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Hsa Insurance Rules Question & Answers

2013 July 26
by Sarah Fields

Robert asks…

Can you still have an HSA account if one of your children carry secondary insurance?

We carry secondary insurance for my step-child per a recent court order. Her mother has set up an HSA in 01/07 and is using the secondary coverage for the child. Is it against the law to have an HSA when you have secondary medical coverage available to a child? I thought you couldn’t have both secondary coverage and an HSA, but since it is a child and not the primary account holder doesn’t that rule apply?

Sarah Fields answers:

Any adult can contribute to an HSA if they:

• Have coverage under an HSA-qualified “high deductible health plan” (HDHP)
• Have no other first-dollar medical coverage (other types of insurance like specific injury insurance or accident, disability, dental care, vision care, or long term care insurance are permitted).
• Are not enrolled in Medicare.
• Cannot be claimed as a dependent on someone else’s tax return.

Based on the above I agree with your thinking that she cannot have secondary coverage unless it is specific injury insurance or accident, disability, dental care, vision care, or long term care insurance

Donna asks…

What are the pros or cons of a Health Savings Account?

Is an HSA better than regular health insurance? Is it really true that the company that I work for and me save money with HSAs?

Sarah Fields answers:

A health savings account (HSA) is a savings vehicle established to set aside funds tax free to pay for health care expenses. HSAs, created as part of the Medicare Prescription Drug and Modernization Act of 2003, HSAs allow individuals who have high-deductible health plans (HDHPs) to save money for health-care expenses tax free. HSAs can be established by any qualified individual covered by an HDHP.

Who can establish an HSA?Generally, if you are covered under an HDHP, you are eligible to establish an HSA. In 2007, a qualifying HDHP health plan (1) has an annual deductible of at least $1,100 for individual coverage or $2,200 for family coverage, and (2) limits annual out-of-pocket expenses (e.g., co-pays, deductibles) to $5,500 for individual coverage and $11,000 for family coverage.

You will not be eligible to open an HSA, even if you are covered under an HDHP, if any of the following apply:

You are already covered under a non-HDHP, including a comprehensive major medical plan, a plan sponsored by your employer or your spouse’s employer, or a prescription drug plan or rider with a low deductible or no deductible. (Some health plans are exempted from this provision, including dental or vision care insurance, long-term care insurance, disability insurance, and accident insurance.)
You can be claimed as a dependent on another person’s income tax return.

You are entitled to Medicare coverage (i.e., you are age 65 or older), and have enrolled in Medicare.

O qualify as an HDHP, a plan offering family coverage must specify that no payment can be made from the plan for any individual (except for exempt preventative care benefits to which a deductible does not need to apply) until the family deductible is satisfied.

If your spouse has non-HDHP family coverage, but that plan does not cover you, you may still contribute to an HSA if you are otherwise eligible to do so. However, your spouse will not be eligible to contribute to an HSA.

An HSA is a tax-exempt trust or custodial account that can be established through any qualified trustee or custodian, including a bank, an insurance company, or a third-party administrator. In some cases, this may be the same institution offering the HDHP. You can open an HSA on your own or, if available, through your employer. Employers may offer HSAs as part of a cafeteria plan.

You, your eligible family members, or others who wish to do so can make contributions to your HSA. If you’re employed, your employer may also make contributions to your HSA. Contributions may be made directly or through salary reduction under a cafeteria plan (if offered by your employer). However, no contributions can be made to your HSA once you retire.

Employers who make contributions to employee HSAs must generally make comparable contributions to the HSAs of all comparable participating employees (either the same percentage of the deductible amount or the same dollar amount). Otherwise, the employer must pay an excise tax equal to 35 percent of the actual contributions made. An employer, can, however, make larger HSA contributions for nonhighly compensated employees than for highly compensated employees without violating the comparability rule. In addition, the comparability rule is applied separately to part-time employees and does not apply to contributions made through a cafeteria plan. However, contributions to an HSA made under a cafeteria plan are subject to Section 125 nondiscrimination rules.

For 2007, you can contribute up to $2,850 for individual coverage, and $5,650 for family coverage, to your HSA. This annual limit is the sum of the limits determined separately for each month (i.e., the amount you can contribute in each month is computed by dividing the annual contribution limit by 12).

You can choose to make monthly contributions to your HSA, or you can make a lump-sum contribution any time before your tax return becomes due (i.e., for most individuals, by April 15th of the year following the year for which contributions are being made), as long as your contributions have already accrued.

What if you become eligible for an HSA after the beginning of the year? In this case, your maximum contribution for the year is the annual maximum dollar amount for the year, even though you weren’t eligible for the entire year. However, you must remain in the HSA-eligible plan for the entire calendar year following the last month of the year in which you made that contribution. Otherwise, the contribution will be included in your gross income for the calendar year in which you ceased to be eligible, and will be subject to an additional 10 percent penalty tax.

You may also be eligible to make additional “catch-up contributions” to your HSA if you are 55 or older. For 2007, the catch-up contribution amount is $800. This amount is scheduled to increase by $100 each year until it reaches $1,000 in 2009. (If eligible, both you and your spouse can make separate catch-up contributions to an HSA.) However, no regular or catch-up contributions can be made once you reach age 65 and are enrolled in Medicare.

You may be ineligible to make contributions to an HSA if you are currently covered under a flexible spending account (FSA) or a health reimbursement arrangement (HRA) that duplicates coverage provided by the HSA. However, if you have an FSA or an HRA, you will be eligible to participate in an HSA if:

Your FSA or HRA is a limited purpose account that repays or reimburses only vision, dental, or preventative care expenses
Your FSA or HRA is a high-deductible arrangement (called a post-deductible arrangement by the IRS) that pays or reimburses health-care expenses only after the minimum annual HDHP deductible has been satisfiedYou suspend your HRA for a time by electing to forgo payment or reimbursement of HRA benefits incurred during the suspension period (your employer can continue to make contributions during the suspension)
Your HRA is a retirement HRA that only reimburses medical expenses you incur once you retire (though contributions can be made before you retire).

As the account owner, you can direct your contributions to a savings or investment option offered by the qualified trustee or custodian of your HSA. Any interest and investment earnings on contributions grow tax deferred until withdrawn, and like contributions, will be tax free when withdrawn if used to pay qualified medical expenses.

Individual contributions you make to your HSA that do not exceed the maximum contribution limit are tax deductible on your federal income tax return. Because you deduct these contributions “above-the-line” when computing your adjusted gross income, you can deduct HSA contributions even if you don’t itemize. You can also deduct contributions made by a family member on your behalf.

If your employer makes contributions to your HSA, these are excludable from your gross income. Any contributions made through a cafeteria plan are treated as employer contributions. However, you cannot deduct employer contributions to your HSA.

You can withdraw money from your HSA for qualified medical expenses for yourself, your spouse, and your dependents. Distributions from an HSA for qualified medical expenses are not taxable. However, distributions for nonqualified expenses are considered taxable income and are subject to an additional 10 percent penalty.

The 10 percent penalty for nonqualified expenses does not apply if the distribution is made as a result of the beneficiary’s death or disability or when the beneficiary reaches age 65.

Qualified medical expenses are health-care expenses, as defined by Internal Revenue Code 213(d), that are paid by you, your spouse, or your dependents. These include laboratory fees, prescription and nonprescription drugs, dental treatment, ambulance service, eyeglasses, and hearing aids, as well as many other health care expenses. HSA funds may also be used to cover health insurance deductibles and co-payments.

Generally, health insurance premiums, including HDHP premiums, are not qualified expenses, except for the following types of health coverage (1) COBRA coverage; (2) Qualified long-term care insurance (3) Health coverage maintained while receiving unemployment compensation and (4) Retiree health insurance other than a Medicare supplemental policy (Medigap).

The HSA trustee or employer is not responsible for ensuring that amounts distributed from an HSA are used for qualified medical expenses.

For a list of qualified medical expenses, see IRS Publication 502.

If eligible, you may roll over funds from your IRA to your HSA once during your lifetime. However, the amount you roll over can’t exceed the annual HSA contribution limit for that year, and is reduced by any amount you’ve already contributed to your HSA for the year.

At the end of the year one of the advantages of HSAs is that unlike FSAs, HSAs do not have a “use it or lose it” provision. Funds remaining in your account at the end of the year are not forfeited and can continue to accumulate tax free year after year until withdrawn.

An HSA is portable. Because the account is yours, you can keep it and continue to make contributions even if you change employers or leave the workforce.

If you divorce
If all or part of your interest is transferred to your spouse as part of a divorce settlement, it will not be considered a taxable transfer, and the transferred interest will continue to be treated as an HSA.

If you retire
Although you can no longer open or make contributions to an HSA once you reach age 65 and are enrolled in Medicare, you can take tax-free distributions from your account to pay for medical expenses. You can withdraw funds from your account for nonmedical purposes without owing a penalty (although the amount you withdraw will be subject to income tax).

If you die
Funds remaining in your HSA upon your death become the property of your designated beneficiary. If the beneficiary is your spouse, he or she becomes the account holder and the account remains an HSA. If the beneficiary is not your spouse, the account ceases to be an HSA as of the day of your death, and the fair market value of the funds are includable in your beneficiary’s gross income.

Ruth asks…

What’s the best health insurance for self employed couple that does natural medicine?

We currently have united golden rule. they don’t pay for anything we have done, conventional or alternative. We want to have a baby soon, but would like to work with a midwife (paying cash). We wouldn’t mind paying for insurance if they would actually pay for SOMETHING, but nothing we actually need done is covered.

Would an hsa be better? I guess I’m kind of looking into something that would cover the ER or major illness…

Sarah Fields answers:

You cannot have only an HSA; it is against the law.

To put money into an HSA, you must also have a “high deductible health plan” (HDHP).

The best option for our situation is probably to get a bare-bones “high deductible health plan” that covers only those things for which you (1) cannot afford to pay cash, and (2) would be using “conventional” providers, not natural medicine, and then, after getting the HDHP, put a few thousand into an HSA to use for things that the HDHP will not cover.

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