care
- Child and adult immunizations
- Tobacco cessation programs
- Obesity weight-loss programs
- Certain disease screening services
What is an HSA?
A Health Savings Account (HSA) is a pre-tax savings account, owned by you, held in a tax-exempt trust or custodial account. You use the amounts in the account to pay or reimburse eligible medical expenses. Your savings in your HSA accumulate from year to year and are not subject to forfeiture.
What are the benefits of an HSA?
- The contributions you make to your HSA are pre-tax
- The contributions remain in your HSA account until you use them
- The interest or other earnings on the amount in your HSA grow tax free
- Distributions from your HSA are tax free if they are used for qualified medical expenses
- The money in your HSA is yours to keep, even if you leave your employer. The account stays with you. There is no “use it or lose it” rule.
What are the requirements participate in an HSA?
- You must be covered under a high deductible health plan (HDHP)
- You cannot be enrolled in Medicare
- You can’t be claimed as a dependent on someone else’s tax return
- You cannot have any other health coverage. This means:
- You cannot participate in your employer’s health FSA (except if it is a limited-purpose health FSA)
- Your spouse cannot participate in a health FSA (except if it is a limited-purpose health FSA)
- You cannot have a carryover from participating in a prior year’s health FSA (except if it is a limited-purpose health FSA)
- Your spouse cannot have a carryover from a prior year’s health FSA (except if it is a limited-purpose health FSA)
- You cannot participate in an HRA
- Your spouse cannot participate in an HRA
Who contributes to the HSA?
You own your HSA account and you may contribute to your HSA, your employer may contribute to your HSA, or someone else may contribute to your HSA on your behalf. After you make a contribution election, how the money gets to the HSA depends on your employer’s plan. You can send the money on your own, or perhaps your employer will withhold the amount you elect from your paycheck on a pre-tax basis and contribute it to your HSA on your behalf. Generally you may change your contribution election at any time, effective as of the next pay period. Family members may also contribute to your HSA.
How much can I contribute to the HSA?
Limits on contributions are set by the IRS each year. In 2022, you can contribute up to $3,650 if you have self-only coverage or up to $7,300 if you have family coverage. If you are 55 or older at the end of the year, you may contribute an extra $1,000 in catch-up contributions.
How do I get distributions from my HSA?
Since you participate in a HDHP, you will pay your medical charges during the year without coverage from the insurance company until you reach the annual deductible. You can receive distributions from your HSA, tax free, to be reimbursed for qualified medical expenses you incur without insurance coverage. Any money in your account remains there and continues to accumulate tax free.
Reimbursement requests are generally sent to your account holder to determine if they are eligible for reimbursement.
If you use the money in your HSA to pay non-qualified medical expenses, the amount you withdraw will be subject to income tax and may be subject to a 20% penalty.
Your account holder may impose fees for maintaining the HSA.
What are qualified medical expenses?
Qualified medical expenses are expenses that would generally qualify for the medical and dental expenses tax deduction, similar to the expenses eligible for reimbursement from a health FSA. To be eligible for reimbursement, an item must be for medical care. Medical care is defined under section 213(d) of the Internal Revenue Code as an item or service that is used to diagnose, cure, mitigate, treat or prevent disease or affect a structure or function of the body. The care must also be primarily to prevent or alleviate a physical or mental defect or illness. An expense cannot be reimbursed if it is primarily to maintain general good health or for other personal reasons. Over the counter medicines and drugs and menstrual care products are considered medical care and eligible for reimbursement from your HSA.
Insurance premiums are not qualified medical expenses unless the premiums are for any of the following.
- Long-term care insurance.
- Health care continuation coverage (such as coverage under COBRA).
- Health care coverage while receiving unemployment compensation under federal or state law.
- Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).
The premiums for long-term care insurance that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually.
Whose expenses are eligible for reimbursement from my HSA?
Qualified medical expenses are those incurred by the following persons.
- You and your spouse
- All dependents you claim on your tax return
- Any person you could have claimed as a dependent on your return except that:
- The person filed a joint return;
- The person had gross income of $4,300 or more; or
- You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s return.
What are the implications to tax return filing?
You may have to file Form 8889 with your Form 1040 if you had HSA activity during the year. Consult your personal tax advisor.
