The Complete HSA Guidebook

Transcription

Foreword
The
Complete HSA
Guidebook
How to Make
Health Savings Accounts
Work for You
3rd Edition
Sophie M. Korczyk, Ph.D.
Hazel A. Witte, J.D.
Stephen D. Neeleman, MD, CEO, HealthEquity, Inc.
15 West Scenic Pointe Drive, Suite 400, Draper, UT 84020
801.272.1000 www.healthequity.com
1
The Complete HSA Guidebook
“The Complete HSA Guidebook is the most comprehensive explanation
of how HSAs work to date—it should be a tremendous resource for
people who want to be protected from catastrophic illness and save tax
free money for the future.”
--John Desser, Founder, Coalition for Affordable Health Coverage
(www.cahc.net)
“The most comprehensive and user-friendly guide—of any kind—I
have ever had the pleasure to read! Clearly, this is a must-read for
anyone— agent, accountant and patient/insured anywhere.”
--Harry Randecker, President, National Association of Alternative
Benefits Consultants
(www.naabc.com)
“The guidebook has everything a consumer, business owner, or
broker will need to understand, establish, and utilize an HSA.”
--Grace-Marie Turner, Galen Institute
(www.galen.org)
“The most consumer-friendly guide to the most consumer-friendly
health insurance product to appear in years.”
--Dr. Merrill Matthews, Director, Council for Affordable
Health Insurance
(www.cahi.org)
The
Complete HSA
Guidebook
How to Make
Work for You
3rd Edition
801.727.1000
www.healthequity.com
Copyright 2008 HealthEquity™.
All rights reserved. www.healthequity.com
ISBN: 0-9763992-1-0 Printed in the United States of America
The
Complete HSA
Guidebook
How to Make
Work for You
3rd Edition
801.727.1000 www.healthequity.com
Foreword
We began writing the First Edition of the Complete
HSA Guidebook just a few short months after the
original HSA law came into effect on January 1, 2004.
Now, four years have passed and we are beginning to
see significant growth in the number of health savings
accounts (HSAs) throughout the country. Recent
estimates suggest that nearly 10 million Americans have
health benefits that are covered through HSAs.
Some of the most recent national data suggests that
people with HSAs are behaving differently than those
with HMO or PPO type insurance. Large populations of
consumers with HSAs have been shown to shop more
carefully for medical care and go to the emergency room
less often for non-life threatening illnesses. Other studies
show that the vast majority of people with HSAs finish
the year with growing money in their accounts that they
can roll over to pay for future medical expenses or into
long-term savings and investments.
In our First Edition of the Complete HSA Guidebook,
we asked the question, “Can private US health care be
saved?” I believe the answer is a resounding “YES!”
It will not come through inefficient, government run
systems, but through incentivized consumers that
demand innovative, free market solutions to improve and
pay for health care in the United States.
Health savings accounts have already collectively saved
their owners millions of dollars in health care costs and
the account balances are growing quickly—at the time we
are writing this edition, it is estimated that national HSA
balances are approaching $2 billion.
Our initial goal with the guidebook was to create a book
about HSAs that was both comprehensive as well as easy
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Foreword
to understand. I believe we accomplished that goal as
many of our readers have commented on the important
role the Complete HSA Guidebook has played in helping
them better understand HSAs. This 3rd Edition has
been updated to include the most recent amendments to
the HSA law and clarifications from the IRS.
We remain committed to helping people improve their
health and their financial well being through better
understanding and adoption of HSAs. We hope this
guidebook remains a powerful tool to accomplish that
end.
Stephen D. Neeleman, MD Salt Lake City, Utah
January, 2008
ii
Contents
Table of Contents
Foreword.............................................................................. i
Contents..............................................................................iii
Intoduction
Health Care worries ..........................................................vii
What is an HSA?.................................................................vii
Is the HSA a Brand-New Concept?..................................... ix
So What Is New About This Type
of Health Care Coverage?............................................... xi
Why Now? ........................................................................ xi
How Does the HSA Improve the Situation?....................... xii
What This Book Does.......................................................xiii
Chapter 1: Health Savings Accounts—A New Approach
The High Deductible Health Plan (HDHP).......................1-1
The Health Savings Account (HSA) ............................... 1-11
The Two-Part Plan—How it Differs from Other
Health Plans; How it’s the Same ............................... 1-16
Not All HSAs Are the Same ..........................................1-18
Choosing an HSA Provider ............................................1-18
The Health Savings Account (HSA) ............................... 1-11
Keep in Mind . ................................................................1-22
Up Next ........................................................................1-22
Chapter 2: Who Would Want an HSA?
Eligibility—Who Can Establish and Contribute to an
HSA . ...........................................................................2-1
Eligibility for HSA Distributions ..................................... 2-14
Eligibility for Tax Deductions . ........................................ 2-17
iii
Contents
Making Sure HSAs are Right for You .............................2-24
Also Think About These Options .................................. 2-27
Keep in Mind . ................................................................ 2-27
Up Next ........................................................................2-28
Chapter 3: How to Set Up an HSA
HSA—Remember the Definition ......................................3-1
In a Nutshell......................................................................3-3
How to Find out about HSAs...........................................3-4
Getting a Certificate of Coverage ....................................3-4
The Employer and the HSA .............................................3-5
Keep in Mind . ..................................................................3-8
Up Next ..........................................................................3-8
Chapter 4: How Does Your HSA/HDHP Work?
Using the HDHP .............................................................4-1
Permitted Coverage Alngside an HDHP...........................4-1
Using the HSA .................................................................4-8
Knowing Who Can Provide You Treatment . .................4-10
How You Pay ................................................................. 4-14
Keep in Mind . ................................................................4-23
Up Next ........................................................................4-24
Chapter 5: A Consumer Guide to Paperwork
and Record Keeping
Why Record Keeping Is Especially Important ..................5-1
Paperwork Your HDHP and HSA Will Send You ............5-3
Paperwork to Keep the IRS Happy . ................................5-4
Submitting Expenses to Your Plans ..................................5-5
How Long to Keep HSA Receipts, Statements and
Other Documentation . ...............................................5-9
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Contents
Troubleshooting .............................................................5-10
When You Disagree with Your HSA Statement . ...........5-10
If You Are Not in an Integrated Plan ............................. 5-11
Keep in Mind . ................................................................ 5-11
Up Next ........................................................................ 5-12
Chapter 6: Making an HSA Work for You
Your Cost-Benefit Analysis . .............................................6-1
Determining the Right Amount of Money to
Contribute to Your HSA .............................................6-2
Case Studies ....................................................................6-4
Keep in Mind................................................................... 6-13
Up Next......................................................................... 6-14
Chapter 7: Your HSA/HDHP and Everyday Health
Care Challenges
You Need Elective (Non-Emergency) Surgery .................7-1
It’s an Emergency ............................................................7-4
Family Matters .................................................................7-5
You Change Jobs or Lose Your Job . ..............................7-10
It’s Business ................................................................... 7-11
You Retire Before You Are Eligible for Medicare ........... 7-13
When You Enroll in Medicare ........................................ 7-13
Using Your Account After Disability .............................. 7-14
Keep in Mind................................................................... 7-16
Up Next ........................................................................ 7-16
Chapter 8: The HSA Law
The Federal HSA Law ......................................................8-1
Estate Treatment of HSAs . ..............................................8-8
Employer Requirements . .................................................8-8
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Contents
Bankruptcy .................................................................... 8-12
State Law ....................................................................... 8-12
Keep in Mind . ................................................................ 8-14
Up Next ........................................................................ 8-15
Appendix
Glossary of Health Care Coverage Terms........................ A-1
IRS Forms.......................................................................A-13
Updates..........................................................................A-13
Publication 502 Excerpt for tax year 2003......................A-14
How You Can Spend Your Tax-Free HSA Dollars...........A-14
How You Cannot Spend Your Tax-Free HSA Dollars..... A-44
Index.............................................................................. A-51
vi
What is an HSA?
Health Care worries
What issue tops off every list of national worries? Health
care. Everyone—employers, employees and individuals—
wrestles with how to get and pay for the necessities of
medical care. Health care costs are a moving target as
inflation, accessibility and complexity take their toll.
Consumer-driven health plans are the latest response
to soaring costs. They teach and empower consumers
to take financial control of their health care spending;
Health Savings Accounts (HSAs) are the centerpiece of
this new approach.
What is an HSA?
An HSA is a savings account that is combined with a
qualified high-deductible health plan (HDHP). The HDHP
protects the insured from the cost of a catastrophic
illness, prolonged hospitalization or a particularly
unhealthy year. The HSA can be used for meeting
expenses before the HDHP deductible is met or for
other health care expenses allowed under the Internal
Revenue Code. These accounts can provide consumers
flexibility and choice, along with incentives to become
careful consumers.
The HSA account is administered by a bank, insurance
company or approved third-party custodian or
trustee. As long as the individual has a qualified
HDHP, contributions to the HSA can be made taxfree. Employers can also make tax-free deposits to an
employee’s HSA account.
vii
Introduction
HEALTH PLAN
COMPONENTS
HDHP
HSA
HSAs help individuals save for medical and retirement
health expenses tax free. Essentially, the individual
decides how to use the money, including whether to save
it or spend it through the years. The HSA can be used to
finance work/life transitions, such as COBRA payments
(for health care coverage through your former employer)
or premiums for long-term care. HSA funds can be used
to offset retiree health expenses, such as Medicare Part
B, or retiree health care coverage sponsored by your
former employer. To help individuals make decisions,
HealthEquity—the HSA Company, provides the
tools to compare hospital, drug, or doctor costs and
assist in making decisions on care and spending.
HSAs are like IRAs or 401(k) plans in that both
individuals and employers can make tax-free deposits
and investments that grow tax-free. HSA dollars can be
spent on a wide variety of medical products and services.
Money can be taken from the account for non-medical
expenditures by paying taxes and a penalty. Taxes and
penalties do not apply after the account owner has
enrolled in Medicare.
viii
What is an HSA?
Is the HSA a Brand-New Concept?
Not exactly. For over a decade, employers have offered
components of consumer-driven health plans through
savings accounts such as Medical Savings Accounts (state
MSAs or federal Archer MSAs), health reimbursement
arrangements (HRAs) and flexible spending accounts
(FSAs). These have been used to pay for medical
copayments, dependent care, dental and vision
plans and other costs, with tax-deductible or pre-tax
dollars. However, all but the MSA plan present special
restrictions—they can’t be taken to new jobs and can’t be
carried over to the next year (the famous “use-it-or-loseit” conundrum).
While MSAs (or Archer MSAs) have been in existence
since the mid-1990s, this federal pilot program was
limited to small employers and the self-employed, as
an affordable alternative to high-priced, low-deductible
health plans. MSAs required that the individual also have
an HDHP in place, and savings in the MSA could be
rolled over year to year. However, there were limitations
on who could have an MSA and the number of MSAs
that could be established, as well as an end-date to the
pilot program.
For many years, certain retirement plans like section
401(k) plans and individual retirement accounts (IRAs)
have used the concepts of investment accounts and yearto-year rollovers. Variations on that approach, including
Roth IRAs, 529 education accounts and Coverdell
accounts, all have sensitized and educated individuals on
ix
Introduction
the many ways consumers can plan for and use individual
savings accounts.
Congress created HSAs as part of the Medicare
Prescription Drug, Improvement and Modernization Act
of 2003. This legislation replaced MSAs and made HSAs
a permanent health care coverage vehicle, combining
some of the features of many of the individual savings
accounts mentioned above. It also extended eligibility to
those who are unemployed, self-employed or employed
by an employer of any size.
2008 IRS HSA information
Single
Family
Minumum
$1,100
$2,200
Maximum OOP
$5,600
$11,200
Annual HDHP Deductibles
Annual HSA Contributions
Single Maximum
$2,900 $5,800
All amounts will increase by consumer price index (CPI) each
year
Maximum HSA contribution is as listed, or the prticipant’s
HDHP annual deductible whichever is less
For updates please visit www.hsaguidebook.com
Is the High Deductible Health Plan a New
Concept?
No. High deductible health plans (HDHPs) have been
around for a long time, as protection against the
economic consequences of injury and illness. Such
expenses can be too high for most families to pay on
their own.
x
What is an HSA?
So What Is New About This Type of Health Care
Coverage?
The HSA/HDHP is a permanent health plan option that
ties together the ability to own and use a tax-favored
savings account with a health plan that provides the
security of major medical health insurance coverage.
While some of the concepts behind the HSA aren’t
entirely new, these accounts are in many respects more
attractive than older versions, allowing individuals to
invest their money, carry it over from year to year and
take it with them as they change jobs or retire.
With the HSA/HDHP, consumers have significant
power and responsibility for their health care decisions.
The consumer (or the employer, or both) sets aside a
pool of money to spend on health care before HDHP
coverage kicks in. Policymakers hope that, by having such
a financial incentive, participants will become better and
more prudent health care consumers.
Why Now?
Health care costs are escalating for many reasons,
including new medical technologies that increase life
expectancy, medications that increase quality of life,
increasing numbers of patients with chronic illness,
over-utilization of health care and administrative waste.
Everyone is challenged by health coverage rate increases,
and is searching for reasonable ways to control costs.
Changes in the practice of medicine, as well as consumer
preferences, also affect the way health care dollars are
assigned and spent.
xi
Introduction
Our health care system does not make a direct
connection between receiving a service and paying for
it. Instead, a third party—the insurance company or plan
administrator—actually processes and pays the bill; the
consumer never sees the actual price tag. The consumer
is usually only aware of the amount of his or her copayment, rather than the full price for office visits, lab
tests, etc. The co-payment seems to be the price, costconscious. But as services become more expensive, the
consumer does pay for the increase indirectly, through
higher deductions from wages for health care. .
The result is that premium costs are pricing health care
out of reach for employers and individuals. Dissatisfaction
with the lack of choice in care and financing adds to the
precarious state of health care coverage.
How Does the HSA Improve the Situation?
The HSA/HDHP can bring both consumer choice and
flexibility back into health care. You can use the HSA for
co-payments and deductibles and for services that are
not offered by the health plan, with tax-free dollars. You
may also decide to seek a physician out of your network,
and you can pay for that care from your HSA. The HSA
also gives you a chance to deal with the variability of
health care expenses. For instance, one year you may
have just a few doctors’ appointments, while the next
year you may meet the deductible mid-year and still
need extra physical therapy appointments. With the
HSA funds from the previous year, and the funds added
during the current year, you might be able to meet all
your needs tax-free. You can use the HSA to bridge life
xii
What is an HSA?
events, such as unemployment, job changes and periods
of disability by paying for health insurance premiums, or
health care directly.
What This Book Does
This book is your guide to getting the best from an
HSA. It gives you the basics, as well as advantages and
limitations of HSAs, and provides examples of real-life
situations that you can relate to your own circumstances.
Each chapter has cross-references, definitions and charts
that will assist you. With this book, you will be ready for
the consumer health care revolution.
xiii
Chapter
1
Health Savings Accounts—
A New Approach
Health savings account (HSA) based health coverage
actually has two parts, a high deductible health
plan (HDHP) and a health care saving and spending
account (the HSA). This chapter provides an
overview of how health savings accounts, combined
with high deductible health plans, are poised to
change the health care coverage landscape.
4 The HDHP
4 The HSA
4 The Two-Part Plan—How it Works
4 Not All HSAs Are the Same
4 Choosing an HSA Provider
4 HSA Transition Rules and Grace Periods
Health Savings Accounts—A New Approach
The High Deductible Health Plan (HDHP)
Before you can open an HSA, you must first establish a
qualified HDHP. The HDHP is the insurance component
of the HSA-based health coverage. The purpose of the
HDHP is to cover higher cost health care expenses
that would be difficult to pay for out-of-pocket, even
with your HSA – care that is unexpected and very
expensive. You will find that HDHPs are typically much
less expensive than traditional, full-coverage plans. The
IRS requires that you have one of these plans prior
to opening an HSA. The HDHP must satisfy certain
requirements regarding deductibles and out-of-pocket
limits in order to “qualify” you to have an HSA. These
requirements will be addressed in the following sections.
Plans that satisfy these deductibles and out-of-pocket
limits are referred to as qualified HDHPs. To understand
these plans, you will need to be familiar with the
following terms and concepts:
Deductibles
The deductible is the amount of covered expenses that an
individual must pay in a given plan year before any charges
are paid by the medical plan or insurance company.
The plan year may be the calendar year (January 1 to
December 31), or some other twelve-month period
(some plans allow deductibles to accumulate for longer
than twelve months – see Carry-Over Deductibles in this
section) that your employer or insurer chooses for
managing your plan and keeping track of deductibles and
other limits. To qualify to open an HSA in 2008, a single
person must have an HDHP with a deductible of at least
1-1
Chapter 1
$1,100. The minimum deductible is $2,200 for a family.
The deductible limit is subject to change annually due to
increases in the Consumer Price Index (CPI). The IRS
typically announces changes to these limits in June the
year prior to the change.
Individual 2008
Family 2008
Minimum Health Plan Deductible
$1,100 (no change)
$2,200 (no change)
Embedded Deductibles
Some HDHP plans provide multiple deductibles or
“embedded” deductibles. In such plans, the lowest
deductible in the plan is the one that determines whether
the plan is a qualified HDHP.
Example: The Jones family is covered under a plan
that provides family coverage with a per-person
embedded deductible of $1,000 per family member
and a total family deductible of $2,200 (also called
an umbrella deductible). The plan begins paying
for care for individuals in the family that exceed
$1,000 in expenses even if the total $2,200 family
deductible has not been met. Mr. Jones incurs covered medical
expenses of $1,500 during the year. The plan pays benefits of
$500 on his behalf, even though the $2,200 family deductible
has not been met. Since claims are paid by the insurance
company for individuals before they reach $1,100, the plan is
not a qualified HDHP, and the family is therefore not eligible
to contribute to an HSA. Without the $1,000 per-person
deductible, however, the plan would be an eligible HDHP.
1-2
Carry-Over Deductibles
There are two common types of carry-over deductibles:
1) When an insurance plan is switched mid-year, either
by an employer or individual, occasionally, the
insurance carrier will allow expenses that were applied
to the previous deductible to “carry over” to the new
policy. However, in order to be HSA-qualified, plans
can not “carry over” expenses. The full deductible still
has to apply, even when you switch mid-year.
2) Some insurance carriers will allow expenses that
were applied to the previous deductible to be applied
to, or “carried over” to, the new policy when the
plan year resets. Usually, the “carry over” deductible
is applied for expenses incurred at the end of the
plan year during a certain period of time (usually
one to three months before the plan year end). This
is not a requirement, but it is a nice feature when
expenses occur late in the year. In only the rarest of
circumstances will this type of “carry over” deductible
exclude your plan from being HSA-qualified. Because
the deductible includes more than 12 months, the IRS
minimum deductible limit (based on a 12-month plan
year) must be increased.
1-3
Chapter 1
Example: If Matt has a plan that allows him to
include expenses from 15 months (3 month carry
over) to satisfy the deductible, the minimum
deductible for his individual policy in 2008 is
15/12 x $1,100 = $1,375 and for family coverage
15/12 x $2,200 = $2,750. If Matt’s plan does
not satisfy these increased minimums it is not a
qualified HDHP.
Out-of-Pocket Limits
The out-of-pocket limit is the highest amount of money
you may have to pay during a plan year. In many HDHPs,
the out-of-pocket limit and the deductible are the same
amount. However, some plans do not completely cover
expenses post-deductible. In this scenario, a plan may
“split the bill” with a member until the out-of pocket
maximum is reached. This is called coinsurance.
Example: Tricia has a deductible of $1,100 and an
out-of-pocket max of $3,000. Tricia pays up to her
$1,100 deductible, after which her plan agrees to
split the bill 80/20. The plan will pay 80 percent
of costs after the deductible and Tricia will pay 20
percent. If Tricia has a further $9,500 in expenses,
she will pay 20 percent of that bill, or $1,900. At
this point her total spending will have reached $3,000. She has
hit her out-of-pocket max and her insurance plan will pay the
rest of her covered medical expenses for that plan year.
1-4
Amounts you pay as deductibles, co-payments, or
coinsurance, are included in your out-of-pocket expenses,
which are kept as a running total. Insurance premiums
you pay are not counted toward out-of-pocket limits.
Once you have reached your plan’s limit for the year,
remaining eligible expenses are covered at 100 percent
regardless of the plan’s usual co-payment or coinsurance
arrangements. Some plans refer to this limit as the stoploss limit.
In 2008, a qualified HDHP’s out-of-pocket limits must be
no higher than $5,600 per year for individual coverage
and no higher than $11,200 per year for family coverage,
though they can be lower.
Maximum Health Plan
Out-of-Pocket
Individual 2008
$5,600
Family 2008
$11,200
If a plan has multiple out-of-pocket limits, the sum of
these limits must be equal to, or less than the amount
stipulated by law.
1-5
Chapter 1
Example: Dean and Laurie and their two children
have a family plan. Their plan specifies that each
out-of-pocket maximum is $2,200, after which
the plan pays 100 percent for each member of
the family that reached that maximum. Since
the out-of-pocket maximum per family by law is
$11,200, their plan would be a qualified HDHP (4
x $2,200 = $8,800). However, if they had four children, their
plan would not be a qualified HDHP, because the maximum
out-of-pocket limit would be higher than legal maximum (6 x
$2,200 = $13,200).
Network Plans
A network plan (such as a PPO) is a health plan that
generally provides more favorable pricing and benefits
for services provided by its network of providers than
for services provided outside the network. If your HDHP
is a network plan, your expenses will be re-priced if you
use in-network health care providers. Re-pricing refers
to the adjustment of health care providers’ “sticker”
or “retail” prices to reflect discounts the providers may
have negotiated with your health plan. Network plans
and re-pricing are both allowable in qualified HDHPs, but
they are not required.
Network plans may provide a different level of benefits
for members when they use in-network vs. out-ofnetwork providers. Many of these plans have separate
out-of-pocket limits and deductibles for network
and non-network care; a powerful incentive for plan
participants to use network providers.
1-6
The law does not specify any maximum out-of-pocket
limit for spending on non-network care, so an HDHP
may have higher out-of-pocket limits for services
provided outside the network than the $5,600/$11,200
limits allowed for an HDHP. A plan may also restrict
benefits to what is considered the usual, customary
and reasonable amounts, and any expenses above that
amount that are not paid by an HDHP do not have to
be included in determining maximum out-of-pocket
expenses
Example: Your plan determines that the
reasonable cost of certain types of surgery is
$2,000, a price they have negotiated with their
in-network providers. You go to an out-of-network
provider and the bill totals $2,500. The health
plan may pay only $2,000 of this bill.
You should understand whether your HDHP has
separate limits, as well as what the extent of their
network is and choose your health care providers
accordingly. These details can be found by speaking with
your employers’ benefits administrator, your insurance
broker or by reading the summary of plan benefits
provided to you at the time you are choosing your health
plan.
Yearly and Lifetime Limits
Like a traditional, lower deductible health plan, an HDHP
may also have lifetime limits on benefits as long as they
are reasonable (e.g. they don’t try to circumvent the
1-7
Chapter 1
maximum out-of-pocket limits). The HDHP can also
impose a yearly limit on specific benefits that are covered
under the plan after the deductible has been met, such
as limiting your reimbursements for substance abuse
treatment to a certain number visits per year. The result
of this limit is that anything above it, other than the
deductible (or possibly coinsurance), is not considered to
be an out-of-pocket expense.
Example: Rachel’s plan has a yearly limit of 15
visits to the chiropractor. Even though she hasn’t
met her out-of-pocket limit of $5,600, any visits
beyond those 15 cannot be counted toward her
deductible or out-of-pocket limit. This is considered
to be a reasonable limit on plan benefits. However,
if her plan had an annual limit of $10,000 for a
single condition, such as cancer, the annual limit would not be
considered a reasonable limit because it is reasonable to expect
that treatment costs may exceed that annual limit for a person
with a serious condition.
Preventive Care, Permitted Coverage and Prescription
Drugs
Under the law, a qualified HDHP cannot allow first-dollar
coverage, with some exceptions (see below). First-dollar
coverage may mean different things in different plans.
Some states require health plans to provide first-dollar
coverage for certain health benefits. This is coverage that
pays the entire covered or eligible amount without the
application of a deductible, or with just the application of
a co-payment or coinsurance amount. A co-payment is a
1-8
fixed-dollar payment the patient makes per doctor visit,
treatment, study or prescription filled. Coinsurance is the
percentage of an insurance claim for which the patient
is responsible. Health savings account law does make an
exception for first-dollar coverage if the coverage applies
to preventive care and permitted coverage.
Preventive Care Benefits
Plans do not have to offer preventive care, but if they
do, the IRS states benefits eligible for first-dollar coverage
may include:
• 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
• Screening services (for a list of these
services, see Table 4.1 in Chapter 4)
• Drugs or medications where the person has
benefit intended to treat an existing illness,
injury, or condition. In situations where it
would be unreasonable or impracticable to
perform another procedure to treat the
condition, any treatment that is incidental or
ancillary to a preventive care screening or
service is allowed
1-9
Chapter 1
The definition of preventive care that applies to HSA/
HDHP plans generally excludes any service or benefit
intended to treat an existing illness, injury, or condition.
In situations where it would be unreasonable or
impracticable to perform another procedure to treat the
condition, any treatment that is incidental or ancillary to
a preventive care screening or service is allowed.
Permitted coverage
If you have an HDHP, you may also have certain types
of permitted coverage including insurance for accident,
disability, dental and vision care and long-term care
coverage. This topic is discussed further in Chapter 4:
How Does Your HSA/HDHP Work?
Prescription Drug Benefits
Some plans offer prescription drug benefits through
separate plans, also called health plan riders, which cover
prescription drugs outside of any deductibles that may
apply to other services covered under the plan. Such
prescription drug benefits are not considered permitted
coverage under the HSA law unless these riders are
specifically designed for preventive care medications
as described above. Thus, a participant who is covered
by an HDHP that meets the law’s requirements and
is also covered by a non-preventive prescription drug
plan or rider that provides benefits before the HDHP’s
deductible is met may not open or contribute to an HSA.
This is because the prescription plan provides first-dollar
coverage for a benefit that is not permitted. Discount
cards that entitle you to price reductions on services or
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products, such as prescription drugs, are allowed with
the HSA/HDHP, as long as you are required to pay the
cost (at the reduced rate) until the deductible is satisfied.
The Health Savings Account (HSA)
An HSA is a special tax-advantaged savings account, the
proceeds of which may be spent for qualified medical
expenses. Qualified medical expenses are expenses
incurred by the account owner, his or her spouse, or
dependents for medical care as defined in section 213(d)
of the Internal Revenue Code. These are generally the
same expenses as those that individual taxpayers can
deduct on their federal income tax returns. The qualified
medical expenses are broader than what most health
plans cover. Certain types of health insurance premiums
are also considered qualified medical expenses for
purposes of HSAs (see also Chapter 4, Tables 4.2-4.4,
and Appendix). Remember: To establish and contribute
to an HSA, you must also have a qualified high deductible
health plan (HDHP). Please see prior section for more
information on HDHPs.
Contributions
Anyone (employer, family member, or any other person)
may contribute to an HSA on behalf of an eligible
HSA holder. Even state governments can make HSA
contributions on behalf of eligible individuals insured
under state high-risk pools that qualify as HDHPs.
Health savings account contributions are tax-deductible
(see Chapter 2 for details on who may claim the
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Chapter 1
deduction), grow tax-free and are never taxed if used
for qualified medical expenses. Unused money rolls over
to the next year and is fully portable; this means you
take it with you when you leave your employer, if your
employer changes plans, or if you change your plan.
HSA dollars are owned by you, the account holder, and
cannot be taken by the employer’s creditors in the event
of a company lawsuit or bankruptcy.
The maximum amount you can contribute to your
HSA is determined by the IRS. All HSA holders with
a qualified plan may contribute up to these limits. The
limit for individuals in 2008, is $2,900 and the limit for
families is $5,800. These limits are the maximum allowed
contributions for total contribution (from all sources)
over a year period, though HSA holders and employers
may contribute less if they wish.
HSA Contribution Limit
Individual 2008
$2,900
Family 2008
$5,800
Example: Jerry and Lynn are married and have
a qualified HDHP with a family deductible of
$3,500 effective January 1, 2008. Their maximum
HSA contribution can be $5,800, though they
can also choose to deposit less or no money into
their account.
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New account holders may contribute up to the
maximum as long as their account was opened by
December 1 of that year. Even if a person signs up for an
HSA in November, they can still contribute $2,900 for
an individual (or $5,800 for a family). However, the law
stipulates that this amount can only be contributed if the
person remains eligible for the 12 consecutive months or
full calendar year following the December 1st of that first
year of eligible coverage. If an account holder closes their
account prior to the end of this period, the amount they
can contribute is prorated monthly. In addition any time
an account holder closes their account mid-year, their
contributions for that year are prorated monthly by the
amount of time the account was open.
Example: If Becky opened an account June 1, 2008,
she would need to remain in HSA-based coverage
until January 2010 to qualify for the maximum
contribution rate in 2008. If Becky chooses to leave
her qualified plan in March 31, 2009 she would only
have been eligible to contribute 6/12 of $2,900 in
2008 and 3/12 of $2,900 in 2009. In other words,
$1,450 in 2008 and $725 in 2008. If Becky contributed more
than these amounts, she would need to withdraw the excess
money and report it on her tax documents. If Becky stays in
a qualified plan until January 1, 2010, she would be eligible to
contribute the full IRS limit in 2008 and 2009.
Note: The Tax Relief and Health Care A ct of 2006
Prior to 2007, HSA holders were only allowed to
contribute up to their deductible or the IRS limit,
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Chapter 1
whichever was the lowest. The deductible stipulation was
removed by the Tax Relief and Health Care Act of 2006
for contributions beginning January 1, 2007.
Also prior to 2007, HSA holders opening an account
midyear could only contribute up to the IRS maximum
prorated monthly in accordance with how long the
account was open that year. This rule was relaxed in the
Tax Relief and Health Care Act of 2006, allowing account
owners to contribute the full amount during their first
year. However, to do this the individual must remain
eligible for the 12 consecutive months or full calendar
year following the December 1st of that first year of
eligible coverage. Should the account holder become
ineligible prior to the 12 months passing, both years
would have to be pro rated and any excess contribution
removed (see previous section for example).
For updates on contribution limits and law, please visit:
www.hsaguidebook.com
IRA, FSA, and HRA Rollovers
The Tax Relief and Health Care Act of 2006 introduced
several new ways to fund an HSA, as of January 1,
2007. Health savings account holders may now transfer
money from a Roth IRA into an HSA to help build their
account balance. In addition to transfers from a Roth
IRA, account holders may also roll over money from
health reimbursement arrangements (HRAs) and flexible
spending accounts (FSAs). However, the circumstances
allowing for HRA and FSA rollovers are very strict. For
more information regarding these transfers rollovers,
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please see Chapter 2 – Health FSA/HRA Rollovers and
IRA Transfers).
Special Funding Rules for Individuals 55 or Older
For individuals age 55 and older, contributions can be
made that are higher than the limits. These are called
“catch-up contributions”. Like an IRA, the amounts
in the HSAs can be rolled over year-to-year which
encourages savings. Like IRA owners, HSA owners over
age 55 can contribute more in hopes of boosting the
savings in the HSA. These “catch-up amounts” are as
follows:
• 2008 - $900
• 2009 - $1,000
If each spouse is over age 55, each spouse must have
an individual HSA in order for each to make a catchup contribution. A married couple may make catch-up
contributions totaling $1,800 in 2008. They have their
own individual HSA. All contributions must cease once
an individual enrolls in Medicare as they are no longer
HSA-qualified.
Like the previous change in contributions, if the account
holder becomes eligible sometime after January 1st,
he/she can choose to contribute the entire catch-up
contribution. In order to do so, the individual must
remain eligible for the remainder of that year and the
entire 12 month period following that year. If the
account holder does not remain eligible during that
period of time, both years must be pro-rated and the
excess contribution removed. The excess amount will be
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Chapter 1
included as income for tax purposes. All contributions
can be made as late as April 15 of the following calendar
year.
Example: If Roger and Noelle are both older than
55 years and neither is covered by Medicare, they
can contribute an additional $1,800 ($900 each)
to their individual HSAs for 2008. If only Roger
has an HSA, he can contribute an extra $900 only.
The Two-Part Plan—How it Differs from Other
Health Plans; How it’s the Same
High deductible health plans are not new—many insurers
and employers have offered plans with high deductibles
for a long time. HSAs have features in common with
other benefits such as individual retirement accounts
(IRAs) and section 401(k) plans, which are taxadvantaged accounts that keep their tax advantage when
used for specific purposes. These aspects include year-toyear rollover, portability, employee’s choice of account
investments and survivor benefits.
The HSA also has aspects similar to other health plans,
including health reimbursement arrangements (HRAs)
and flexible spending accounts (FSAs):
• In an HRA, the employer funds an account
from which the employee is reimbursed
for qualified medical expenses, such as
co-payments, deductibles, vision care,
prescriptions, long-term care insurance and
most dental expenses. Reimbursements
are not taxable to the employee, and are
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tax-deductible by the employer. Important:
if you changed jobs, most HRAs are not
allowed to be transferred from employer to
employer.
• A health FSA allows employees to set
aside pre-tax earnings to pay for benefits
or expenses that are not paid by their
insurance or benefit plans. You cannot roll
over your FSA balances from year to year,
though, FSA participants may have until
2½ months after the plan year ends—a
total of 14 ½ months—to use up balances
accumulated in their accounts during the
plan year if their employer allows. This
extension is not automatic; the employer
must amend the plan to make it available.
The employee forfeits any amounts unused
after the extension expires.
• There are elements of all these types of
benefits in the HSA concept, and in some
circumstances, all three types of accounts
can be used together (for allowable
combinations, see further discussion in
Chapter 2 on eligibility). However, HSAs are
unique because, in addition to being able
to be spent tax-free on qualified expenses,
HSAs are owned by the individual (not an
employer) and the savings can accumulate
year after year and can even be invested in
growth accounts. Health savings accounts
combine the best components of all the
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Chapter 1
other tax-deferred savings vehicles but avoid
the problems of early use penalties for
qualified expenses or the “use it or lose it”
dilemma caused by FSAs.
Not All HSAs Are the Same
You can’t just set aside your HSA contributions in a
shoebox, or even a safe deposit box or in an ordinary
bank or other account—the money has to be set aside in
an account specially designed for this purpose.
Trust Custodian Issues: What a Custodian Does
The HSA trustee or custodian holds your balances for
you, receives and records contributions and processes
distributions. In general, an insurance company or a bank
can be an HSA trustee or custodian, as can any entity
already approved by the Internal Revenue Service (IRS)
to be a trustee or custodian of IRAs. Other entities may
request approval to be an HSA trustee or custodian
under IRS regulations.
However, be warned, not all of these companies will
provide the same level of service or support. Many
banks that offer HSAs know little about the health care
side of these accounts, while insurance companies may
lack knowledge about the banking aspect. Do your
homework about the quality of product offered before
you sign up for a provider.
Choosing an HSA Provider
Your employer may make arrangements for you to
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establish an HSA with a particular provider. You may be
required to select your own provider, or you may have
the option of selecting a different provider from the one
your employer has chosen (see further discussion of this
issue in Chapter 8: The HSA Law).
Here are some questions you should ask before choosing
an HSA provider. Some of the issues you should examine
include fees, account investment earnings and how your
account will be managed.
Ask the following questions about fees:
• How are fees set? It costs money to manage
your account, keep records and send out the
appropriate forms and statements. Is your
fee based on the amount in your account or
on how much you contribute monthly? Or
is it a fixed fee that is independent of how
much you contribute?
• Which fees can be assessed? Some possible
fees include those for account maintenance,
replacement of checks if lost or stolen, and
stop-payment charges if you should have a
dispute with a health care provider or if an
erroneous charge to your account is made.
Other charges could apply if the account
is rolled over to another custodian, or
permanently closed. The disclosure rules
apply to account fees and will depend on the
custodian selected; fee disclosure rules are
different for banks, insurance companies,
mutual funds and other entities.
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Chapter 1
• If your account is offered through your
employer, who pays the fees? You? Your
employer? Can you pay fees directly or must
they be paid out of your account? If fees
are charged against your account they will
reduce the amount you have available to
spend on health care.
Part of the value of having an HSA is that unspent
balances accrue investment earnings over time. Ask the
following questions about account earnings:
• What is the rate of return on your account?
For instance, if the HSA is in a bank, what
interest rate does it earn, and how is it
compounded?
• What is the minimum threshold of money
in the HSA in order to make investments?
Is there a charge to make investments or
is there a minimum amount of money that
must be invested?
• Are investment earnings on an account
ever forfeitable? Does the account carry
investment risk? Is it insured?
Manage your HSA in the same, careful way you
manage any other investments. Here are some account
management issues you should be sure to understand:
• Can your creditors seize balances in your
HSA in the event you declare personal
bankruptcy? For more on this question, see
Chapter 8: The HSA Law.
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• Does the account trustee or custodian
impose limits on the size or number of
distributions you can take in a month or
other time period?
accept rollovers or trustee-to-trustee
transfers from other eligible accounts?
Trustees and custodians may accept rollovers
and transfers but are not required to do so.
The field of health care can be confusing to navigate.
Health care prices are not always readily apparent. As
a smart HSA owner, you will want to maximize your
investment and spend your money wisely. Some forward
thinking HSA providers have provided services to assist
you in this area. Make sure to find out if your potential
HSA provider offers value added services to help you
better manage how to save and spend your health care
dollars. These services may include:
provide you with bill review and negotiation
help?
• Do you have access to price transparency
and quality comparison tools?
• Does your account trustee or custodian
provide phone or web consultant help to
assist you in reviewing and minimizing your
health care spending?
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Chapter 1
Keep in Mind
• The HSA must be combined with a qualified
HDHP.
• The HSA is funded by contributions; the
HDHP is funded by premiums.
• You own and control any balances
accumulated in your HSA, but your
employer, insurer or both control the
HDHP.
Up Next
This chapter has covered the basic outlines of the HSA/
HDHP. In Chapter 2 we guide you through deciding who
is eligible and when.
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Chapter
2
Who Would Want an HSA?
Chapter 1 provided the basics of the HSA/HDHP
plan. This chapter examines:
4 Who Can Establish and Contribute to an HSA
4 Eligibility for HSA Distributions
4 Eligibility for Tax Deductions
4 HSAs and Other Plan Options
4 Making Sure HSAs Are Right for You
4 Options to Think About
Making an HSA Work for You
Eligibility—Who Can Establish and Contribute to
an HSA
Everyone deals with eligibility issues during their working
lives. Every employee has faced eligibility for vacation
leave, over time, pension plans, disability benefits or
education benefits at least once.
Eligibility has three possible meanings for HSA owners:
• Eligibility to set up and contribute to an
HSA;
• Eligibility to have medical expenses paid
from the HSA; and
• Eligibility to claim a tax deduction.
In this section we consider eligibility to establish an HSA
and make contributions.
An Eligible Individual
Eligibility is a key concept that requires close attention.
Under the law, an eligible individual:
• Must be covered under a qualified highdeductible health plan (HDHP) on the first
day of any month for which eligibility is
claimed;
• May not also be covered under any health
plan that is not a qualified HDHP, with the
exception of certain permitted coverage
(discussed in Chapter 1: Health Savings
Accounts)—A New Approach and Chapter
4: How Does Your HSA/HDHP Work?
and certain health-related payment plans
discussed later in this chapter;
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Chapter 2
• Must not be enrolled in Medicare (the
health care component of the Social Security
program); and
• May not be claimed as a dependent on
another individual’s tax return (see Table
2.1, at the end of this chapter for the
criteria governing who can be claimed as a
dependent).
Any eligible individual can contribute to an HSA, as can
his or her employer or another person on behalf of the
individual, such as a family member. An employer may
pay for both an HDHP and an HSA, or pay for some or
all of the HDHP and a certain amount toward an HSA.
The employer may offer an HDHP only, with a certain
amount allowed for other benefits including an HSA,
perhaps through a cafeteria plan. In any of these cases,
the participant is the eligible individual and owner of the
HSA. The circumstances as required by law have been
met.
If an individual is a Subchapter S owner, self-employed or
unemployed, the individual can make the contribution as
long as the eligibility requirements are met.
Example: Jane is a self-employed individual with an
HDHP; she may set up and fund an HSA. However,
without an HDHP, she cannot contribute to an HSA.
If she enrolls in Medicare, she is also ineligible to
contribute to an HSA, even if she continues to work.
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The HSA may also be a valuable tax-advantaged
source of health care coverage for family members in
life transitions. Under the law, a family member may
contribute to an HSA on behalf of another family
member if the other family member qualifies as an
eligible individual. However, only the HSA holder
receives a tax deduction for contributions. A graduating
college student who meets the eligibility requirements
noted above may receive a very useful graduation
present—an HDHP and an HSA funded by parents,
friends or other family members. If that first job doesn’t
have health benefits, coverage can continue, and they can
begin to contribute themselves once financially able. Even
if the job comes with health benefits that don’t include
an HDHP, their HSA can continue to grow through
interest or investments (though they can not contribute
more money if they are not on a qualified plan, the HSA
may still be invested or used to pay for expenses).
Additional eligibility requirements—employers
Employers may have additional requirements for
employees wishing to participate in a health plan,
including those with an eligible HDHP and who wish
to contribute to an HSA. These eligibility requirements
are separate from those required under law, and are
found in employer-sponsored health plans across the
board. Nevertheless, it is important that employees
understand all eligibility requirements in order to limit
any misunderstanding or confusion that may occur when
a new type of health plan is implemented.
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Chapter 2
Health plans typically require new employees to be
working for the employer for at least a short period of
time before they are eligible to participate. Unless the
employee is covered by some other qualifying HDHP
during this period, he or she may have to suspend HSA
contributions until it is possible to resume coverage
under a qualified HDHP.
Retiree and disabled eligibility
If an otherwise eligible person is not actually enrolled in
Medicare even though that individual has reached age 65,
he or she may contribute to an HSA until the month that
person is enrolled in Medicare. They may also continue
to make catch-up contributions until they enroll in
Medicare (see further discussion below and in Chapter 1:
Health Savings Accounts—A New Approach).
Keep this in mind—you are not eligible to set up an
HSA if you do not have a high-deductible health plan.
Medicare is considered to be first dollar coverage, not
a high-deductible health plan. If you are enrolled in
Medicare, you are ineligible to set up or contribute to
an HSA. There are a few Medicare pilot programs in the
country for medical savings accounts or MSAs. These
are separate and distinct from HSAs.
However, if you are 65 and are not enrolled in Medicare,
AND you have a qualified high deductible health care
plan, you may set up and contribute to an HSA. If you
have access to a “retirement” health reimbursement
arrangement, which provides reimbursement only after
2-4
you retire, and you have an HDHP, you can still set up
an HSA. The key is that you have an HDHP. If you have
first dollar coverage—whether from Medicare or your
former employer’s retiree health plan—you cannot set up
an HSA (unless the first dollar coverage is for preventive
care as described in Chapter 1).
Likewise, an otherwise eligible person who is also eligible
to receive Veterans’ Administration medical benefits,
but does not actually receive those benefits during the
preceding three months, may contribute to an HSA.
Anyone who receives health benefits under TRICARE
(the health care program for active duty and retired
members of the uniformed services, their families and
survivors) is ineligible to contribute to an HSA, because
the coverage options under TRICARE do not meet the
requirements of an HDHP.
If you are covered by an HSA/HDHP and qualify for
short-term or long-term disability benefits under an
employer-sponsored plan, nothing should change if the
basic health care coverage arrangement remains intact
during the disability period. If you decide to apply for
Social Security Disability Insurance (SSDI) benefits,
everything changes because you cease to be an eligible
individual. We discuss this issue further in Chapter 7:
Your HSA/HDHP and Everyday Health Care Challenges.
Contribution Eligibility and Limits
You are eligible to contribute to an HSA if you are
enrolled in a qualified high deductible health plan and
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Chapter 2
are not enrolled in any supplemental care plans that
would preclude your eligibility as discussed earlier in this
chapter. As long as you are eligible, anyone – employer,
family or friends – can contribute money to your HSA.
However, only you and your employer will receive tax
benefits from these contributions.
The same annual contribution limit applies regardless
of who contributes. These contribution limits are set
by law (see Chapter 1) and will be updated each year
to allow for inflation. If you contribute more than the
allowable amount, it is called an excess contribution.
Excess contributions are subject to a 6 percent excise
tax. Excess employer contributions also become subject
to income tax.
Individual 2008
Family 2008
$2,900
$5,800
For updates on contribution limits and law, please visit: www.
hsaguidebook.com
When the Contribution Must be Made
Eligibility to contribute to an HSA is determined on a
monthly basis (see Chapter 1). For instance, if you drop
your HDHP during the last 2 months of the year, you
cannot make contributions for those months. But there
is some flexibility about the timing of contributions.
Contributions for a given tax year may be made in one
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or more payments, at the convenience of the individual
or the employer, depending on who is making the
contribution. Participants must be enrolled in a qualified
HDHP on the first day of the month in order to make
or receive an HSA contribution during that month.
Contributions are reported on the individual tax return
and therefore are tied to the tax return for that year. So,
the contribution may not be made before the beginning
of the tax year that it covers, and must be made no
later than the legal deadline, without extensions, for
filing the individual’s income tax return for that year.
Most individuals are calendar-year taxpayers. For such
individuals, contributions for a given year may be made
between January 1 of a given year and April 15 of
the following year. Even though your health coverage
plan year may be any 12 month period established
by an employer or insurer for managing the plan and
accounting for benefit payments, the schedule for HSA
contributions aligns with the calendar year.
The A ccount is Yours
An account beneficiary’s interest in an HSA is not
forfeitable, so an employer cannot recoup any
contribution previously made to the employee’s HSA.
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Chapter 2
Example: Ken’s employer contributed $2,000
to his HSA on January 2, 2008, expecting that
he would work through December 31. Ken quits
on May 3, 2008. His employer may not recoup
any portion of the contribution to Ken’s HSA.
However, Ken must remain in a qualified HDHP
for an appropriate amount of time in order to avoid paying
taxes on some of his employer’s HSA contribution. The
2008 individual contribution limit is $2,900. If this number
is prorated monthly, it comes to roughly $242 a month. For
a $2,000 contribution at this prorated amount, Ken would
need to stay qualified for nine months that year, or until the
end of September.
Trustee to Trustee Transfers
Trustee to trustee transfers are transfers of account
balances directly from one trustee or custodian to
another. Transfers from other HSAs, or from Archer
MSAs (see Introduction) into an HSA are permitted as
long as you are the owner of both accounts. You may
not transfer money from another individual’s HSA, even
if they are a family member or spouse, into an HSA in
your name. Health savings account transfers of balances
accumulated in previous years do not affect the current
year’s contribution limits. This type of transfer is similar
to moving funds from one IRA to another IRA. This can
be done an unlimited number of times within a 12 month
period.
2-8
Rollover Contributions
Rollover contributions are moving the funds from one
HSA or Archer MSA to another, but the funds are sent
to the account holder rather than directly from one
trustee/custodian to another. The individual would
have 60 days to get the funds back into an HSA without
having any taxes or penalties. Only one rollover can be
completed in a 12 month period. Just like trustee to
trustee transfers the rollover does not apply towards the
contribution limits for the year.
Example: Tyler has an HSA of $5,000 at Bank A and
wishes to transfer the entire account to an HSA at
Bank B. He can withdraw the balance from Bank A
and redeposit it in Bank B as long as it is within 60
days. This is a rollover. He may also request a trustee
to trustee transfer, in which Bank A sends the money
directly to Bank B. Tyler may do either of these options and
still make whatever contributions for which he is eligible without
having to consider the amount rolled over in calculating his limit.
However, if Tyler withdraws the money and does not redeposit
it or spend it for qualified health care, a 10 percent penalty will
apply and he will have to pay income taxes on the amount.
Health FSA/HRA Rollovers
As discussed in Chapter 1, under limited circumstances,
health flexible spending accounts (FSAs) and health
reimbursement arrangements (HRAs) may be used to
fund an HSA in a one-time rollover. There are specific
rules that must be followed to do this. A qualified
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Chapter 2
HSA distribution from the health FSA or HRA can be
completed if it is a direct transfer from the employer to
the HSA custodian or trustee and can not exceed the
lesser of the amount in the account on September 21,
2006 or the balance at the time of the transfer. Because
of this, if an individual did not have one of these accounts
in place as of September 21, 2006 he or she can not elect
an HSA distribution. Rollovers from HRAs and FSAs
should be initiated by the employer sponsoring those
accounts. The employer must update their plan document
to allow for the rollover prior to the end of the runout period of their plan year. In addition, the option to
transfer funds to an HSA must be offered to all qualified
employees. The transfer must be made before January 1,
2012. Employers considering this option should consult
with their health care broker, accountant and/or legal
team.
This rollover does not count towards or reduce the
annual contribution amount. When the qualified HSA
distribution is made from an FSA or HRA, it reduces
the balance of those accounts to zero, but it does not
cause the coverage period to end. The account holder
must remain HSA eligible from the time of the rollover
through the last day of the 12th month following the
distribution. Should the account holder not remain
eligible through this period of time the amount
transferred will be included into income for tax purposes
and an additional 10 percent tax assessed. The rollover
amount is not considered an excess contribution and
removing the amount will not keep the individual from
paying the income tax or 10 percent penalty.
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Consequently, any FSA or HRA rollovers that occur
other than at the end of the coverage period will result in
the account holder being ineligible and he/she will have
to include the transferred amount in income and pay the
additional 10 percent tax.
IRA Transfer
To help fund the HSA, an account holder can do a once
per lifetime trustee-to-trustee transfer from a Roth IRA
to the HSA. This transfer is limited to the maximum
annual contribution for the year and reduces the annual
amount that can be contributed. The individual must
remain an eligible individual for the entire 12 month
period following the month in which the transfer was
completed. If he or she does not remain an eligible
individual, the transferred amount is included in income
for tax purposes and is assessed an additional 10
percent penalty. Simple and SEP IRAs are not eligible
for transfer.
Contributions by spouses
Spouses often have to make decisions on how to fund
health care when both have access to health care
coverage, typically from their employers. Most couples
have experience exploring how to best use the benefits
available to them.
For HSAs, contributions that are allowed for spouses
depend on the coverage each spouse chooses—again,
unless one spouse is ineligible. Equal division of the
allowable contribution amount between spouses is the
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Chapter 2
default option; the spouses could agree on a different
division.
Examples:
Both spouses have family coverage. Tom and Alice are
married. Tom is 58 years old and Alice is 53. Tom
and Alice both have family coverage under separate
HDHPs. Tom’s HDHP has a $3,000 deductible
and Alice’s has a $2,200 deductible. Because both
plans provide family coverage, Tom and Alice are treated as
having coverage under one family plan and can contribute a
combined amount up to the annual statutory CPI amount. Tom
can contribute $3800 to an HSA (1/2 of the annual statutory
amount of $5,800 for 2008, plus a $900 catch-up contribution
because he is age 55 or older). Alice can contribute $2,900
to an HSA. Tom and Alice can agree to contribute different
amounts but their total annual contributions cannot exceed
$6,700 ($5,800 + $900).
Both spouses have self-only coverage. Jim and Kathy are married.
Jim is 35 years old and Kathy is 33. Jim and Kathy each have a
self-only HDHP. Jim’s plan has a $1,100 deductible and Kathy’s
has a $1,500 deductible. Jim can contribute $2,900 to an HSA
and Kathy can contribute $2,900. The same result applies
whether Jim and Kathy work for different employers, one is selfemployed and one is an employee, or both are self-employed.
One spouse has qualifying coverage, the other doesn’t: David and
Sherry are married. His employer offers David an HSA/HDHP
plan. Sherry has a traditional plan that does not meet the
criteria for an HDHP. Sherry elects family coverage, thereby
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covering David under her non-qualifying plan. David is not
eligible to contribute to an HSA, because he is covered by
Sherry’s plan. However, if Sherry elected coverage under her
plan only for herself, or herself and their children, David would
not be covered under her plan, and could contribute to an HSA
if otherwise eligible.
One spouse is eligible, the other isn’t. Joe and Jenny are married.
Joe has just turned age 65 and has enrolled in Medicare. Jenny
is 56. Joe and Jenny have separate HSAs, each with self-only
coverage. Joe can no longer contribute to an HSA, but can use
the funds accumulated in his account to pay qualified medical
expenses including his Medicare premiums (for definitions and
examples, see Chapter 4 on how an HSA works). Jenny is
enrolled in a plan with a deductible of $1,500. She is eligible to
contribute up to the CPI indexed amount, $2900 for 2008 to
her HSA, plus a catch-up contribution of $900 for 2008.
Family and single coverage at the same time. Al and Sue are
married. Al has a family HDHP with a $5,000 deductible.
Sue, however, has a self-only HDHP with a $2,000 deductible.
They will be treated as having only family coverage, and their
maximum combined contribution is the IRS statutory amount
for family coverage, $5800 for 2008 to be divided between
them by agreement.
Spouses cannot roll over their HSAs into a joint account.
Keep in mind that an HSA is an individual account only.
Even in the case of a husband and wife working for the
same employer, the HSA as well as the contributions
must be separate. An employer making contributions to
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Chapter 2
HSAs must make comparable contributions on behalf
of all eligible participating employees, which must be
the same percentage of the deductible or same dollar
amount for all employees in the same coverage category;
otherwise, they will run afoul of the nondiscrimination
rules. There are some limited exceptions to these
rules, please see Chapter 8: The HSA Law for more
information.
Eligibility for HSA Distributions
How is it possible to ensure that the money saved in an
HSA actually goes to health care spending? After all, the
purpose of the HSA is for the consumer to decide how
best to spend his/her health care dollar, and have the
ways and means to do so.
Under the law, HSA distributions are tax-free if used for
any of the qualified medical expenses of the participant,
his or her spouse or dependents. This is true whether
or not the spouse or dependent is covered by an
HDHP (see Table 2.1, end of this chapter, for what
makes a person your dependent). Even if both spouses
have HSAs, one can pay those expenses for the other.
However, you may only pay medical expenses for a
married dependent if that dependent does not file a joint
income tax return with a spouse. Also, both HSAs may
not reimburse the same expense. Distributions from
the HSA may cover qualified expenses even if they are
not applied toward your deductible under the HDHP; as
long as they are qualified according to the IRS (See Table
4.2 at the end of Chapter 4 for a summary of these
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expenses). In this way, the HSA provides extra flexibility
in making medical care decisions.
Any money from the HSA that is used for non-medical
purposes will be included in the individual’s gross income
for tax purposes and is subject to an additional 10
percent penalty on the amount included. However, if the
account beneficiary reaches age 65 or dies, distributions
may be used for other purposes without being subject
to the 10 percent penalty. Mistaken distributions from
an HSA can be repaid by April 15th of the following
year without penalty or tax, provided this is permitted
by the trustee, and there is “convincing evidence that
the amounts were distributed from an HSA because of
mistake of fact due to reasonable cause.” (IRS Notice
2004-50 - Part iii - Administrative, Procedural, and Misc.)
Spouse
HSAs can provide flexibility for couples paying health
care expenses.
Example: In the last example of David and Sherry,
Sherry has a traditional plan that does not meet the
criteria for an HDHP and does not include coverage
for David. Sherry’s plan has first dollar coverage
that is subject to co-payments. David elects an
HSA/HDHP for himself. Even though Sherry is not
covered by David’s HSA/HDHP plan, he can use his
HSA to pay her co-payments. Likewise, in the example of Joe
and Jenny at the end of the last section, Jenny can use her HSA
to pay Joe’s qualified medical expenses.
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Chapter 2
Loss of Job or HDHP
If you lose your job or change jobs, or your employer
changes the plans it offers, you may no longer be
covered by an HDHP. If so, you may lose your eligibility
to contribute to an HSA. But losing your eligibility
to contribute to an HSA doesn’t mean you can’t use
the HSA. You may still use any balance in the HSA
for qualified medical expenses. You continue to own
the account as it is, even though you can no longer
contribute to it. If you become eligible again in the
future, you will be able to resume contributions.
A t A ge 65 and Later
After you reach age 65, if you enroll in Medicare you can
still use your HSA for health care expenditures, but you
can no longer make contributions since you no longer
have a qualified HDHP. Medicare premiums, long-term
care coverage, and premiums in an employer-sponsored
retiree health care coverage plan can all be paid out
of your savings in the HSA. You can even use your
accumulated balances for any other purpose you desire
without incurring the 10 percent penalty for non-medical
uses that applies before this age. However, you cannot
pay Medicare supplementary insurance premiums (also
called Medigap) out of your HSA without paying taxes on
the amount.
After the A ccount Owner’s Death
When the account owner dies, any amount remaining
in the HSA passes to the individual named as the HSA
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beneficiary. If the owner’s surviving spouse is the named
beneficiary, the HSA becomes the HSA of the surviving
spouse. An HSA is considered an individual account, and
as such the spouse inheriting the HSA is considered the
owner. The spouse can then use the HSA as any other
HSA owner would. The surviving spouse is subject to
income tax on amounts in the account only if they are
not used for qualified medical expenses.
If the HSA passes to a person other than a surviving
spouse, the HSA ceases to be an HSA, and the heir is
required to include the fair market value of the HSA in
gross income. Fair market value is calculated as of the
date of the account owner’s death, and is reduced by any
payments made from the HSA on behalf of the decedent
within one year after death.
Eligibility for Tax Deductions
The employer, employee or individual, or both,
depending on who makes the contribution, may claim
deductions for HSA contributions. Health savings
accounts qualify as a deduction for federal taxes and
most state taxes. For more information, see Chapter 8:
The HSA Law.
Income Tax Deductions for the Employee or Individual
Purchaser
The tax-deductible contribution amount is calculated on
a month-to-month basis based on the total amount of
the deduction and the number of months of participation
(see examples in Chapter 1, where we explain the basics
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Chapter 2
of HSAs). The contribution is an “above-the-line
deduction,” for the purposes of calculating adjusted
gross income, unless done through a cafeteria plan (see
also Chapter 8: The HSA Law).
Example: Hank, a single taxpayer, makes $36,000
a year and contributes $1,000 to his HSA. He can
subtract the $1,000 HSA deposit when calculating
his adjusted gross income.
However, if you itemize, you cannot count the HSA
contributions twice by calculating it against the gross
income and deducting the HSA contributions as an
itemized medical expense. In fact, no expense can be
deducted twice or paid twice out of different tax-exempt
accounts or through different insurance plans (for more
on this issue, see Chapter 4: How Does Your HSA
Work?).
As an eligible individual, you can deduct a contribution
on your return even if another person makes it on
your behalf (see also Chapter 7: Your HSA/HDHP and
Everyday Health Care Challenges).
Contributions an employer makes to the employee’s
HSA are treated as employer provided coverage for
medical expenses under an accident or health plan and
are excludable from the employee’s gross income if
made on behalf of an eligible individual. The employer
contributions are not subject to income tax withholding
from wages or subject to the Federal Insurance
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Contributions Act (FICA), the Federal Unemployment
Tax Act (FUTA), or the Railroad Retirement Tax Act.
Employer contributions may be subject to certain state
taxes (see further discussion in Chapter 8. The HSA
Law).
Contributions for Self-Employed and Owners of S
Corporations
Self-employed individuals and owners of S corporations
are not considered employees. As such, they cannot
receive employer contributions. However, they can make
contributions on their own and claim the above-the-line
deduction on their personal income taxes.
Contributions by a partnership to the HSA of a bona fide
partner are treated as a distributive share of partnership
income. They are considered to be guaranteed payments
derived from the partnership’s trade or business, and
reported as such on IRS Schedule—K1 (form 1065). The
contributions are included in the partner’s net earnings,
from which the partner is then able to deduct those
contributions as an adjustment to gross income—just as
any HSA owner is able to do—within the confines of the
law.
Contributions to the HSA of a 2 percent shareholderemployee in consideration for services rendered are
treated as a guaranteed payment, and are includable in
the 2-percent shareholder-employee’s net earnings. The
contributions can then be deducted as an adjustment to
gross income.
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Chapter 2
Tax Deductions for the Employer
To be tax-deductible, employer HSA contributions
must be comparable. There is one exception to this
rule. Employers may contribute more to HSAs of nonhighly compensated employees. The IRS uses the same
definition of “highly compensated employees” for HSAs
as they do with other retirement accounts.
Contributions are considered comparable if the employer
makes the same contributions on behalf of all eligible
participating employees with comparable coverage
during the same period. Contributions are considered
comparable if they are either the same dollar amount or
the same percentage of the deductible under the HDHP.
For instance, Company A’s contribution is considered
comparable if each eligible employee gets $500 towards
an HSA. Company B’s contribution is also considered
comparable if it covers 75 percent of the deductible.
Even in the case of a husband and wife working for the
same employer, the HSAs must be separate as well as
the contributions, or the comparability rules may be
breached.
Except as described below under cafeteria plans, an
employer may not institute matching contributions to
HSAs. However, comparability rules do not apply when
contributions are made through cafeteria plans (see
further discussion later in this chapter and in Chapter 8
on the laws governing HSAs).
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HSAs and Other Plan Options
In Chapter 1 we compared HSAs with health flexible
spending accounts (FSAs) and health reimbursement
arrangements (HRAs). HSAs can substitute for or be
used with these other accounts when employers, within
limits, make them available. HSAs can also be used with
employee assistance plans (EAPs) and cafeteria plans.
HSAs and FSAs
Employees use health FSAs to pay for a wide range of
expenses not covered by their health plans, including
dental, vision, co-payments and coinsurance. If you are
covered by an HSA/HDHP, you can still use an FSA,
but it has to be structured more narrowly. An FSA may
be limited to paying for permitted coverage benefits (for
definitions, see Chapter 1, where we introduce the basics
of HSAs). In this case, it works in parallel with the HSA;
both accounts may pay for benefits at the same time (see
Figure 2.1, end of this chapter).
Alternatively, if the employer offers a general-purpose
FSA, it can be set up to provide benefits only after the
minimum annual deductible specified in the plan has
been satisfied. This is called a post-deductible FSA. In this
case, the FSA works in sequence with the HSA. To see
how the post-deductible account works with the HSA,
see Figure 2.2, end of this chapter. The FSA can also
be a combination of both the limited-purpose and the
post-deductible as long as the employer has it written
accordingly in the plan document.
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Chapter 2
Previously, an employee with a grace period (the
additional two and one-half months to use the funds
before the Use-it-or-lose-it rule is applied) on the general
health FSA would be considered to have non qualifying
coverage and would therefore, be ineligible to contribute
to an HSA. Due to new laws enacted January 1, 2007,
the individual who has one of the two following scenarios
and is otherwise eligible can now contribute to an HSA.
1. The health FSA must have a zero balance at the end of the prior plan year
2. The individual makes a qualified HSA distribution at the end of the plan year to an HSA creating a zero balance in the FSA .
HSAs and HRAs
An employee may be covered by both an HRA and
an HSA. The HRA may be a limited-purpose account,
limited to providing permitted coverage (see Figure
2.1, end of this chapter). Like an FSA, an HRA can also
be structured to pay benefits only after the deductible
is met. Alternatively, the employee may elect not to
receive reimbursements from the HRA during the period
the employee is covered by an HSA/HDHP, other
than permitted coverage and benefits; this is called a
suspended HRA. Finally, the HRA can be structured to
provide benefits only after the employee retires.
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Employee Assistance Programs (EAPs)
An EAP is an employee benefit that covers all or part of
the cost for employees to receive counseling, referrals
and advice in dealing with stressful issues in their lives.
An employee covered by an EAP, a wellness program
or a disease management plan may still contribute to an
HSA, so long as these plans do not provide substantial
medical benefits.
HSAs in Cafeteria Plans
An employer may offer an HSA as part of a cafeteria
plan. A cafeteria plan is an employee benefit plan that
allows employees to choose benefits from a number of
different options, including 401(k)s, health insurance,
other insurance and time-off. Health savings account
contributions may be made through cafeteria plans.
Many of the rules governing HSAs offered as part of a
cafeteria plan are different from those governing HSAs
offered outside of such a plan. For example, an employer
offering an HSA as part of a cafeteria plan may structure
its contributions as matching contributions, which means
the employee receives an employer contribution only
if the employee contributes to the account as well. In
such a situation, some employees might not receive any
contributions to an HSA, or might receive contributions
that differ in dollar terms or as a percentage of the
HDHP deductible. In contrast, an employer offering an
HSA that is not part of a cafeteria plan must ensure that
all eligible participating employees receive a comparable
contribution— either in dollar terms or as a percentage
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Chapter 2
of the HDHP deductible—to their HSA plan (see earlier
discussion in this chapter and Chapter 8 on the laws
governing HSAs for more on comparable contributions).
At the same time, however, employer HSA
contributions made under a cafeteria plan must meet
the nondiscrimination rules applicable to cafeteria plans.
These are the same rules applied for 401(k)s and flexible
spending accounts. Nondiscrimination rules have a
number of meanings in employee benefits law; in this
case, the term refers to rules that ensure that a plan
does not favor the employer’s most highly compensated
employees.
Making Sure HSAs are Right for You
If you offer an HSA to your employees, are eligible for
an HSA, or are thinking about it for someone else, think
carefully about health care budgets. The HSA/HDHP
allows consumers to be more involved in decisions on
how their health care dollars are actually spent and
encourages them to budget effectively and save money.
In order to think in terms of a health care budget, you
have to look at the type of health care for which you will
need to pay.
Any time you have a choice of health plans, whether
from a selection of plans offered by your employer, or as
an individual purchaser, you should consider your health
care use patterns.
2 - 24
Do You Use Substantial Amounts of Health Care?
Do you or a family member who would be covered
under your plan have a chronic condition such as
diabetes, a heart problem or asthma? A chronic
condition is one that lasts a long time, or recurs
frequently, and can be treated but not eradicated. Some
people with chronic conditions may need substantial
health care on an ongoing basis. Not all chronic
conditions are cost-intensive; however, they may require
monitoring. And some may require medical appliances
that are not usually paid by health plans, but are
considered medical expenses for purposes of an HSA,
and therefore, could be paid from an HSA.
Consumers need to weigh the benefits of flexibility and
tax-favored HSA distributions with covered benefits
under low deductible plans to determine which plan
is right for them. With increasing co-payments and
coinsurance in traditional plans, HSAs are often times the
right choice.
Do You Need Health Care Coverage for that
Unanticipated Expense or Disaster?
You and your family may be in good health, but you still
want health care coverage against that unanticipated
accident or other unpredictable event. Can you set aside
money in an HSA on a regular basis to cover your annual
bout with the flu or your child’s ear infection? Many
people don’t reach their deductibles because they don’t
spend much on health care. The HSA/HDHP plan may
be just right for you; since it gives you control over your
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Chapter 2
spending and allows you to save tax-free in an account
that you can use if and when your health care spending
increases.
Using Your Plan’s Network
High deductible health plans typically offer networks
of providers that have agreed to give special pricing to
participants in plans with which they have contracts.
Discounts lower the amount you may need to pay out
of your HSA. Are you willing to use doctors in your
plan’s network if it can lower your health care costs? If
you decide to go “out-of-network”, are you willing to
pay for the higher costs, possibly out of your HSA? The
HSA does give you flexibility to go to an out-of-network
doctor, knowing that, if the money is in your HSA, you
can pay for that visit. The HSA/HDHP is anchored in
making good choices, both health-wise and budget-wise.
You should also consider your job, your industry or
occupation and your career stage and career plans.
Do you change jobs often? People tend to change jobs
more often in some fields than in others, and younger
people tend to move around more than people who
are more established in their careers. HDHPs can
be extended under COBRA like any other plan. You
can use accumulated balances in an HSA for COBRA
premiums during a period when you may lack other
coverage. You can continue to use your HSA for health
care expenditures even if you don’t have other coverage;
however, you cannot contribute to an HSA without
having a qualified HDHP.
2 - 26
Also Think About These Options
Should you get your HDHP and HSA from the same
company? You are free to use any qualified trustee or
custodian for your HSA. The insurer who offers your
HDHP may offer an HSA as well--this can be a good
choice as account management can then be integrated
with the health plan. But if you are not happy with your
account trustee or custodian, or are offered a better
deal in terms of fees or services, you are free to change
companies.
Since you own your HSA, it is not like other benefit
plans your employer may offer. An HSA is not protected
from your creditors unless it qualifies as an employersponsored benefit plan under ERISA (see Chapter 8: The
HSA Law). ERISA (The Employee Retirement Income
Security Act of 1974) is the federal law that governs the
terms under which employee benefit plans are offered.
According to the U.S. Department of Labor, an HSA
offered by an employer is not necessarily an ERISA plan,
nor is an HSA you open on your own.
Keep in Mind
• You need to consider whether you are able
to establish and contribute to an HSA, have
benefits paid from one, or claim the tax
deduction for a contribution. Eligibility for
each of these aspects of the HSA can differ.
• The HSA can work with other taxadvantaged accounts to pay for health
expenses, including HRAs and FSAs, but
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Chapter 2
HRAs and FSAs will work differently when
combined with an HSA than when used on
their own.
• Whether an HSA/HDHP is right for
you can depend on a number of factors,
including your health needs and those of
your family, and how often you may expect
to change jobs and/or health plans.
Up Next
This chapter has explained how you qualify to establish
an HSA/HDHP and how this two-part plan will interact
with other health care options your employer may offer
you. In the next chapter, we look at how you can find
the right HSA/HDHP for you.
Table 2.1 Who Is a Dependent?
Source: Authors’ compilation based on Department of the Treasury,
Internal Revenue Service, Publication 502: Medical and Dental Expenses.
A person whom you claim as a dependent for income
tax purposes must meet each of the following tests, as
applicable:
1. That person lived with you for the entire year as a
member of your household or is:
• Your child (including a legally adopted child
or a foster child), grandchild, great-grandchild
• Your stepchild or your stepchild’s
descendant;
2 - 28
• Your sibling, half-sibling or step-sibling, or a
descendant of these persons;
• Your parent, grandparent or other direct
ancestor other than a foster parent
• Your stepfather or stepmother;
• A brother or sister of your father or mother;
• A descendant of your brother or sister; or
• Your father-in-law, mother-in-law, son-in-law,
daughter-in-law, brother-in-law or sister-inlaw.
2. That person was a U.S. citizen or resident, or a
resident of Canada or Mexico for some part of the
calendar year in which your tax year began. For
individual taxpayers, the tax year is typically the
calendar year.
3. You provided over half of that person’s total support
for the calendar year. Special rules may apply to
children in divorce and other situations.
4. You may claim a child who meets one of the tests in
#1 above as your dependent if s/he lived with you in
the U.S. (special rules may apply) for more than half
the year and is under age 19 (or under age 24 if a fulltime student). Beginning in 2005, a uniform definition
of a dependent child applies for all tax purposes.
A few cautions:
• Because expenses are tax-deductible either
when they are incurred or when they
are paid, you may be able to deduct a
dependent’s medical expenses even if you
cannot claim an exemption for him or her
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Chapter 2
on your current-year tax return.
• You may pay medical expenses out of
the HSA for yourself, your spouse or a
dependent only if the expenses are not
covered by insurance.
2 - 30
Chapter
3
How to Set
Up an HSA
In previous chapters we described the basics of HSAs
and HDHPs and explained to you how to figure out
if you are eligible to participate. As HSAs become
more commonplace, most Americans under the
age of 65 can benefit from their unique advantages.
It doesn’t matter if you have individual or family
coverage, employer-sponsored coverage, whether
your employer is large or small, if you are sponsoring
the plan, whether you have retired early, or are not
employed at all. If you are eligible (see Chapter 2:
Who Would Want an HSA?), and have a qualified
HDHP, you can set up an HSA. This chapter is about
how to get an HSA.
4 HSA-Remember the Definition
4 Setting up an HSA on Your Own
4 In a Nutshell
4 How to Find out about HSAs
4 Getting a Certificate of Coverage
4 The Employer and the HSA
How to Set Up an HSA
HSA—Remember the Definition
A health savings account (HSA) is a savings account that
is combined with a qualified high deductible health plan
(HDHP). The HDHP protects the insured from the cost
of a catastrophic illness, prolonged hospitalization or a
particularly unhealthy year. The HSA can be used for
meeting expenses before the HDHP deductible is met
or for other health care expenses allowed under the
Internal Revenue Code.
Setting up an HSA on Your Own
A knowledgeable health insurance broker can help
you find and apply for a qualifying HDHP. You can also
explore health insurance websites that offer HDHPs.
Make sure that the deductibles meet the required
levels so that you can then qualify to open an HSA. For
calendar year 2008 a qualified individual policy is $1,100
or higher; $2,200 or more for a family policy. Out-ofpocket limits can be no higher than $ 5,600 for self-only
coverage and no higher than $11,200 for a family. If you
are applying for a plan without employer sponsorship
you might not be covered for pre-existing conditions, but
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Chapter 3
you could still pay for health expenses out of the HSA for
such conditions.
To open an HSA, you must have established your
qualified HDHP plan and be otherwise eligible as of the
first of the month you wish to establish your account.
Your HDHP and HSA are not required to come from the
same company; you may prefer the service, terms and
investment opportunities of an HSA provider that is not
provided through your insurance company.
Questions to Ask
It is important that your expectations are clear for the
basic administration of your HSA. Make sure you get
answers to the following questions so that your HSA will
run smoothly:
• How much should I contribute? Can I make
contributions monthly? Quarterly?
• How often do I receive a statement?
• How often can I increase or decrease my
contribution?
• When will I receive my debit card or
checkbook?
• What should I do if I need to use the account
before I get them?
Closing the Deal
Your HSA provider will require you to sign a custodial
agreement and a trust agreement, or otherwise enroll
as part of your employer-based health insurance
3-2
program. Some HSA administrators do not require “wet
signatures”, or hard-copy paper forms, if the enrollment
process is tied to enrolling for the HDHP. The IRS
prototype forms for HSA custodial accounts (5305-C)
and HSA Trust Accounts (5305-B) can be found on the
IRS website at www.irs.gov. (See also Chapter 8: The
HSA Law).
Once your HSA is set up, you should designate a
beneficiary right away. If the beneficiary is a spouse, he
or she will become the owner of the HSA if you should
die. It will be included in your estate for other named
beneficiaries (see page 2-16, After the Account Holder’s
Death).
Once your HSA is open and you’ve got your debit card
or checkbook in hand, going to the doctor is just like
before—except that you may be required to pay at the
time of service. If your HDHP is a network plan and you
use its providers, your bill may be sent to your insurance
company for re-pricing and then returned to you for
payment at the discounted rate. Ask your health care
provider to contact your administrator for submission
information. Health savings account administrators and
HDHPs can assist you.
In a Nutshell...
Your steps are:
• Research and sign up for an eligible HDHP
• Research HSAs and IRS-approved trustees
• Sign up for an HSA, including executing your
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Chapter 3
custodial and trust account agreements
• Designate a beneficiary
• Get your debit card and/or checkbook to
access your HSA
• Keep track of your account as you would
your checkbook and retirement accounts
How to Find out about HSAs
There are a number of good websites that describe the
basics of HSAs, give updates about changes in the HSA
law and list companies that provide HSAs. Below is a
starter list of some of these sites:
www.hsaguidebook.com
www.hsafinder.com
www.hsainsider.com
www.vimo.com
www.healthdecisions.org
www.treasury.gov
www.healthequity.com
Google: health savings accounts or HSAs.
Your insurance broker should also have some experience
with HSAs and be able to provide you with more
information.
Getting a Certificate of Coverage
If you have had continuous health insurance coverage
(see Chapter 7: Your HSA/HDHP and Everyday Health
Care Challenges), any conditions that are considered
pre-existing may be covered sooner than any required
3-4
wait time. It is important to have a certificate of coverage
from your last insurer as proof of your health insurance
coverage. A written certificate issued by a group health
plan or health insurance issuer shows your prior health
coverage (creditable coverage). A certificate must be
issued automatically and free of charge when you
lose coverage under a plan, when you are entitled
to elect COBRA continuation coverage or when you
lose COBRA continuation coverage. You may need
to provide this certificate to your new plan if medical
advice, diagnosis, care or treatment was recommended
or received for the condition within the 6-month period
prior to your enrollment in the new plan.
If you become covered under another group health plan,
check with the plan administrator to see if you need to
provide this certificate. You may also need this certificate
to buy, for yourself or your family, an insurance plan that
does not exclude coverage for medical conditions that
are present before you enroll in the HDHP.
The Employer and the HSA
Health savings accounts offer employers an opportunity
to empower employees to be incentivized and take
control of the way they consume health care services.
This can lead to lowering future cost increases. If you are
an employer and have not offered health benefits before,
the initial choices of the type of plan, administration, and
whether or how much to contribute to the HSA will
make a difference in how well received your choice of
health care coverage is, and whether it will meet your
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employees’ needs.
As an employer, you may be experienced in offering
similar accounts that require trustee and custodial
agreements or investment decisions, such as section
401(k) plans. You can use that experience, and the
experience of your employees, to understand the
process.
You may have offered health benefits in the past and
now want to make the switch to the HSA/HDHP type
of plan. Benefit design is important and good employee
education is key to the success of this type of program.
This book will guide you in educating your employees
about HSAs.
Benefit Design
There is room to customize your health care plan. For
instance, the IRS allows, but does not require, a range
of preventive care screenings and services for first dollar
coverage in an HDHP. You can pick a qualified HDHP
that meets your health and cost needs.
You can also make decisions on how to customize
premiums and contributions. You can make full or partial
premium payments for HDHPs, or a variation on that for
individual and family coverage. You also decide how much
to contribute to your employees’ HSAs—whether to
make full or partial contributions or none at all. One of
the key benefits to both employers and employees with
an HSA-type plan is the significant cost savings on health
insurance premiums for the HDHP relative to traditional
3-6
HMO/PPO type plans. These premium savings can be
used to partially fund employee HSAs. When making
contributions, make sure you meet comparability rules
(see Chapter 8: The HSA Law).
The IRS also allows employers to offer HRAs and FSAs
at the same time as the HSA/HDHP plan. However,
they do have limitations on use or covering only postdeductible expenses. (See Chapter 2: Who Would Want
an HSA?).
Employee Education
Education is key to a smooth transition to the HSA/
HDHP health care coverage. Employees may be
uncomfortable with this new type of plan, and it is
likely that many won’t understand how it works. For
some, who do not understand how the tax-savings and
premium decreases affect the overall cost, this may look
like a benefits decrease. In order to be successful, it is
very important that you take the proper steps to help
your employees understand how this new system works,
how to contribute, and how to make payments. Help
them assess how much to contribute to an HSA, how to
keep records, whom to ask when they have questions,
how to check HSA balances and deposits, use a network,
and get good health care information. Your HSA
administrator and health plan may have tools to help you
perform these tasks.
Employers who provide employees with information and
tools to help them make better health care decisions,
especially decisions on how to use the health care system
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effectively, will find a more receptive base. You will
also want an HSA provider who can help support your
educational effort throughout the plan year.
Keep in Mind
• A knowledgeable broker can help you find
an HSA provider and HDHP that suits you
or your company.
• Make sure you understand the nuts
and bolts of how the HSA you choose
works—how to contribute, how often you
receive account statements, designating a
beneficiary, etc.
• Good benefit design is key to making the
HSA/HDHP plan work for your employees.
There is room to customize your plan and
contributions to meet your needs.
• Educating employees to be active health care
consumers is more important than ever.
Up Next
Earlier chapters introduced HSAs and HDHPs and told
you how to figure out if you are eligible. This chapter
told you how to find an HSA and an HDHP. In the next
chapter we elaborate on how these plans work.
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Chapter
4
The previous three chapters explained the basics of
HSAs and HDHPs; how to figure out whether you
can have an HSA and whether you should; and how
to get one.
In this chapter we explore how an HSA/HDHP works
and how you can manage your account to get the
best benefits your money can buy. We explain:
4 Using the HDHP
4 Using the HSA
4 Knowing Who Can Provide You Treatment
4 How You Pay Your Providers
4 What is Permitted Coverage
4 Managing Your HSA
Using the HDHP
The HDHP is simply a standard insurance plan with a
higher deductible. To comply with the HSA law, the
deductible must apply to both network and non-network
care. In contrast, many managed care plans don’t apply a
deductible to care you obtain within your plan’s provider
network.
Exactly what your plan does cover depends on your
employer, your insurer, and the choices you make from
the plans available to you. For example, some plans may
pay for fertility treatments, others may not; some plans
may pay for bariatric (weight-loss) surgery, others may
not. There are many variations among HDHPs, so don’t
assume your next plan covers the same things as your
last. Be particularly sure you understand your new plan’s
provisions. These can be found in your plan’s summary
of benefits that you receive at the time of enrollment.
This section explains the types of coverage that a
participant may have along with an HSA/HDHP. If a
participant has coverage in addition to the HDHP that is
not permitted, then the participant may not contribute
to the HSA. In general, the rules exclude many types of
coverage for first-dollar medical expenses.
Permitted Coverage Alongside an HDHP
Permitted coverage is the coverage an individual may
maintain, in addition to an HDHP, without losing
eligibility for an HSA, even though the coverage
may provide first-dollar coverage for certain medical
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expenses.
Coverage that is permitted includes:
• Worker’s compensation insurance;
• Indemnity plans that pay a fixed amount per
day or other period of hospitalization;
• Coverage limited to a specific disease or
illness (e.g. cancer, diabetes);
• Accident, disability or auto insurance;
• Tort liability payments; and
• Insurance for vision care, dental care, or
long-term care.
A few important cautions:
• Permitted hospitalization indemnity
plans mean just that— you must have been
admitted to the hospital to qualify for a
benefit. An indemnity plan is one that pays
health insurance benefits in the form of cash
payments rather than services. Some HSA/
HDHP vendors may call these plans “gap”
plans or “HSA protector” policies, because
one function of such plans is to cover you
against a large bill before you meet your
plan’s deductible. This can serve to protect
your HSA dollars, or to help pay for hospital
expenses before you have had time to build
your account balance.
Indemnity or “gap” plans can’t cover
outpatient hospital services such as medical
tests that you might have in a hospital
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or hospital-related facility without being
admitted to the hospital. In other words,
the indemnity plan is not intended to cover
relatively small expenses just because they
are incurred in the hospital rather than in a
freestanding facility.
• Prescription or other discount
programs. Your plan may provide you
with a membership card that qualifies
you for a discount on prescription drugs
or other health care goods or services.
Such programs are permitted along with
participation in an HSA/HDHP, even though
they may apply to the very first eligible
expenses you incur (that is, they are not
subject to a deductible). They are permitted
because they are not insurance.
• Preventive care and the HSA/HDHP.
Generally, an HDHP may not provide
benefits for any year until the deductible has
been met. But preventive care has a special
role in the health care system. Many plans
and providers believe their first job is to
prevent disease from developing, and, if a
medical condition does develop, to diagnose
it early enough that you have a chance for
full recovery.
To accommodate the importance of
preventive care, there are exceptions
(called, in legal terms, a safe harbor) for
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preventive care. So, an HDHP may provide
first-dollar coverage for preventive care or
apply a lower deductible. Chapter 1: Health
Savings Accounts—A New Approach provided
a list of the basic categories of treatments
that are considered preventive care for the
purposes of HSAs/HDHPs. Some 50 types
of screening services are also included in
the federal definition of preventive care
(see Table 4.1, at the end of this chapter).
Screening services are medical tests designed
to detect treatable diseases or conditions.
It is very important to remember that while
an HDHP may offer coverage for preventive
care benefits before the deductible is
satisfied, it is not required to do so. There
is no requirement that an HDHP cover
preventive care on more favorable terms
than available for other benefits, or that it
offer any benefits for preventive care at all.
Read your plan information carefully to fully
understand how preventive care is treated.
• State law and preventive care. Some
states have laws requiring that insurers
provide certain types of health care
considered preventive care without imposing
a deductible that might apply to other care
paid for under the plan. Such laws are called
benefit mandates, and the benefits required
under these laws are called mandated
4-4
benefits. The idea behind requiring favorable
treatment for preventive care is that if some
people have to pay for such care with their
own money (rather than benefiting from
insurance coverage) they will forego care
that could be important in diagnosing and/
or preventing illnesses or diseases. Archer
MSAs (see Introduction) relied on state law
to determine the types of care that could
be provided without a deductible if required
by state law. Unlike Archer MSAs, the HSA
law uses a federal definition of preventive
care. Therefore, individuals and some
employers in states whose laws require
first-dollar coverage for benefits that do
not fit the federal definition will be unable
to participate in HSA/HDHPs (see further
discussion in Chapter 8: The HSA Law). In
such states, only those employers offering
self-insured plans will be able to adopt
HSAs/HDHPs. Self-insured plans are those
under which the employer pays for medical
claims as they arise rather than contracting
for coverage from an insurer. Several states
are in the process of changing state law to
allow for HSAs by exempting HSA/HDHP
plans from state benefit mandates. Please
see Chapter 8: The HSA Law for more
information.
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Coverage that is Not Permitted for HSA Purposes
• Permitted coverage alone is not
an HDHP. If a plan provides primarily
permitted coverage, and there is no general
medical coverage, it is not an HDHP.
Without an HDHP, the holder may not
establish an HSA.
• Using other tax-advantaged health
plans with your HSA/HDHP. The whole
point of the consumer-driven health care
revolution—and HSAs/HDHPs in particular—
is to incentivize and empower the consumer
to be responsible for health care spending.
You cannot enroll in traditional coverage and
still open and contribute to an HSA. Many
people who are enrolled in traditional plans
can use FSAs and HRAs to help with some
of this first-dollar spending by using these
accounts to pay for deductibles, co-payments
and coinsurance. If you want to enroll in an
HSA/HDHP, you can still participate in an
FSA or HRA, but the FSA or HRA has to be
more restrictive than if you were enrolled
in a traditional plan (for more on this, see
Chapter 2: Who Would Want an HSA?).
• Student coverage. A student in college
or a graduate in a professional program
may be ineligible to participate in a parent’s
plan because the student has reached the
plan’s age limit or is not a full-time student.
Some higher education institutions make
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comprehensive medical coverage available to
such students (for more on such plans, see
Chapter 7: Your HSA/HDHP and Everyday
Health Care Challenges).
This type of coverage may meet the standards
for an HDHP. If such coverage is available, a
student can contribute to an HSA, assuming
he or she is otherwise eligible. If the coverage
does not meet the HDHP standards, the
student can decline the higher education
institution’s coverage and enroll in a plan that
does meet the criteria. Make sure to evaluate
the dependent status of your student before
setting up an HSA for him or her.
• Medicare. Once enrolled in Medicare
(which is not an HDHP), you are no longer
eligible to make contributions to an HSA (see
Chapter 7 for more detail). If you choose
not to enroll in Medicare, you may continue
to make HSA contributions, including catchup contributions, as long as you continue to
have an HDHP. At age 65 (the usual eligibility
age for Medicare), a person can spend
balances accumulated in the HSA on nonqualified expenses with no penalty, though
the expenditures will be subject to income
tax.
• Prescription drug coverage. First-dollar
coverage subject to co-payments, such as $20
co-payment per prescription, is not permitted
(see further discussion in Chapter 1, where
we explain the basics ofHSAs.
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Using the HSA
You can spend the funds in your HSA on qualified
medical goods and services or on certain limited types of
insurance coverage.
Medical Expenses
You can use your HSA on a wide range of medical
expenses—generally the same ones that you can deduct
if you are eligible to deduct medical expenses on your
individual income tax return (see Table 4.2). These
expenses may not necessarily be covered under your
HDHP. Ultimately, it is your choice how you spend your
HSA dollars.
Insurance Premiums That You Can Pay from the HSA;
Those You Can’t
In general, you can’t use your HSA to pay insurance
premiums. However, there are certain exceptions
(see also Table 4.3, at the end of this chapter, and
Chapter 7: Your HSA/HDHP and Everyday Health
Care Challenges). Once you are 65 and eligible for
Medicare, you can pay Medicare premiums (A, B, C &
D), out-of-pocket expenses that Medicare doesn’t pay,
and Medicare HMO premiums. You can’t pay Medigap
premiums out of your HSA. Medigap policies are policies
individuals can buy to cover out-of-pocket costs not
covered by Medicare (see Chapter 7 for more detail).
If you are age 65 or older and still working, you can pay
your share of premiums for employer-based coverage out
4-8
of your HSA, though you can’t pay for these premiums
before age 65. If you are age 65 or older and not
working, you can also pay your share of any premiums
your employer requires you to pay for employersponsored retiree health care coverage.
If you are unemployed, you can pay COBRA premiums
if you are eligible for COBRA benefits. You may become
eligible for COBRA benefits upon retirement at any age
(see Chapter 7).
You may also use your HSA to pay premiums for
qualified long-term care insurance. To be qualified, a
long-term care insurance plan must meet criteria set out
in federal law.
Restrictions Your HSA Trustee or Custodian May
Impose
You, not the trustee or custodian of your HSA, are
responsible for showing you have spent your HSA in
accordance with the law’s requirements. However,
the trustee or custodian can limit your access to HSA
distributions in certain specified ways. For example, the
trustee may prohibit distributions for amounts less than
$50 or may only allow a certain number of distributions
per month. Different trustees or custodians may
impose different restrictions—or even no restrictions at
all—on distributions. So if easy access to your account
is important to you, you need to consider this feature
when shopping for an HSA (see also Chapter 1: Health
Savings Accounts—A New Approach and Chapter 3:
How to Set Up an HSA).
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Chapter 4
Knowing Who Can Provide You Treatment
In general, the HSA/HDHP combination is the most
flexible type of health care arrangement available. The
money in the HSA is yours to spend and save. This
means you can choose to obtain treatment from virtually
any legal provider of qualified medical services, whether
they are in or out of your network, as long as you are
willing to pay with your HSA.
Services Not Covered under Your Plan
You can use your HSA balance to pay for health care that
is not offered under your health plan, within the limits
of qualified government expenses (see Table 4.2, end of
this chapter). Not only does this include many dental and
vision expenses, but many other less common expenses,
such as removing lead-based paint in your residence.
Removing lead-based paint is an expenditure that would
generally not be covered by a health insurance plan. It
will not be credited toward your deductible. See Table
4.2 at the end of this chapter for a list of expenses you
can use your HSA to cover.
Services Covered under Your Plan
Alternatively, you could use your HSA only for health
care goods and services that are covered under your
plan. Then, you would generally have two choices: you
could consult providers who participate in your plan’s
network, or you could consult non-network providers
for some or all of your care.
Using network providers. Health care providers—
4 - 10
doctors, hospitals and other health care facilities—
participating in your plan’s network have agreed to
give members of your plan a discount from their
usual charges. They hope the discount will attract plan
members to their practice or facility.
Depending on your plan’s rules, to get the best benefits
your plan offers you may also need to use a gatekeeper
physician and obtain referrals and authorization for certain
medical services or procedures. A gatekeeper physician
is usually a primary care doctor, pediatrician, or internist
responsible for overseeing and coordinating all aspects
of a patient’s care. A referral is a recommendation of
a medical professional. In many managed care plans,
a referral may be necessary to see any practitioner
or specialist other than your gatekeeper physician, if
you want the service to be covered. An authorization
is the plan’s permission to proceed with a medical or
surgical procedure. Like a referral, authorization may be
required if you want the plan to pay for the procedure.
Conversely, without authorization, the plan may refuse
to pay for the procedure even if the procedure would
otherwise be covered. A managed care plan is a health
plan that limits costs by limiting the reimbursement levels
paid to providers by monitoring health care utilization of
participants, or both.
If you use your HSA only for services covered under
your plan and consult only providers who participate in
your plan’s network, all your expenditures under the
HSA will generally count toward your deductible and
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Chapter 4
toward your plan’s out-of-pocket limits.
Example: Maria’s doctor charges $150 for an annual
visit to check on her ongoing thyroid treatment. As
a provider in her plan’s network, her doctor has
agreed to accept $75 from her plan for each such
visit. If she has not yet met her deductible at the
time of the visit, she pays $75 out of her HSA. This
amount is also credited toward her plan’s annual outof-pocket limit, or limit on how much she can be expected to
spend in a given year before the plan takes over entirely.
Even if you use network providers, you still need to
understand exactly how your plan expects you to obtain
care. Your plan may require you to obtain a referral to
see a specialist or authorization for a medical procedure
even if the specialist or the doctor recommending the
procedure participates in your plan. If you fail to obtain a
referral or authorization when one is required, your plan
may charge you a higher co-payment, coinsurance rate,
or a flat-dollar penalty. Neither the excess co-payment or
coinsurance you may be required to pay, nor the penalty,
will count toward your HDHP’s out-of-pocket limit for
the year. As a result, failure to know and follow your
plan’s rules can cost you money.
Using non-network providers
Suppose Maria decides to consult a doctor who does not
participate in her network. As a non-network provider,
the doctor will charge her $150 for this visit. Since she
has not met her deductible, she decides to pay the $150
out of her HSA. If her plan has a single limit for network
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and non-network care, the $150 will also be credited
toward her plan’s annual out-of-pocket limit.
However, the HSA law permits the plan to have a
separate limit for non-network care. If her plan has a
separate limit for non-network care, the $150 will be
credited toward that limit. In this example, if she had met
her deductible for the year, the plan would pay whatever
it provides for non-network care—commonly 50 percent
of the allowable charge. In this example, the plan would
pay $75, and the $75 Maria paid would be credited
toward her out-of-pocket limit for the year.
This is a somewhat simplified example because it does
not account for another type of discount health care
plans often apply. If your provider has not contracted
with your plan, and thus does not offer you a network
discount, the plan is not obligated to accept the
provider’s charges.
Plans typically count only what they consider usual,
customary and reasonable (UCR) charges toward the
participant’s deductible and/or out-of-pocket limits. This
is the term for an insurance company’s estimate of “the
going rate” to be paid in your geographical area for a
given medical service or procedure.
Suppose Maria’s insurance company decides that usual
and customary charges for a thyroid check-up should
be $130. It would then pay half of this reduced amount,
and she would pay the other half. In addition, however,
the doctor may charge her the difference between his
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original charge and her insurance company’s estimate
of usual and customary charges, in this case, $20. If this
happens, her cost for the visit would be $85. The doctor
still gets paid his usual charge of $150—$85 from Maria
and $65 from her insurance company. However, because
her insurance company has not allowed the full amount
of her doctor’s charges to be considered, only $65 of
the $85 she paid is credited toward her out-of-pocket
limit for the year.
How You Pay
The basic process of paying for care is much the same
as it was under any health care coverage plan you may
have had in the past. We start by outlining the payment
process in a traditional plan—including the parts of
the process that happen away from your doctor’s or
other provider’s office—then point out how the process
changes in an HSA/HDHP plan.
In a Traditional Plan
In a traditional plan, you typically pay for care in one of
two ways, depending on whether the doctor or other
provider participates in your plan’s network.
• In-network care. If the provider—suppose
it’s your family doctor—participates in your
network, you typically present your health
care plan membership card and pay the
required co-payment or coinsurance at the
time of the visit. The provider files your
claim with the insurance company and gets
paid the contractually agreed or re-priced
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amount.
• Out-of-network care. If the provider does
not participate in your plan’s network, the
process is somewhat simpler. You pay the
entire bill at the time of the visit, because
a non-network provider typically will not
submit the claim to your plan for you. Then
you may be reimbursed for part of what
you paid, as in our example of the out-ofnetwork thyroid check-up above, depending
on how much of your deductible, if any, you
have met for the year.
In an HSA/HDHP Plan
In an HSA/HDHP plan, the payment process at the
doctor’s office (hospital, laboratory or other facility)
is much the same. Your HSA provider may supply you
with a membership card, along with a payment card
that may function much like your bank’s debit card and/
or checkbook that will allow you to write checks out of
your HSA.
• In-network care. If the doctor or other
provider is in your network, you might not
pay anything at all at the time you receive
care, depending on the structure of your
plan. The provider may ask you to pay
part of the bill at the time of your visit,
however, do not pay the entire cost as the
bill has not been re-priced and you may be
overcharged. The provider submits your
claim for re-pricing. Then the plan pays its
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Chapter 4
contractually agreed amount if you have met
your deductible for the plan year, taking
into account the network discount, or you
pay this reduced amount if you have not yet
met the deductible. Depending on how your
HSA is set up, you can pay the new amount
out of your own bank account or with a
credit card, file a claim with your HSA, or
pay the amount directly out of your HSA.
• Out-of-network care. If your provider does
not participate in your plan’s network, you
may pay for your care at the time the care
is provided. This is also what happens in a
traditional plan. You can pay the charge out
of your own bank account or with a credit
card and file a reimbursement request with
your HSA, or pay the amount directly out
of your HSA. Then you may be reimbursed
for part of what you paid, as in our example
of the out-of-network thyroid check-up
above, depending on how much of your
deductible, if any, you have met for the year.
If you paid directly from the HSA and get a
reimbursement from the insurance company,
that reimbursed amount must be returned
to the HSA as a mistaken distribution (see
Chapter 8: The HSA Law).
Important Differences
While the basic outlines of the payment process are
pretty much the same whether you are enrolled in a
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traditional plan or in an HSA/HDHP, you may have to
understand a few new terms and relearn a few of the
steps in the payment process.
• Cashless doctor visits? Most health care
providers—or at least most doctors’ offices—
are not used to completely “cashless” visits
from their patients. In a traditional plan,
your co-payment or coinsurance serves
as something like a “down payment” on
your care, with the balance to come from
your plan. To accommodate the needs of
providers, some HSA/HDHP plans may
provide for an “encounter fee”, or an
amount you pay at the time of a visit to a
network provider. While this fee may not
represent your full financial responsibility
to the provider, it is counted toward your
financial responsibility for that visit and for
your care for the year. Important: Many
providers—both in-network and out-ofnetwork—are unfamiliar with HSA/HDHP
plans and will try to charge you retail price
when you receive services. You should speak
with your HSA provider or HDHP about the
best way to obtain fair pricing when you visit
your doctor.
• Building up your HSA. The law governing
HSAs provides you and/or your employer
with a good deal of flexibility in funding your
HSA. That means you or your employer
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Chapter 4
can make contributions to the HSA on any
schedule that is convenient, so long as the
total contributions made to your account
in a given year do not exceed the annual
maximum contribution limit (see how
this works in Chapter 1, which introduces
HSAs).
If you have a bill that exceeds your balance,
you may pay the bill out of your other
resources, and then file for reimbursement
from your HSA once your balance has
built up sufficiently. Your HSA trustee or
custodian will provide you with forms or
another process that you can use for this
purpose.
If your HSA is offered as part of a cafeteria
plan, your employer may help you build up
your HSA to meet your health care spending
needs. If an employee elects to make
contributions to an HSA through a cafeteria
plan, the employer may contribute the
maximum amount elected by the employee
to the HSA. This type of accelerated
contribution must be equally available to
all participating employees throughout
the plan year, and must be provided to
all participating employees on the same
terms. The employee would then repay the
advance or accelerated contribution through
4 - 18
the regularly scheduled cafeteria plan
contributions.
• The Role of FSAs and HRAs. Employers
are allowed to offer FSAs and HRAs along
with their HSA/HDHP plans, so long as the
FSAs and HRAs meet certain requirements.
For example, one option is that either
account may be set up to pay benefits only
after the HDHPs deductible has been met.
After that point, the account would cover
any co-payments or coinsurance for which
you are responsible (for more detail on
allowable variations of FSAs and HRAs, see
Chapter 2: Who Would Want an HSA?).
If your employer provides you an HSA/
HDHP with a post-deductible FSA or HRA,
you would submit your receipts to those
accounts for reimbursement only after you
have met your HDHP deductible. We will
provide more detail on submitting claims to
these accounts in Chapter 5: A Consumer
Guide to Paperwork and Record Keeping.
Managing Your HSA
The HSA gives you a great deal of power over how you
spend your health care money, how many dollars you
spend on health care, and how much of your health care
money you decide to save. In this section we review
some of your choices and offer some advice on making
the best choice for you.
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Chapter 4
Choosing the Services to Use
Suppose you have chronic lower back pain. Your plan
will pay for a visit to an orthopedist, an osteopath or a
chiropractor, but your favorite chiropractor is not in your
network. Your HSA gives you the flexibility to consult
your chiropractor, see if that treatment helps and, if
not, to go to your orthopedist for further tests and/or
medication.
How to Look for Value
How do you find out which doctor or hospital is right
for you? Learning about the best hospitals and doctors
is not that much different from buying the right toaster,
cell phone service, or car—you must do your homework.
We wrote a whole book about this and other issues
in finding the right health care today (The Complete
Idiot’s Guide to Managed Health Care, New York: Alpha
Books, 1998); you can find it in many larger libraries or
on the internet.
There are other reference sources, including some that
may be in your home right now. For example, many
local magazines publish articles about the best local
hospitals and physicians for various conditions. Your
HSA provider or HDHP may also provide useful tool to
help you in your search for value. The internet is also an
important resource tool. There are many websites that
publish reports about the cost and quality of health care
providers across the country.
How to Assess A ppropriateness of Care
4 - 20
It never ceases to amaze us that if you find three people
with the same condition—and even the same apparent
degree of severity—one might get surgery, one might get
prescription drugs, one might get no particular medical
care at all, and all three might feel just as good. Medicine
is an art as well as a science, and many conditions don’t
take the same course in every person. In addition, you
should remember that even now, when controlling health
care costs is high on everyone’s agenda, some surgeries
remain over-performed, and some drugs remain overprescribed.
So if you are diagnosed with a disease or other condition
and your doctor recommends treatment or surgery, do
your homework (see the next section). If you are offered
surgery, ask your doctor why, what alternatives you have,
and any other questions you may have. Most doctors will
welcome your questions. If your doctor doesn’t, you may
be seeing the wrong one.
Where to Go for Help
• Read up on it. Many health plans give their
participants reference books on basic health
care. Since the flu doesn’t care which plan
you are enrolled in, keep such books from
any previous plans. Parents may have their
own favorite child-care books.
• The Internet. Another variable source
of information—if you can get it away from
your kids—is your computer. Leading HSA
administrators and health plans will provide
4 - 21
Chapter 4
powerful internet based tools to help you
make better health care decisions. If you
have a chronic condition, however common
or rare it may be, there is undoubtedly
a national association that serves people
with that condition, providing the newest
information and credible research
references. An internet search using your
condition as the key word will yield the right
names. If you are new to net surfing, start
with various government research sources
such as the National Institutes of Health
(www.nih.gov). Then branch out from there.
Be aware that while some internet sites
may have an official or professional look to
them, anyone can put up a web site, and you
should not act on any information you find
online unless you trust the source. Always
check for the URAC (Utilization Review
Accreditation Commission) or HON (Health
on the Net Foundation) logos (usually found
in a bottom corner). If a website has been
accredited by either of these organizations,
the information is should be accurate and
trustworthy.
• Make a call. Your first stop when you
think you need medical care soon, but you
don’t know what to do, should be your
health plan. Many plans and HSA providers
have advice lines, staffed by nurses or other
medical professionals who can help you
4 - 22
figure out whether you should go to the
doctor tomorrow, head for the emergency
room tonight, or take two aspirin and
go to bed early. Your family doctor’s or
pediatrician’s office may also maintain an
advice line.
• Use your common sense. In an
emergency, you are your own best source of
help. If you are concerned that a condition
or injury could lead to permanent injury or
loss of life, call 9-1-1. While you should not
go to the emergency room for that twoweek cold just because you can’t stand it
any more, a two-week cold that suddenly
turns to difficulty breathing could require
immediate care. Use your common sense,
and feel secure in the knowledge that federal
law protects your right to do so. Your plan
must generally pay for emergency care if the
situation was such that a prudent layperson—
not a doctor—with an ordinary layperson’s
understanding of medicine would have done
the same thing.
Keep in Mind
• Many of the rules for using your HDHP are
much like the rules you have experienced in
a traditional plan. However, if you contribute
to an HSA, the law limits other types of
health care coverage you may have. If the
plan is not considered to be an HDHP or
4 - 23
Chapter 4
permitted coverage, you cannot establish or
contribute to an HSA.
• You can spend your HSA on a wider range
of services than your HDHP is likely to
cover. The choice is yours.
• If your plan has a provider network, using it
can help make your HSA dollars go further.
• The HSA/HDHP gives you more power
over your health care dollar than a
traditional plan. Inform yourself, and use
your power wisely.
Up Next
This chapter explained how to use your HDHP and HSA;
how to know whom you can see and where you can go;
how you pay for care; and how to manage your money
in an HSA.
Chapter 5 covers using your plan efficiently, including
understanding and submitting paperwork and keeping
the right records.
Table 4.1 Preventive Care Screening Services Allowed
to be provided as first dollar care—these services may or
may not be paid for by your HDHP.
4 - 24
Table 4.1 Preventive Care Screening Services
Allowed to be provided as first dollar care—these
services may or may not be paid for by your HDHP.
Cancer Screening
Breast Cancer
Cervical Cancer
Colorectal Cancer
Prostate Cancer
Skin Cancer
Oral Cancer
Ovarian Cancer
Testicular Cancer
Thyroid Cancer
Heart and Vascular Diseases
Screening
Abdominal Aortic Aneurysm
Carotid Artery Stenosis
Hemoglobinopathies
Hypertension
Lipid Disorders
Infections Diseases Screening
Bacteriuria
Chlamydial Infection
Gonorrhea
Hepatitis B Virus Infection
Hepatitis C
HIV Infection
Syphilis
Tuberculosis Infection
Mental Health Conditions and
Substance Abuse Screening
Dementia
Depression
Drug Abuse
Problem Drinking
Suicide Risk
Family Violence
Metabolic, Nutritional, and
Endocrine Conditions Screening
Anemia, Iron Deficiency
Dental and Periodontal Disease
Diabetes Mellitus
Obesity in Adults
Thyroid Disease
Musculoskeletal Disorders
Screening
Osteoporosis
Obstetric and Gynecologic
Conditions Screening
Bacterial Vaginosis in Pregnancy
Neural Tube Defects
Preeclampsia
Rh Incompatibility
Rubella
Ultrasonography in Pregnancy
Pediatric Conditions Screening
Child Development Delay
Congenital Hypothyroidism
Lead Levels in Childhood and
Pregnancy
Phenyliketonuria
Scoliosis, Adolescent Idiopathic
Vision and Hearing Disorders
Screening
Glaucoma
Hearing Impairment in Older
Adults
Newborn Hearing
Source: U.S. Treasury Notice 2004-23.
4 - 25
Chapter 4
Table 4.2 What Are Qualified Medical Expenses?
Your HSA can be used for a wide range of medical goods
and services in addition to the usual medical services and
prescribed medications covered in the typical health plan,
as well as for certain types of health insurance premiums.
Please see appendix for more detailed explanations.
Qualified Medical Expenses
•Acupuncture
•Alcoholism or
drug addiction
treatment
•Dental treatment
•Ambulance
services
•Diagnostic
devices
•Artificial limbs
•Disabled
dependent care
expenses
•Artificial teeth
•Bandages
•Birth control
pills and other
prescription
contraceptives
•Eye surgery
•Braille books
and magazines
(excess cost)
•Guide dog or
other animal
•Breast
reconstruction
surgery
•Home care
•Car
modifications
•Legal fees
to authorize
treatment of
mental illness
•Certain home
improvements
•Chiropractor
•Christian Science
practitioner
•Contact lenses
4 - 26
•Crutches,
purchase or
rental
•Eyeglasses
•Fertility
enhancement
•Hearing aids
•Lead-based paint
removal
•Legal termination
of pregnancy
•Lifetime
care-advance
payments
•Long-term care
•Medical
conferences
concerning
chronic illnesses
•Nonprescription
medicines
•Nursing home
•Nursing services
•Optometrist
•Over–thecounter drugs
•Oxygen
•Prescription
medications
•Psychoanalysis
(other than
related to
training)
•Smoking
cessation
programs
•Special education
(if prescribed by
doctor)
•Special home
for mentally
challenged
person
•Sterilization
(reproductive)
•Telephone or
television for
hearing
•Therapy
prescribed as
treatment
•Transplants
(costs of donor)
•Transportation
and other travel
costs for medical
care
•Weight loss
program (if
prescribed by
doctor)
•Wheelchair
•Wig (for hair
loss if prescribed
by doctor)
Non-qualified Medical Expenses
•Babysitting,
childcare, and
nursing services
for a normal,
healthy baby
•Diaper services,
unless they are
needed to relieve
the effects of a
particular disease
•Controlled
substances in
violation of
federal law
•Electrolysis or
hair removal
•Elective cosmetic
surgery
•Expenses used
in figuring health
coverage tax
credit
•Dancing lessons
•Funeral expenses
4 - 27
Chapter 4
•Future medical
care
•Hair transplant
•Health club dues
•Household help
other than that
qualifying as long
term care
•Illegal operations
and treatments
•Insurance
premiums
other than
those explicitly
included
•Liposuction
•Maternity
clothes
•Medicines
imported from
another country
•Nutritional
supplements
unless prescribed
for a medically
diagnosed
condition
•Personal use
items unless
specifically
included
•Swimming
lessons
•Teeth whitening
•Veterinary fees,
except for guide
or assistance
animals
•Weight-loss
program
Table 4.3 Eligible Insurance Premiums for All
Participants:
• Long-term care insurance
• COBRA health care continuation coverage
• Health care coverage during a period of
unemployment
Table 4.4 Eligible Insurance Premiums for
Participants Age 65 or Older:
• Medicare Part A or B
• Medicare HMO
• Employee share of premiums for employer
sponsored health care coverage (if HSA
4 - 28
owner remains employed)
• Employee share of premiums for employer
sponsored retiree health insurance (if
participant does not remain employed)
4 - 29
Chapter
5
A Consumer
Guide to Paperwork
and Record Keeping
Previous chapters explained what the HSA and
HDHP are, how you qualify to enroll in an HSA,
and how to use your account. Because the HSA is
individually owned and participants are responsible
for proving how the account has been spent, a full
discussion of Record Keeping is provided in this
chapter.
In this chapter, we discuss:
4 Why Record Keeping is Especially Important in an HSA/HDHP
4 Paperwork Your HSA and HDHP Will Send You
4 Paperwork to Keep the IRS Happy
4 Submitting Expenses to Your Plans
4 How Long To Keep HSA Receipts, Statements and Other Documentation
4 Troubleshooting
4 When You Disagree with Your HDHP
4 When You Disagree with Your HSA Statement
4 If You Are Not in an Integrated Plan
A Consumer Guide to Paperwork and Record Keeping
Why Record Keeping Is Especially Important
We recommend keeping records related to health care
spending whatever your type of plan, because disputes
or questions about billing and payments can come up
even a year or two after the procedure or office visit
(see further discussion about slow-billing providers later
in this chapter). But some features of the HSA/HDHP
make it particularly important to have records that allow
you to reconstruct how you have spent your money.
You Own the HSA
The HSA is funded by your contributions, not premiums,
paid by you or your employer. It is both a health care
coverage plan and a savings plan. The money is yours to
keep.
You Can Spend Your HSA over a Considerable Amount
of Time
Because the HSA is intended to serve at least in part as
a long-term savings vehicle, you can access accumulated
funds over a considerable period of time. There is no
time limit for claiming a reimbursement from your
account, so long as you incurred the expense you
are claiming after the HSA was established. That may
mean you need to produce or recover records about
contributions into the account, what was paid out of the
account, when and why, long after the transactions have
occurred.
5-1
Chapter 5
You Are Responsible for Documenting How You Used
Your HSA
In a traditional plan, your plan paid only for what it
included. Typically, the covered services are set out
more or less clearly in the plan documents you got from
your insurer or the Summary Plan Description (SPD) you
got from your employer. The HSA, in contrast, can be
used for a wide range of expenses limited only by HSA
legislation and generally what is accepted by the IRS for
itemized medical deductions (see Table 4.2, What Are
Qualified Medical Expenses and Appendix). You need to
be able to understand what these allowable uses are and
back up your claims with receipts, or you may face a 10
percent penalty (if you spend the money before you turn
65) and be required to pay taxes on the expense.
Different Rules May A pply to Network and NonNetwork Care
Most plans that include provider networks apply different
out-of-pocket limits, deductibles, or both, to network
and non-network care. In a traditional plan, this was
probably not a matter of concern to you unless you or
your family had a particularly high-expenditure year. In
an HSA/HDHP, however, your deductible may be half or
more of your out-of-pocket limit, so you are more likely
to hit the HDHP’s out-of-pocket limit than in a traditional
plan. This means you may want to keep track of your
network and non-network spending, and adjust your
provider choices if you are close to meeting one limit but
not the other.
5-2
Example: Suppose Roy has a self-only plan with a
$1,700 out-of-pocket limit for network care and a
$2,600 limit for non-network care. Network care
is insured at 100 percent; non-network care at 80
percent. His plan’s deductible for the year is $1,700.
Roy has spent $1,600 so far this year for network
care and $250 for non-network care. He is considering foot
surgery that will cost $2,000. He can choose a network provider
or one out of his network. If he chooses a network provider,
he will have to pay $100, no matter what price the provider
has negotiated with his plan. If he chooses a non-network
provider, he will have to pay $400 ($2,000 x 20% non-network
coinsurance).
Paperwork Your HDHP and HSA Will Send You
Explanation of Benefits (EOB)
The EOB is a summary of the payment made by your
health plan to the medical provider. It details how much
the provider originally charged you and the discount, if
any, the provider is required to give based on your plan.
The EOB also notes your financial responsibility for the
visit or other procedure. See Table 5.1 at the end of this
chapter for an example of an EOB. This EOB summarizes
the cost of the services provided during the doctor’s visit
and updates both the status of the HSA and the owner’s
progress toward meeting the HDHP deductible. Note
that the EOB also explains the participant’s rights to
dispute any statements made in it.
5-3
Chapter 5
HSA Statement
Your HSA provider will send you a periodic statement
detailing your contributions, those your employer may
have made on your behalf, payments made to providers
from your HSA, investment and/or interest earnings
accrued to your account, and fees your account may
have been charged. See Table 5.2 at the end of this
chapter for an example of a periodic account statement.
Keep your statements in the same way—and maybe in the
same place—as you keep your bank account statements.
Paperwork to Keep the IRS Happy
Several IRS forms apply; you have seen most of them
before.
Form W-2
Employers must generally file a Form W-2 for any
employee to whom they paid wages, and employees
must enclose a copy of this form with federal, state and
local income tax returns. Your employer must report
employer contributions (which include pre-tax cafeteria
plan deductions to income) to your HSA in Box 12 on
your Form W-2.
Form 1040
Your Form 1040 will contain a line where you can enter
your post tax HSA contribution in arriving at your adjusted
gross income. You must include any distributions that are not
made for qualified medical expenses for you, your spouse, or
dependents in your adjusted gross income and there will be
a 10 percent penalty on such distributions.
5-4
Form 1099-SA
Your HSA custodian or trustee will report any HSA
distributions both to you and to the IRS on Form
1099SA. That is why you have to be prepared to justify
your spending as allowable under the law.
Form 5498-SA
Your HSA trustee or custodian has to report
contributions to the HSA to the IRS and to you on this
form. Any amounts reported on Forms 1099-SA or
5498SA should agree with what you report on your
Form 1040.
Submitting Expenses to Your Plans
Keeping track of expenses, contributions and earnings
is much like sorting out expenses you will deduct on
your income taxes from those that are not deductible,
but you have to learn a new paradigm for sorting health
expenses by category.
Submitting Expenses to the HDHP
If your provider participates in your plan’s network,
the provider should submit your claim to your plan. If
not, you may be required to file the claim yourself, so
that your expenditure gets credited toward the proper
deductible and/or out-of-pocket limit. The plan should
supply you with a form for filing claims, but many
providers give you enough information on your “walkout statement”—what you get as you leave the office—
that you can use that statement itself to file your claim.
Keep copies of your statement in case there is a dispute.
5-5
Chapter 5
Submitting Expenses to the HSA
You can pay HSA-eligible expenses with a debit card
your account administrator may provide you, or with a
checkbook that draws on your HSA. Alternatively, you
may pay a bill out of your own bank account or with a
credit card, and then submit the bill for reimbursement
from your HSA. Some HSA administrators allow
account holders to electronically transfer funds to their
other account to reimburse themselves from their HSA.
You can only submit expenses you have incurred after
you established your HSA.
Submitting Expenses to a Flexible Spending
A ccount (FSA)
If you had an FSA in the past, and your employer
converts to one consistent with having an HSA/HDHP,
you won’t have a lot of new paperwork to learn. You
submitted expenses to your old FSA by providing an
EOB or a benefit denial from your health plan; an HSAcompatible FSA is likely to work much the same way.
Keeping Track of Deductibles
The EOB you receive from your HDHP will have
information that keeps track of your progress toward
meeting the plan limits for the year. In the sample EOB
we provide in Table 5.1, this information is in the section
headed “Deductible Information”. Make sure you know
how to interpret this information, and always try to work
from the most recent statement so that you can make
the right decisions about your care and how to pay for it.
5-6
The Importance of the Calendar
There are several reasons why it is important to keep
track of when expenses occurred and were paid.
A voiding “the shoebox effect”. Even if your HSA
provider gives you a debit/credit card or a checkbook,
you may wind up submitting your claims yourself. This
could be because you forgot to use the HSA, or perhaps
because when you first establish your HSA you might
not have enough accumulated in it to pay the claims. If
you stuff your receipts in the classic shoebox, intending
to get to them later, you may miss out on important
benefits from your account. And you may end up using
post-tax dollars when HSA funds were available. Establish
a clearly labeled file, and keep track of what you have
already submitted, what has been paid, and what is still
outstanding. See Table 5.3 for a simple system you can
set up to make sure nothing slips by.
Coordinating your account management with the IRS
calendar
The HSA is a tax-favored account, so the IRS has
something to say about how you spend your balance.
You can wait as long as you want after the expense has
been incurred to submit it to your HSA (see further
discussion later in this chapter on how long to keep HSA
records). However, no matter how old the expense is,
you have to be prepared to document it fully in the year
that you claim it.
5-7
Chapter 5
Coordinating your account management with the
HDHP calendar
The HSA is yours, but the HDHP may only be yours for
now. Your employer may change from an HDHP offered
by one company to one offered by another, or may
in the future eliminate your HDHP entirely in favor of
another plan design. If your current HDHP is replaced
by another HDHP, be sure any expenses you accrue are
paid by the correct plan, and coordinate your HSA with
the new HDHP. If your employer changes plans and you
can no longer be covered by an HDHP, you need to
keep track of when this happens, as you can no longer
contribute to an HSA as of the first day of the first
month after the month in which your HDHP coverage
ends. For example, if your HDHP coverage ends on June
15, 2008, you are no longer eligible to contribute as of
July 1, 2008. However, you can continue to use the funds
remaining in your HSA for permitted expenses.
How a slow-billing provider can complicate your life
Some busy hospitals or medical practices can lose your
claims. We have seen cases where the doctor’s office
filed the claim online, it came through illegible, so the
office filed it again, and it came through illegible, again.
Or maybe the hospital or doctor’s office changed billing
systems and some claims got lost in the transition. End
result: the bill goes unsubmitted for payment for many
months.
Any plan is responsible for covered expenses you
incurred while a member of that plan, but once the plan
5-8
is closed out, that responsibility can expire pretty quickly.
Your former plan has to keep a reserve for claims
participants submit after the plan is closed, but this
reserve may not be very large, and can get exhausted
before a late claim is considered.
That’s the slow-billing provider’s problem, right? Not
necessarily. When you came in for your office visit or
hospital procedure, you signed a paper saying if your plan
wouldn’t pay, you would. Always alert providers if you
are changing insurance plans or have been advised that
your employer is planning to do so. Encourage them to
submit any outstanding bills promptly, or it could cost
both of you money.
How Long to Keep HSA Receipts, Statements and
Other Documentation
You are responsible for documenting that HSA
distributions were made for qualified purposes. The HSA
custodian or trustee, your insurer and your employer
are responsible for various aspects of your account
reporting, but not for this. The IRS can audit most
individual taxpayers for three years after the extended
due date of the return. This means if your income tax
return for 2007 is due April 15, 2008, but you file for
the automatic extension to August 15, the IRS can audit
you until August 15, 2011. For some individual taxpayers
that period is extended to five years, for example; if you
have a hobby business, your 2007 return can be audited
until August 15, 2013. But if the IRS alleges or suspects
fraud, it can audit all your returns as far back as it wants.
5-9
Chapter 5
Our suggestion is that you keep records documenting the
status of HSA distributions for at least the period of time
your income tax return is considered “open,” or subject
to audit, and preferably for as long as you maintain the
account.
Troubleshooting
If you get a bill that doesn’t make sense, call your
provider’s office, the customer service number provided
for your plan, or both. If someone sent you an incorrect
statement, it will come back again, unless you do
something about it. Everybody makes mistakes, and a
busy medical practice, in particular, will be dealing with
a large number of plans that may be constantly changing
their requirements, and patients whose plans are
changing as well. Keep track and follow up.
When You Disagree with Your HDHP
Some of the same claims-processing errors that are
possible under a standard insurance plan can also happen
under an HSA/HDHP. A network provider’s invoice
might be incorrectly processed as out-of-network, or
the birth date for a participant could be incorrectly
recorded, resulting in a denial of benefits. Because your
progress toward meeting the year’s deductible could
be affected, we recommend you follow up on errors
immediately.
When You Disagree with Your HSA Statement
If you have never had an unauthorized charge appear
on a credit card, you are part of a very elite club. You
5 - 10
don’t have to be a victim of identity theft—just a simple
processing error can put a bill on your account that
belongs on someone else’s. If your HSA issues you a
debit or credit-type card to use with your health care
providers, you have to check charges to your account
just as you do the charges on your credit card bills.
You should understand your rights to have a disputed
charge investigated and/or removed. If your HSA issues
you checks, you should understand your rights to stop
payment on a check, and what to do if you lose your
checkbook.
If You Are Not in an Integrated Plan
You should always reconcile paperwork you receive
from your HDHP with statements from your HSA.
And if a different company from the one that provides
your HDHP holds your HSA—that is, you are not in an
integrated plan—the record systems may not “speak” to
each other. You may have to be their “voice”. If you have
had a problem with your HDHP and/or HSA, you may
have to follow up with both your health plan and HSA
administrator to make sure any errors are corrected in
both accounts.
Keep in Mind
• Your HSA is your money. Treat it and related
records as you would your retirement plan,
any other savings account, or a credit card.
Make sure you understand charges to your
account and get explanations for any you
don’t understand or don’t think you made.
5 - 11
Chapter 5
• Your HSA and your HDHP can be used for
different types of health care expenditures.
Make sure you know which plan covers
which spending, and that each covers the
spending for which it is responsible.
• Keep your HSA records as long as the
account remains open, even if you have
moved your account to a different bank or
other company from the one where you
first established your account, and even if
you are no longer eligible to contribute to
your account.
Up Next
This chapter and Chapter 4 told you in detail how the
HSA works. Chapter 6 will give you some real-world
examples for making an HSA work for you.
5 - 12
Table 5.1 Explanation of Benefits Form (EOB)
#1 Money-in-the-Bank Road
5 - 13
Chapter 5
Table 5.2 Periodic HSA Statement
Responsibility to Review Statements: You should examine your
HSA statement promptly. Notify HealthEquity within 30 days if you
find any errors at 866-346-5800 or write us at HealthEquity Inc.,
1276 South 820 East, Suite 201, American Fork, UT 84003. We will
investigate your complaint and will correct any error promptly.
John Q. Doe
1111 Center Street
Townsville, UT 00000
Date
12/04/08
Description of
Transaction
Investment
ACCOUNT STATEMENT
Health Savings Account (000)
Account Number: 000000-000
Period: 12/01/08–12/31/08
Deposit or
(Withdrawal)
Account
Balance
Beginning Balance
$7,260.95
335.26
7,596.21
12/04/08
Investment
333.12
7,929.33
12/04/08
331.61
8,260.94
-181.00
8,079.94
12/11/08
Investment
HSA Card: Heritage
Family Dental Inc,
Townsville, UT
Investment
-495.00
7,584.94
12/11/08
Investment
-495.00
7,089.94
12/11/08
Investment
Employer
Contribution for 2006
Interest for Dec-06
(Annual percentage
yield for period
2.53% on average
collected balance of
$7,175.01)
-510.00
6,579.94
454.16
7,034.10
15.23
7,049.33
12/04/08
12/19/08
12/31/08
Ending Balance
12/31/08
Market Value of HSA
Investments
2,052.50
Total Value of HSA
5 - 14
$7,049.33
$9,101.83
Table 5.3 HSA and HDHP Records Made Easy
Here’s a simple system for keeping track of your HSA
and HDHP records. You should be following most of
these steps already, even if you don’t have an HSA.
We suggest a simple multi-pocket folder available in any
stationery supply store, or perhaps a 3-ring binder with
colorful separators. Financial reports provided by your
HSA administrator or by household budget programs
such as Quicken may also help you track your expenses.
Original documents and receipts will be required in the
event of an IRS audit. After you have picked your system,
set up the following sections:
1.Bills and proofs of payment for care obtained from
network providers. Include canceled checks or credit
card receipts for any bills you didn’t pay directly from
your HSA.
2.Bills and proofs of payment for care obtained from
non-network providers. Again, include canceled
checks or credit card receipts for any bills you didn’t
pay directly from your HSA.
3.EOBs from network providers, arranged in reverse
chronological order (most recent on top), so you can
easily track your progress toward meeting HDHP
limits that may apply to your network care.
4.EOBs from non-network providers, again arranged in
reverse chronological order, so you can easily track
your progress toward meeting any separate HDHP
limits that may apply to non-network care. You may
not need separate files for network and non-network
5 - 15
Chapter 5
care if your HDHP does not apply separate limits.
5. Bills and proofs of payment for health care spending
that is not covered under your plan, and thus not
counted toward your deductible. Such spending could
include the excess cost of Braille reading material for a
blind person or transportation costs to see a specialist
in another city (for more on such expenses, see
Chapter 4: How Does Your HSA/HDHP Work?).
6.Periodic statements from your HSA trustee or
custodian. For ease of reference, you may want to
arrange this part of your file in reverse chronological
order as well, so the first statement you see is the
most current.
Label your file with the current year, and set up a new
file every year (you already do that for your income tax
records, don’t you?). This will make it easier to track bills
and reimbursements as time goes on.
NOTE: Any home financial software or spreadsheet
program can be customized to help you budget and keep
track of your medical expenses. However, if you need to
substantiate or contest a claim, you will need the original
documents.
5 - 16
Chapter
6
HSAs offer great opportunities for consumers to
become involved with their personal health care
decisions and to benefit from making wise choices:
4 Your Cost-Benefit Analysis
4 Determining the Right Amount of Money to Contribute to Your HSA
4 Case Studies
Your Cost-Benefit Analysis
Deductible Levels
Higher deductible levels generally come with less costly
premiums than lower deductible levels. You should
take this into account when deciding whether or not
to choose an HDHP/HSA option. While it may seem
intimidating to take on a high deductible, remember,
the plan should cost significantly less and the money you
save can be used in reaching that higher deductible. Take
the time to think about your personal ability to balance
these benefits with potentially more financial exposure
in the event of a high-cost year. If you need family
coverage, balance individual deductibles (if required)
with the umbrella deductible (Chapter 1: Health Savings
Accounts—A New Approach) to get the right savings
level.
Coinsurance and Co-payment Levels
Another way for you to balance the benefits and risks
of an HSA is to understand the coinsurance levels.
Coinsurance or co-payments determine what you pay
once you or your family reaches your plan’s deductible.
Different coinsurance and co-payment levels can affect
the premium price and the additional amount you may
need to pay out of your HSA or out-of-pocket once the
deductible is met. For example, if your coinsurance level
is 100 percent, meaning your plan pays 100 percent after
the deductible; your premium will most likely be higher
than one with a coinsurance of 80/20, meaning the plan
pays 80 percent and you pay 20 percent until you meet
your out-of-pocket max.
6-1
Chapter 6
Out-of-Pocket Maximums
Maximum out-of-pocket costs to qualify for HSA
eligibility for individuals ($5,600 for 2008) and families
($11,200 for 2008) are set by law. However, HDHP
plans can vary as to whether this is for all claims or for
those that are only in-network as allowed by most health
plans. Your out-of-pocket maximum level can affect
your exposure and your ability to go out-of-network to
receive expensive care.
Determining the Right Amount of Money to
Contribute to Your HSA
The short answer is you should contribute the most
money the law allows, and you are financially able to
contribute, on an annual basis to your HSA. Why?
Because HSAs have some of the best tax benefits of any
savings accounts including traditional IRAs, 401(k)s and
Roth IRA accounts. Only with an HSA can the owner
contribute tax-deductible deposits, enjoy tax-free growth
through interest or increasing investments, and spend
this money on most health related services and products
without paying taxes. Furthermore, unlike most other
medical spending accounts such as FSAs or HRAs, the
money in your HSA is yours to keep. It can also be used
for non-health related costs by paying only your income
tax, with no penalties, when you reach age 65. So keep
contributing!
The Longer Answer
The reality is that most people, including those who have
HSAs, are on a tight budget and may not be able to fully6-2
fund the account. The good news is that the government
allows you to increase or decrease your contributions
throughout the year up until tax-day (April 15th of the
following year) and still receive the tax benefits. The
HSA can also be fully-funded in advance at the beginning
of the year, providing you stay covered by the qualified
HDHP for the entire year.
Example: The Jensen family is expecting the birth
of their second child in July and their HDHP
plan year began on Jan 1, 2008. They are in a
$5,000 family deductible plan with no embedded
deductible. Their plan has maternity coverage
and 100 percent coinsurance once the deductible
is met. Expecting out-of-pocket expenses in July
associated with the birth of their child, they increase their
contributions to $800 per month so that by July 1 they have
deposited $4,800 into their HSA for the year. For the 2008
IRS tax year, the Jensens can deposit up to $5,800 into their
account, so they may still contribute $1000 over the next six
months assuming that they remain eligible to contribute to
the HSA for the entire year. When they receive their bills in
August for the childbirth, they will have money in their HSA
to satisfy these claims up to $5,000. Cost exceeding $5,000
should be paid by the HDHP.
Permitted Insurance Coverage That Protects You
A gainst High Expenses
The law allows you to use other types of insurance with
your HDHP that can help offset the risk that comes
with a higher deductible level. These policies include
6-3
Chapter 6
homeowner’s insurance, automobile insurance, dental
and vision care plans, accidental injury insurance,
workers’ compensation benefits, hospital indemnity plans
that pay a fixed amount per day of hospitalization, and
specific disease policies that pay a fixed amount for the
designated disease. The permitted plans help preserve
your HSA balances and protect you against out-of-pocket
expenses.
Case Studies
As you become familiar with the covered benefits,
deductibles, contributions and out-of-pocket exposure
associated with your HDHP, you can begin to understand
and plan how to make your HSA work for you. Please
see the below examples of real-life scenarios and how
HSAs can work by decreasing insurance premiums and
helping to change behavior.
• Jake—25-year-old healthy male
• Sadie—58-year-old woman (pre-retiree)
• Holly—35-year-old mother of 4, new-onset
diabetes
• Bill—48-year-old with hypertension, highcholesterol
These studies will illustrate how to get the most out of
your HSA by:
• Understanding and selecting the best HDHP
design for your situation; and
• Determining the right amount of money to
contribute into your HSA.
6-4
Case 1
Jake is a 25-year-old healthy male who works for a small
construction business. Jake makes $40,000 per year
and has health benefits covered by his employer. Jake is
married to Jackie; they have one child and hope to have
a second child. Their health care costs are typical for a
young family and include:
• Occasional office visits
• Occasional prescriptions for minor illnesses
Traditional plan: $500 family deductible plan that
includes:
• 80/20 coinsurance once deductible is met
with out-of-pocket maximum $2,000
• Office visit co-payments = $20
• Prescription drug co-payments = $20
Proposed HSA plan: $5,000 family deductible HSAqualified HDHP with:
• 100% coinsurance once deductible is met
• No co-payments
• No “permitted insurance”
• $300 monthly contribution to HSA by Jake
and his employer
6-5
Chapter 6
Year 1—Current Plan Compared to Proposed HSA Plan
Traditional Plan HSA
Contribution
N/A
Office Visits
4x
$20 copayment
Prescription
Drugs
5x
$20 copayment
Total
Expenses
Adjusted
Expenses
(post-tax
effect
Year-End
HSA
Balance
HSA Plan
$300 x 12
months
$80
4 x $50
(office
visit at fair
market
price)
$200
$100
5 x $40
(avg. Rx
price for
antibiotics)
$200
$180
25% Fed,
7.5%
FICA,
7.5%
State
$3,600
$300
$400
All pre-tax
N/A
$400
$3,200
In Jake’s second year in the plan, his wife had a
complicated pregnancy requiring a lengthy hospital
admission and his son required a hernia repair under
general anesthesia.
• Complicated pregnancy—$15,000 in hospital
and physician bills
• Uncomplicated hernia repair—$5,500 in
hospital bills for operating room, surgeon
fees and anesthesiologist fees
6-6
Year 2—Current Plan Compared to Proposed HSA Plan—
High Expense Year
Traditional
Plan
HSA Carry-Over
from Yr 1
HSA Plan
N/A
Yr 2 HSA Account
Contributions
$3,200
N/A
$300 x 12
months
$3,600
Office
Visits
12 x $20
co-payment
$240
12 x $50
(office visit at
fair market
price)
$600
Prescription Drugs
15 x $20
co-payment
$300
15 x $40 (avg.
Rx price for
antibiotics
$600
Pregnancy
$500
deductible
+ $2,000
coinsurance
$2,500
Cost met
$5,000
deductible
$3,800
Hernia
$500
deductible
+ $1,000
coinsurance
$1,500
Already met
deductible
$0
Total Expenses
Adjusted
Expenses (posttax effect
Year-End HSA
Balance
$4,540
25% Fed,
7.5% FICA,
7.5% State
$7,567
N/A
$5,000
All pre-tax
$5,000
$1,800*
*Had these expenses occurred in year 1, Jake would
have had to pay $1,400 in addition to using all of the
funds in his HSA ($3,600 pre-tax and $1,400 post-tax
for a total of $5,000), compared to having post-tax, outof-pocket expenses of $7,567 in his traditional plan. Jake
could reimburse himself the additional $1,400 from his
HSA when the balance rebuilt in the following year.
6-7
Chapter 6
Case 2
Sadie is a 58-year-old single female who is an early
retiree. Her former employer offers no health
benefits for retirees. Sadie is paying the entire cost of
her individual policy. To save money, Sadie elects to
purchase a high-deductible plan that qualifies for HSA
contributions. Her premium savings allows her to put
$1,500 per year in her HSA.
Previous Plan: Low deductible plan that includes:
• Office visit co-payments = $15
• Co-payments for prescriptions ($10 Generic,
$15 Brand, $20 for Non-Preferred)
Sadie suffers from high blood pressure, hyperthyroidism,
and mild depression and is taking hormone replacement
therapy (HRT). The actual costs for brand-name drugs
and the co-payment are listed below:
Condition
Actual Cost
Co-payment
High Blood Pressure
$48.89
$10.00
Hyperthyroidism
$14.69
$10.00
Depression
$72.43
$15.00
Hormone Replacement
$55.42
$20.00
Total Monthly
$191.43
$55.00
Total Annual
$2,488.59
$660.00
The cost to the insurance company is $1,828.59
($2,488.59 actual cost less $660 in co-payments)
New Plan: HSA/HDHP
• $2,500 deductible
6-8
• $1,500 annual contribution to the HSA
• No co-payments
Incentive + Health Support Services
Sadie utilizes resources offered by her HSA administrator
to find less expensive, equally effective alternatives
for her name brand prescription medications. She is
motivated to switch to the alternatives since she has
$1,500 in her HSA—money she keeps if she doesn’t
spend it. This money was the result of changing to a
higher deductible plan. The actual costs of the generic
alternatives are listed below:
Condition
Actual Cost
High Blood Pressure
$20.33
Hyperthyroidism
$7.49
Depression
$26.48
Hormone Replacement
$17.36
Total Monthly
$71.66
Total Annual
$859.92
The Result
Sadie discussed her findings with her physician and he
agreed to change her prescriptions to the less-expensive
alternatives. Because she had incentive, education and
access to information, Sadie was able to save money and
maintain a high-level of medical care. Below is a table
showing Sadie’s savings by participating in an HSA plan:
6-9
Chapter 6
Previous
Plan
HSA Plan
Change with
an HSA
$0
$1,500.00
+$1,500.00
Sadie’s Annual Expenses
$(660.00)
$(859.92)
-199.92
Change with an HSA
$(660.00)
$640.08
$1,300.08
HSA Annual Deposit
Not only is Sadie better off by over $1,300 dollars by
having an HSA, but in addition, she did not have to pay
taxes on the money that went into her HSA, which could
potentially save her hundreds of additional dollars in
taxes as well.
The insurance company was also able to save money.
Rather that paying the difference between the actual cost
and the co-payment, which was $1,828.59, they didn’t
have to pay anything since all the expenses were below
the deductible. These savings will allow the insurance
company to continue to offer HSA-qualified HDHPs for
competitive prices.
Case 3
Holly is 35 years old, married and a mother of four, with
newly diagnosed insulin-dependent diabetes. Holly’s
husband has recently left one job that offered health
benefits through a low deductible, traditional plan. His
new employer offers an HSA plan.
In Holly’s own words:
“In a health insurance plan with a consistent co-payment
of $10, I never had a reason to ask any questions
6 - 10
regarding the services rendered and their respective
costs. I simply paid the co-payment and felt grateful to
have insurance pay the rest— or so I thought…
Under my traditional HMO insurance plan, the
pharmacy simply filled the prescriptions written up by my
doctor for my insulin and diabetic supplies and I felt no
need to research more cost effective, competitive prices. I
was happy to pay my $35 co-payment for insulin.
When introduced to health savings accounts, I was
worried that I would not enjoy the same benefits. I
learned, however, that not only did I receive comparable
care, but also I learned to be a careful “shopper” and
save money. I began to ask questions about such things
as lab work, blood tests and examinations. I learned
how to save money by switching to generic medications,
buying a less expensive blood glucose monitor and test
strips. I found out that the typical blood work done at my
doctor’s office cost anywhere from $55-$70. I learned
that I could purchase my own hemoglobin A1C test at
my local pharmacy for about $24. I did the test at home
and phoned in the results to my doctor. I also learned
to watch for coupons at the pharmacy and rebates on
diabetic products.
I have become more of a researcher for myself and for
my children. Before taking them to the doctor or to the
urgent care, I go first to the informative resources on-line,
to learn more about diagnosis and suggested medical
care.
I have discovered that by being in control of my medical
dollars I am much more conscientious about my health
care consuming habits and my family and I have been
able to save money on medical expenses.”
6 - 11
Chapter 6
Case 4
Bill is 48 years old, recently divorced and has several
medical conditions. His employer is offering an HSA
plan. Under his current plan, Bill has significant monthly
expenses including co-payments for:
• Regular office visits
• High blood pressure medication
• Diabetes medication
• Acid Reflux medication
Annual Comparison of Previous Plan and HSA Plan
Previous
Plan
Beginning Balance
HSA
Plan
N/A
$1,200
Office Visits
(10 visits x $20 copayment)
$200
(10 x $50)
-$500
Prescription
Drugs
(30 prescriptions x $20
co-payment)
$600
(30
prescriptions x
$40)
-$1,200
(10 prescriptions x $40
co-payment)
-$400
(10
prescriptions x
$90)
Lab Work
-$150
(met
deductible)
Total Expenses
-$1,350
$2,600
$0
$1,200
Plus HSA
Account
15% FICA, 7% State
28% Fed
Ending Balance (deductible, coinsurance)
(post-tax effect)
-$2,700
Additional
Exposure
$2,500
6 - 12
(deductible, coinsurance)
All pre-tax
-$0
-$1,400
$0
Under this scenario:
• Bill saved $1,300 by using an HSA plan
versus his previous low deductible plan.
• Bill has 100 percent coverage for other
medical expenses because he has already
met his annual deductible and his HSA
plan will pay 100 percent for all in-network
expenses he accrues in any year that are
above the deductible.
• He has an additional $2,500 risk with a
traditional plan due to the fact that his copayments do not apply against his previous
plan’s $500 deductible or his coinsurance,
which can total up to $2,000 per year if he
has a higher level of care.
Keep in Mind
• You need to understand the details of your
HDHP plan design including the deductible
levels, coinsurance and co-payment levels
and the amount you can contribute to
your HSA in order to balance the risks
and benefits of the plan. Much of this
information is available by studying the
HDHP summary of plan benefits provided
by the insurance company.
• You may find some benefit in purchasing
additional “permitted insurance” policies
to help limit your financial exposure while
gaining the benefits of a tax-advantaged
6 - 13
Chapter 6
savings account.
• Careful planning and management of your
HSA is necessary to gain the most tax-free
benefit. You need to become familiar with
and use health support tools that can help
you get the most for your HSA dollars while
maintaining a high level of care.
• HSA administrators should be able to
provide information on your medical claims
as well as the health support tools that are
necessary to make better decisions.
Up Next
This chapter has explained how to make an HSA/HDHP
work for you. Chapter 7 will discuss everyday challenges
you will face when using your HSA/HDHP.
6 - 14
Chapter
7
Your HSA/HDHP and Everyday
Health Care Challenges
Previous chapters have explained how the HSA and
HDHP work. This chapter examines how the HSA/
HDHP can help you through various real-world and
family situations:
4 You Need Elective (Non-Emergency) Surgery
4 It’s an Emergency
4 Family Matters
4 You Change Jobs or Lose Your Job
4 It’s Business
4 You Retire before You are Eligible for Medicare
4 When You Enroll in Medicare
4 Using Your Account after Disability
You Need Elective (Non-Emergency) Surgery
Imagine you have just been told you need surgery. If you
understand your plan, you can focus on making the best
choices for your long-term medical and financial well
being.
Do Your Homework
Spend some time doing research on the condition, the
possibilities for treatment, and the risks and benefits of
these treatments. This research can be performed on the
internet, at a library, and by speaking with friends and
relatives who may have had a similar condition. Many
HSA administrators and health plans offer powerful
internet tools that come equipped with explanations,
photographs and even videos of possible treatments.
Getting a Second Opinion
Medical experts agree that if you have been told you
need surgery, your next step should be to get a second
opinion. Second opinions differ from first opinions a
surprising amount of the time—so you may even need
a third opinion. Most conditions can wait until you and
your doctors understand your options. If you are facing
major surgery, your HSA may be worth its weight in gold
to you. You can use your HSA to get a second opinion
from any expert you choose, whether or not that doctor
is in your plan’s network.
Even if you have not met your HDHP deductible for the
year, you should understand your plan’s requirements
7-1
Chapter 7
concerning surgery. Many plans require that you get
authorization for non-emergency surgery, and some may
require a second opinion before authorization will be
given. Following the rules of your HDHP can cut waste,
save you money and allow you to use your HSA funds
when you need them most.
Choosing Your Doctor and Hospital: The Role of
Network Providers
The HSA/HDHP gives you the freedom to use either
network or non-network providers for your care. But if
you are facing a major medical event such as surgery, you
may want to fully explore the options in your network
before proceeding. Be sure you know whether your
plan has separate out-of-pocket limits for network and
non-network care then decide whether you want to use
a doctor or hospital in or out of your plan’s network. If
your plan has separate limits, you could wind up paying
thousands of dollars more for care that is no better than
what you would get from your provider network.
If you don’t have much money in your HSA, those funds
may initially have to come out of your after-tax money.
Many hospitals and physicians will allow you to make
payments over time until you retire your debt. You can
use future HSA deposits to make these payments, or to
reimburse yourself if you paid the expenses with other
funds. You will need to balance this benefit against any
interest charges that may be added by the hospital or
physician on your outstanding bill. Interest charges are
not allowable HSA expenses.
7-2
If you are contemplating surgery, remember also that
there will be many people involved in the procedure
in addition to your principal surgeon. For example,
the anesthesiologist should also be a member of your
network if you want to get the best benefits your plan
has to offer. Ask your doctor how many different
specialists will be involved in your surgery and where
your doctor has operating privileges. You then need to
call the hospital and the other specialists and find out if
they are part of your network. If they are not part of
the network, they may be willing to give you a promptpayment discount if you pay for your care punctually.
The time taken to explore these questions could save you
a lot of money.
Authorizations and Referrals
You should also make sure you know what your plan’s
requirements are concerning authorizations and referrals
(for more detail, see Chapter 4: How Does Your HSA/
HDHP Work?). Your plan may impose financial penalties
for failure to obtain required referrals and authorizations,
even if your provider is a member of your network. Such
penalties will not count toward meeting your out-ofpocket limit for the year, so not following the plan’s rules
can cost you money.
Example: Heather is a 34-year-old mother of three
who has been referred by her primary care physician
to a surgeon for elective gallbladder removal for
pain and polyps in her gallbladder. Heather finds out
that the surgeon she has been referred to is a non7-3
Chapter 7
network provider. She feels comfortable with this surgeon.
The surgeon’s office explains that since Heather has an HSA
and can pay promptly, they will offer a discount fee that is only
$50 more than a network provider will charge. Heather then
finds out that the non-network surgeon can perform surgery
in both the non-network surgery center and the in-network
hospital in her town. Heather’s surgeon agrees to schedule
Heather’s surgery at the in-network hospital, realizing this
will save her significant out-of-pocket expenses. Heather is
willing to pay a little extra money in surgeon fees to have the
gallbladder removal performed by the surgeon of her choice.
However, because she is informed and selective, Heather
saves potentially thousands of dollars by having her surgery
performed at an in-network hospital.
It’s an Emergency
Know your plan’s rules (they still apply) about who to
call and when. However, use your common sense as well
as your HSA/HDHP. If you are having a life-threatening
emergency, call 9-1-1 and go to the nearest hospital.
An emergency is the sudden onset of a condition or an
accidental injury requiring immediate medical or surgical
care to avoid death or permanent disability. You, or a
representative such as a family member, must generally
communicate with your plan within 24 to 48 hours
after the onset of an emergency, but you do not have
to change hospitals (if you are initially taken to a nonnetwork facility) until your condition is stabilized. As in
the case of surgery, however, treatment of an emergency
is likely to be expensive, and you should consider using
7-4
network providers once the danger period is over.
If your situation is not life-threatening, you may want
to call the health plan’s urgent care line or nursing hotline before seeking care (the number is generally on
the back of your card if your health plan offers this—
some HSA administrators also offer these services).
An urgent condition is one that needs treatment within
24 hours to prevent it from turning into a serious or
life-threatening illness. Calling first can be especially
important if you are out-of-town, as the urgent care line
personnel may be able to direct you to an urgent care
center or hospital near you that is a part of your plan’s
network (remember, many plans are national in scope
and have network providers all over the country). Using
a network provider will save you money and stretch
your HSA further. But if you are not sure whether your
condition is urgent or an emergency, err on the side of
caution and head for the emergency room first—call
later.
Family Matters
If you get married, give birth, or adopt a child, your
health care coverage needs may change. If you and
your spouse have separate health care plans and one of
you loses your plan, your coverage needs may change
as well. Under the Health Insurance Portability and
Accountability Act (HIPAA), you have the right to ask
your plan to cover your family member(s) without
waiting until the plan’s open enrollment season. HIPAA is
a federal law that limits pre-existing condition exclusions,
permits special enrollment when certain life or work
7-5
Chapter 7
events occur, prohibits discrimination against employees
and dependents based on their health status, and
guarantees availability and renewability of health coverage
to certain employees and individuals. Open enrollment
season is a period of time during which employees may
change plans without incurring costs or penalties.
Enrolling a New Baby in Your Plan
Enroll a new child in your plan as soon as possible. If you
are changing from an individual plan to family coverage
plan your allowable HSA contribution will change on the
first day of the month in which you become covered by a
family-coverage HDHP, allowing you to contribute more
to your HSA.
If You Need to Change to a Family Plan
A baby isn’t the only reason you may need to change
from individual to family coverage. If you have a self-only
plan and your spouse loses his or her coverage, you can
generally change to a family plan without waiting for
open enrollment season. As in the case of a new child,
your allowable HSA contribution will also change on the
first day of the month in which you become covered by a
family-coverage HDHP.
Divorce or Legal Separation
Spouses do not own an HSA jointly. Each spouse must
qualify to contribute to an HSA and each HSA can
have only one beneficiary. In the event of a divorce, the
HSA owned by one spouse, may be divided or given
7-6
to the other spouse by court judgment. If you and
your spouse divorce and you are both covered under
a family plan through one of your employers, the one
not employed by the plan’s sponsor may be entitled
to buy COBRA continuation coverage under the plan
rather than lose coverage. COBRA (for the Consolidated
Omnibus Budget Reconciliation Act of 1985, the law that
authorized this coverage) provides for the temporary
continuation of group health plan coverage available
after a qualifying event (we discuss a few more qualifying
events later in this chapter) to certain employees,
retirees and family members. Divorce is a qualifying
event. Those who are eligible may be required to pay
for COBRA continuation coverage (up to 102 percent of
what the coverage costs the employer) and are entitled
to coverage for a limited period of time (from 18 months
to 36 months), depending on the event that prompted
their eligibility. The eligibility period may in some cases
be extended if another qualifying event occurs during the
period of COBRA eligibility. It is the HDHP that may be
subject to COBRA coverage. However, the HSA is not.
Stepchildren
You can usually cover a stepchild in your employer’s plan,
even if you have not formally adopted the child. The
child has to live with you in a parent-child relationship,
and you have to be responsible for his or her support.
Some plans require that you or your current spouse be
able to claim the child as a dependent for tax purposes
to allow you to enroll the child in your plan.
7-7
Chapter 7
As in the case of adding a newborn, adding a stepchild
to your plan may allow you to increase your HSA
contribution. In figuring out the best way to cover a
stepchild, you should consider the options under your
plan as well as under your spouse’s.
Example: Phil and Paula each have self-only
coverage through their employers. Phil has an
HSA/HDHP while Paula has a traditional plan
with a low deductible that does not qualify as an
HDHP. Paula acquires custody of her daughter,
Mary, who comes to live with them. Paula wants
to cover Mary under her plan. However, her
plan only offers individual and family coverage, with no other
options. If she elects family coverage, Phil will no longer be
able to contribute to an HSA, since he will be covered under
her plan. But if Phil’s plan offers different options, such as
“self-plus-child”, it could make sense for him to cover Mary
under his plan.
The Transition to Adulthood
As if the transition from adolescence to adulthood
weren’t bumpy enough, there can be some rough spots
when your child is getting through school or other
important transitions. The HSA/HDHP can help you
through some of those transitions.
• Your child is not eligible for your plan
but is still your dependent. Most plans
require that your child be younger than age
19 to be covered under your plan, though
the limit may stretch to age 23 if the child
7-8
is enrolled in school and depends solely on
you for support. But your child may still be
your dependent for tax purposes (see Table
2.1 Who Is a Dependent?) even if he or
she does not qualify as a dependent under
your health plan. You can use balances
accumulated in your HSA to pay qualified
medical expenses for this child, including
COBRA premiums.
• Your child would be eligible for your
plan but is married. Once your child is
married, even if he or she would otherwise
qualify for coverage under your plan (by
virtue of age, student status, or both), your
child’s coverage under your plan is generally
terminated. Your HSA/HDHP gives you two
options in this case:
• Your child may elect COBRA coverage, and
you can use balances in your HSA to pay
for this coverage. However, if your married
child files his or her tax return jointly with
their spouse, he or she ceases to be your
dependent and therefore cannot be eligible to
receive distributions from your HSA.
• You may contribute to an HSA for your child
(and the child’s spouse, if you wish) if the
following conditions are met:
(1) the child may not be claimed as a dependent on your tax return
(2) the child (and spouse, if applicable) is covered by an HDHP and not
7-9
Chapter 7
covered by any other plan that offers other
than permitted coverage. Your child and/
or the child’s spouse can claim the HSA
contribution as an above-the-line income tax
deduction. An above-the-line deduction is
one that is taken when calculating adjusted
gross income, and thus is available to
taxpayers whether or not they itemize
deductions.
You Change Jobs or Lose Your Job
COBRA and HIPAA help you carry your coverage with
you through various job changes, and your HSA/HDHP
can smooth these changes even further.
You Lose Your Job or Your Hours Are Reduced
A number of job changes can trigger COBRA eligibility.
These include quitting your job, getting laid off, retiring
or getting fired other than for gross misconduct. Gross
misconduct is not specifically defined in COBRA or
in regulations under COBRA, and will depend on the
specific facts and circumstances. Generally, it can be
assumed that being fired for most ordinary reasons, such
as excessive absences or generally poor performance,
does not amount to “gross misconduct”.
A reduction in your hours can also trigger COBRA
eligibility if part-time employees are not covered under
your plan. A strike by unionized employees can qualify as
a change in hours.
7 - 10
If you elect COBRA benefits, you can use the HSA to pay
COBRA premiums, and you can continue to contribute
to an HSA (if you can afford both, that is).
You Get a New Job
It’s not uncommon for plans to impose a waiting period
before newly hired employees can enroll. If you have a
new job, but have either an individual HSA/HDHP, or
qualified COBRA coverage from your last job, you can
continue to make HSA contributions during this waiting
period. You can also use your HSA funds to pay your
COBRA premiums.
If your new employer makes an HSA/HDHP available,
check on rolling over your old HSA into the new one.
You are allowed one rollover per year, though you can
make any number of direct trustee-to-trustee transfers
(for more on this issue, see Chapter 8: The HSA Law).
Know Your State and Local Laws
COBRA is a federal law that applies only to employers
with at least 20 employees. Your state, county, or city
may also have a similar law with broader coverage—
covering even smaller firms, for example—or more
generous coverage. If the state or local law is more
generous than COBRA, the state or local law is the one
that applies.
It’s Business
You may not be making any job changes, but things can
change at your workplace. Your HSA/HDHP can help.
7 - 11
Chapter 7
Your Employer Files for Bankruptcy
If your company closes or files for bankruptcy, there
may no longer be a health plan. If there is no longer
a health plan, there is no COBRA coverage available.
If, however, there is another plan offered through
a successor employer, you may have COBRA rights
through that plan. If you are offered COBRA coverage,
you may use your HSA to pay those premiums. If there
is no COBRA coverage available, you can use your HSA
to pay for medical expenses or other coverage you might
be able to buy while you are receiving unemployment
compensation.
Your Plant Is Closed
If your plant is closed but the rest of the company or
a parent company remains in business, you have to be
offered COBRA coverage through any surviving plan.
Your HSA can be used to pay those premiums.
Your Company Is Sold
If your company is sold, the buyer of the company may
be obliged to provide you with COBRA coverage. If
there is COBRA coverage available, your HSA can be
used to pay those premiums.
Your Employer Drops Your Plan but Stays in Business
Termination of a health plan does not trigger COBRA
eligibility. You can no longer contribute to an HSA if
your HDHP is terminated, but you can use your HSA for
medical expenses.
7 - 12
You Retire Before You Are Eligible for Medicare
Many people retire long before age 65, when they are
eligible to claim Medicare benefits. If you retire from
your current job before age 65, you can use your HSA
for a wide range of medical expenses. You can use it to
pay COBRA premiums, premiums for long-term care
insurance, or non-COBRA premiums for coverage you
may buy on your own if you are receiving unemployment
compensation. You may also use your account balance to
pay qualified medical expenses directly.
But if you retire from your job, accept a pension
from your employer, then go to work for another
employer, you can’t use your HSA to make any premium
contributions your new employer may require unless you
are at least 65 years old.
When You Enroll in Medicare
You are no longer eligible to make HSA contributions
after you enroll in Medicare. Remember that enrolling in
SSI (the income portion of Social Security) automatically
enrolls you in Medicare Part A and causes you to
be ineligible for HSA contributions. Like the early
retiree, you can use the HSA after reaching age 65 to
pay COBRA premiums, premiums for long-term care
insurance or non-COBRA premiums for coverage you
may buy on your own if you are receiving unemployment
compensation. You may also use your account balance
to pay qualified medical expenses directly. If you remain
employed after age 65, you can use your HSA to pay
your share, if any, for employer-sponsored health care
coverage. If your employer offers health care coverage
7 - 13
Chapter 7
to its retirees or their survivors and requires a premium
contribution from participating retirees or survivors, the
HSA can be used to pay for that coverage as well.
You can also use your HSA to pay Medicare premiums
once you reach the age of 65. Medicare Part A covers
hospital insurance that pays for inpatient hospital stays,
care in a skilled nursing facility, hospice care and some
home health care. Medicare Part B is medical insurance
that helps pay for doctors’ services, outpatient hospital
care, durable medical equipment, and some medical
services that are not covered by Part A.
Also at age 65 or later, you may use your HSA funds to
pay for a wide variety of premiums as a qualified expense.
Refer to the Table 4.4 at the end of Chapter 4 for more
information. Even after age 65, Medigap insurance, a
private insurance that covers out-of-pocket costs not
covered by Medicare, is not a qualified expense. Medigap
is not the same thing as retiree health insurance; you
buy a Medigap policy from a private insurer, while your
employer provides retiree health insurance. If you have
retiree health insurance, you will generally not need
Medigap coverage.
Using Your Account After Disability
Since you do not need to work to make HSA
contributions, you can continue to be covered by an HSA/
HDHP plan after you become disabled. If you are covered
by an HSA/HDHP and qualify for short-term or longterm disability benefits under an employer-sponsored plan,
nothing should change if the basic health care coverage
arrangement remains intact during the disability period.
7 - 14
However, there are important cautions to be observed
here. Your HSA has to be paired with an HDHP, so if you
lose HDHP coverage under your employer’s plan because
you can no longer work, you will no longer be eligible
to contribute to an HSA unless you can find a qualifying
HDHP as an individual buyer. You can use your HSA
balance to make COBRA payments if you become eligible
for COBRA coverage as a result of your disability.
If you qualify for Social Security Disability Insurance (SSDI)
benefits, everything changes. Qualifying for SSDI benefits
is an entirely separate process from qualifying for benefits
under an employer-sponsored disability plan. By law, to
qualify for SSDI benefits, you must be unable to do any
substantial amount of work due to your health (for 2008,
“substantial” work is work that earns you more than
$900 per month), and your condition must have lasted a
year, be expected to last at least a year, or be expected
to result in your death. Applicants have to be unable to
do substantial work for at least 5 months before filing
an application and there is substantial uncertainty about
acceptance; about half of SSDI applications are rejected.
If you are awarded SSDI benefits, you will become eligible
for Medicare coverage two years after the benefit award.
You can use your HSA both during the application
process and after you are awarded benefits. Prior to being
awarded Social Security Disability benefits, you can use
your HSA to pay COBRA premiums if you are eligible. You
can also use your HSA for other medical expenses.
7 - 15
Chapter 7
Keep in Mind
• Your HSA provides funds for choices you
might not have had before. But make sure
you know the rules in your HDHP plan so
that you can make the best informed choice
and use of your HSA funds.
• Changing family status—new baby,
stepchildren, college kids and new spouses—
all present new coverage needs. Be sure to
make the necessary enrollment changes as
soon as the opportunity presents itself.
• HSAs can help you with employment
changes and transitions in and out of the
workforce.
• Enrolling in Medicare puts an end to making
contributions to your HSA. However, the
funds you have built up in your HSA can be
used for a variety of expenses.
Up Next
This chapter has discussed how your HSA/HDHP can help
you through many life and workforce transitions. In the
next and final chapter of this book, we explain the basic
laws that govern HSAs.
7 - 16
Chapter
8
The HSA Law
Previous chapters have covered rules of eligibility,
contributions and distributions. This chapter
provides a synopsis of federal and state laws that
govern aspects of HSAs including:
4 The Federal HSA Law
4 Estate Treatment of HSAs
4 Employer Requirements
4 Bankruptcy
4 State Law
The HSA Law
Some legal requirements governing HSAs are specific
to HSAs; others apply because HSAs are also trusts,
which are governed by both federal and state law. As an
employer who sponsors an HSA, or an employee who
has signed up for one, you should be aware of which laws
impact setting up and using your HSA.
The Federal HSA Law
Congress passed Section 1201 of the Medicare
Prescription Drug Improvement and Modernization Act
of 2003. This provision adds Section 223 to the Internal
Revenue Code to permit eligible individuals to establish
HSAs for taxable years beginning after December 2003.
The Rules Made Easy
Below is a quick summary of the tax rules governing
HSAs/HDHPs. For more in-depth information on how
the rules apply in various situations (see Chapter 4: How
Does Your HSA/HDHP Work? and Chapter 7: Your
HSA/HDHP and Everyday Health Care Challenges).
• State trust laws state that an HSA becomes
established once there are funds deposited
into the account. There has to be an asset
in order for there to be a trust. Once there
is an asset to trust the account is established.
• HSAs are funded on a pre-tax basis. For an
individual, it is an above-the-line deduction,
independent of whether or not you itemize.
• Employer contributions are not taxable to
the employee, nor subject to employment
taxes such as Social Security payroll taxes
8-1
Chapter 8
or the federal portion of taxes that finance
unemployment benefits. The earned income
tax credit (EITC) is not affected by employer
contributions.
• Self-employed individuals and owners of S
corporations are not considered employees.
As such, they cannot receive employer
contributions. However, they can make
contributions on their own and claim the
above-the-line deduction on their personal
income taxes (See Ch. 2-13 and Table 8.1).
• Employer contributions are deductible to the
employer as contributions to a health plan.
• Contributions for any tax year may be made
at any time before the deadline for filing the
HSA owner’s income tax return for that
year (without extensions).
• The maximum amount that can be
contributed and deducted is the statutory
maximum contribution for that year
(indexed for inflation). The individual must
remain eligible the remainder of that tax
year and the entire next year.
Individual 2008
Family 2008
$2,900
$5,800
• There are special increased contributions
for those individuals age 55 and older up to
Medicare eligibility and enrollment (usually
8-2
The HSA Law
age 65).
• 2008 - $900
• 2009 - $1,000 (and years beyond 2009)
• Eligibility to make tax-deductible
contributions is calculated on a month-tomonth basis based the number of months
you are covered by an eligible HDHP.
• A contribution can be made by another
person on behalf of an individual and
deducted by that individual.
• No one can receive or make a contribution
that is eligible to be claimed as a dependent
on another person’s tax return.
• Earnings on money invested in your account
accrue tax-free.
• Rollovers from Archer MSAs and other
HSAs are permitted; those from FSAs and
HRAs are permitted one time and have
special rules that must be followed (see
Chapter 2 – Health FSA/HRA Rollovers and
IRA Transfers).
• An HDHP may provide first-dollar
preventive care or apply a lower minimum
deductible for such care than generally
applies and still be a qualified HDHP.
• If HSA funds are used for non-qualified
items, which include medical expenses
incurred prior to the account being
established, then that amount is subject to
ordinary income taxes plus a 10 percent
8-3
Chapter 8
penalty. The penalty applies only if you are
younger than age 65.
• If you mistakenly use your HSA funds for
an expense that was not a qualified medical
expense, you may repay the distribution no
later than April 15 following the first year
you knew (or should have known) of the
mistake. Your distribution would not then
be included in your gross income, nor would
the 10 percent excise tax apply. However,
the HSA trustee or custodian has the option
to allow or deny the return of a mistaken
distribution.
• HSA contributions, whether made by the
employer or the employee, that exceed
the legal limit for a given year are included
in the employee’s adjusted income for tax
purposes. The employee also pays a 6
percent excise tax on the excess amount. To
avoid this result, the excess contributions for
a taxable year and the investment income
earned on these excess contributions may
be paid to the account owner before the
due date (including any extensions) for
the account owner’s income tax return. If
this is done, the investment income and
the excess contribution is included in the
account owner’s gross income for the year
in which the owner receives the distribution.
However, the 6 percent excise tax is not
imposed on the excess contribution.
8-4
The HSA Law
• Contributions by an individual are taken as
a deduction on Form 1040, which means
you do not have to itemize to receive the
tax break. Your employer will report the
employer HSA contributions on your Form
W-2 and your HSA trustee or custodian
will report distributions to you and to the
IRS on Form 1099 (see also Chapter 5:
Understanding Paperwork and Record
Keeping).
Table 8.1 summarizes the tax treatment of HSA
contributions for various employer and employee
situations.
HSA as a Trust
Health savings accounts are not considered insurance
plans, while HDHPs are. With individual ownership,
year-to-year accumulation of contributions and earnings,
and specified uses and rules, the HSA is a trust.
A trust is a fiduciary relationship where a bank,
corporation, or other entity acting as a trustee holds
legal title with a legal obligation to keep and use the trust
for the benefit of the equitable owner, in this case the
owner of the HSA. A trustee is a party who is given legal
responsibility to hold property in the best interest of or
for the benefit of another entity, directing the investment
of the funds in a trust account and managing it. The
custodian is the person or institution that is in charge of
property in terms of maintenance of an account but has
8-5
Chapter 8
no investment or management responsibilities.
The trustee must deal with the trust property
honestly, and put the beneficiary’s interest above
its own. It must also closely follow the terms of the
trust. Though it may have discretion in investments
and day-to-day management, these functions are
still governed by the trust agreement. The benefit
for which the trustee holds and administers the
account is for that of paying qualified medical
expenses. The trustee must be a bank, insurance
company or other entity that meets IRS
requirements, including net worth.
Health savings accounts may be invested in the
same investments approved for IRAs—e.g. bank
accounts, annuities, certificates of deposit (CDs),
stocks, mutual funds, or bonds. No part of the
HSA trust assets can be invested in life insurance
contracts, in collectibles (art, antiques etc.—other
tangible personal property that the IRS specifies),
and HSA assets may not be commingled with
other property except for investment purposes. An
individual’s interest in the balance is not forfeitable.
Account beneficiaries (the owner), HSA trustees
and custodians cannot enter into a prohibited
transaction with the HSA. A prohibited transaction
is the sale, exchange or lease of property,
borrowing or lending money, furnishing goods,
services or facilities, transferring to or use by or
for the benefit of the beneficiary of any assets
8-6
The HSA Law
contained in the account. The beneficiary also may
not pledge the assets of the HSA. Any amount
used for such purposes is treated as a distribution,
because it is not used for medical expenses, and
included in the beneficiary’s gross income. The 10
percent penalty for such distributions applies.
There should be no surprises for the HSA owner.
He or she should receive periodic statements
on how much is in the HSA, how much it has
earned in interest or investment returns, fees or
administrative expenses (i.e., maintenance, check
replacement) and expenses paid out of the HSA.
The IRS prototype forms for HSA custodial
accounts (5305-C) and HSA Trust Accounts
(5305-B) can be found on the IRS website at www.
irs.gov.
HSA Owner Responsibilities
The law requires certain actions by the HSA owner.
Excess contributions are subject to an excise tax. It
is the responsibility of the HSA owner to determine
whether contributions have exceeded the maximum
annual contribution limit, notify the trustee of the excess
funds and request withdrawal of the excess funds and
any income attributable to them. The HSA owner is also
responsible for determining whether a distribution is for
payment of qualified expenses and maintaining records to
substantiate that expense, not the trustee nor the HSA
owner’s employer.
8-7
Chapter 8
Estate Treatment of HSAs
In the event of a death, if the decedent was married,
and the surviving spouse is listed as the beneficiary, the
surviving spouse is treated as the owner, and the account
retains its character as an HSA. If no spouse survives, the
account will no longer be treated as an HSA upon the
death of the owner. The account is then included in the
estate of the owner, and thus taxable to the recipient.
However, the taxable amount will be reduced by the
amount of the estate tax paid due to the inclusion of
the HSA in the deceased individual’s estate, as well as
any qualified medical expenses incurred by the deceased
prior to death and paid by the recipient out of the HSA
for up to one year.
Employer Requirements
Your employer may offer you an HSA and may
contribute to the HSA on your behalf. If you do not
obtain your HSA through an employer, but rather
directly from an insurer or other vendor, your plan is not
subject to the requirements that apply to an employer
plan. However, you should still read this section to
understand how your HSA differs from other tax-favored
savings plans you might have.
Private Employers - Overview
Two government agencies share most of the federal
regulation of private employer benefit plans: The U.S.
Department of Labor and the IRS. Generally, the
Department of Labor enforces participants’ benefit rights
under The Employee Retirement Income Security Act
8-8
The HSA Law
(ERISA) and the IRS makes sure employers meet the tax
code rules that allow them to sponsor and deduct the
costs of benefit plans.
ERISA, the federal law that regulates employee benefit
plans, generally preempts state laws as they apply to
private-sector employee benefit plans. For instance, state
laws can’t be enforced against an employee benefit plan
even if the state law sets higher standards of benefits
than available in the plan.
However, HSAs pose new challenges to define and
operationalize a health savings vehicle in an employment
setting. If HSAs are covered by ERISA, they are required
to distribute summary plan descriptions, file Form 5500
and meet fiduciary obligations on investments particular
to ERISA.
According to the Department of Labor (DOL Field
Assistance Bulletin 2004-1), HSAs are not considered
ERISA-covered employee benefit plans, as long as the
employer’s involvement is limited. Essentially, DOL
created a safe harbor for HSA plans, meaning as long as
these plans meet certain criteria, they will be safe from
classification as an employee benefit plan.
The HSA is considered by DOL to be a personal health
care savings vehicle, rather than group insurance. DOL
created a safe harbor exemption for HSAs from ERISA
even if the employer makes contributions to the HSA,
which must be completely voluntary, with the following
caveats:
8-9
Chapter 8
• The employer cannot limit the ability of
eligible employees to move their funds
to another HSA beyond the restrictions
provided in the Internal Revenue Code;
• The employer cannot impose conditions on
utilization of HSA funds beyond restrictions
permitted by the Code;
• The employer cannot make or influence
investment decisions with respect to funds
contributed to the HSA;
• The employer cannot represent the HSA as
an employee welfare benefit plan established
or maintained by the employer; and
• The employer cannot receive any payment
or compensation in connection with the
HSA.
If an HSA meets these requirements and therefore, is
not considered an ERISA plan, it is subject to state law.
An HSA that is not an ERISA plan—either because the
employer made that choice or because you did not
obtain it through an employer—lacks a key protection
other ERISA savings plans have. Funds you accumulate in
an employer-sponsored pension plan are shielded from
your creditors in the event that you declare personal
bankruptcy. Because an HSA is not an ERISA plan,
your creditors can attach balances in your account in a
bankruptcy.
The HDHP and ERISA
Unless another ERISA exemption applies (i.e., the plan
8 - 10
The HSA Law
is sponsored by a governmental or church entity), an
HDHP offered by an employer would be an ERISA plan.
It would then be subject to all the fiduciary, reporting
and disclosure rules imposed on employee benefit plans
under federal law.
Comparability Rule
Employer contributions to employees’ HSAs must be
comparable for all employees participating in the HSA.
Comparability under IRS regulation requires the same
dollar amount or the same percentage of the annual
deductible amount for the HSA contribution. However,
it is only necessary to count employees who are eligible
individuals and have the same category of coverage (such
as individual or family). Part-time employees (customarily
those who are employed fewer than 30 hours per week)
are tested separately. If the employer contributions
fail the comparability test, there will be an excise tax
imposed on the employer equal to 35 percent of the
amount the employer contributed to the HSA.
Unless it is done through a cafeteria plan, employers may
not make matching contributions that are conditioned
on a contribution by the employee. For example, an
employer may not offer to contribute $500 to your
account on the condition that you contribute some
amount as well (see chapter 2, page 2-16). With the
passing of the new legislation beginning with the 2007
tax year, there is now an exception to the comparability
rule. Employers may now contribute more to HSAs of
non-highly compensated employees. The IRS will use the
8 - 11
Chapter 8
same definition of “highly compensated employees” for
HSAs as they do with other retirement accounts.
Governmental Employer Plans
Federal, state and local government employers are not
subject to ERISA. The Office of Personnel Management
administers federal employee benefit law. State and
local government employees should look to the agencies
charged with administering their benefit plans. States
and localities may vary widely on issues of reporting,
comparability, eligibility, fiduciary obligations, and recordkeeping.
Bankruptcy
There is no exemption in the law specifically protecting
HSA balances from the reach of bankruptcy creditors.
This means that if the balance in the HSA is taken and
used towards the outstanding debits of other creditors,
the account holder would be subject to income tax
and the 10 percent penalty on the amount used for
nonqualified withdrawals. However, under the 2005
federal bankruptcy law, an individual debtor may deduct
any reasonably necessary health insurance, disability
insurance and health savings account expenses for the
debtor, the spouse of the debtor or the dependents of
the debtor when determining his or her statement of
monthly income.
State Law
State insurance laws often require health plans to
provide certain health care benefits without regard to
8 - 12
The HSA Law
the deductible or on terms no less favorable than other
care provided by the health plan. In order for the HDHP
to be able to offer preventive care, the IRS has defined
the standards for preventive care—what can be paid for
by the plan without jeopardizing the plan’s tax status—
rather than adopting the characterization of preventive
care that applies under state law. So a plan that meets
federal law may not meet the requirements of the state
law. If you live in a state whose insurance laws conflict
with the federal law governing HSAs, you may not be
able to enroll in an HSA unless it is combined with an
employer self-insured HDHP. Self-insured plans are
funded by employers and, unlike those sold by insurance
companies, do not have to comply with state benefit
laws. State legislatures are in the process of deciding
how best to deal with HSAs, and some are enacting
exemptions from state mandates for plans that meet
the federal criteria for HSA/HDHPs. Your insurance
company or broker will be able to help you determine
whether qualified plans are available in your area.
It is also important to recognize that, while the HSA is
a pre-tax savings vehicle under federal income tax law,
it may not qualify for tax breaks under state or local
income tax laws or under the state component of the tax
that finances unemployment benefits. State tax law and
state estate law may also affect how HSAs are treated.
As of January 1, 2007, the following states have some tax
conflicts in regards to HSA:
• Alabama – not income tax exempt
8 - 13
Chapter 8
• California - not income tax exempt
• New Hampshire – tax dividends and interest
earned on account
• New Jersey - not income tax exempt
• Tennessee – tax dividends and interest
earned on account
• Wisconsin - not income tax exempt
Many states are in the process of changing their laws to
comply with federal treatment of HSAs. The Council
for Affordable Health Insurance periodically publishes
reports on their website (www.cahi.org) on the progress
of updating these state tax laws.
Keep in Mind
• To get the tax benefits from an HSA, there
are certain rules of eligibility, contribution,
distribution and filing that the owner must
follow.
• The HSA is treated as a trust, and with that
come certain responsibilities and protections
for you and your beneficiaries.
• The Department of Labor has provided
guidance on HSAs, noting that if certain
rules are followed, they will not be
considered employee benefit plans even if an
employer sponsors them.
• State law is evolving in terms of how tax,
estate and mandated benefit laws treat
HSAs.
8 - 14
The HSA Law
Up Next
This chapter concludes the main body of this book.
The remaining sections include a glossary of terms used
in this book, examples of the forms you might have
to fill out or receive as an HSA owner, and additional
information from IRS Publication 502 regarding how you
can and cannot spend your HSA dollars, tax-free.
8 - 15
Chapter 8
Table 8.1
How Various Types of HSA Contributions Are Treated
Under Federal and State Income and Payroll Taxes
Income and Payroll Taxes
Type of HSA
Contribution
Federal
State or Local
Income Tax
Income Tax
Social
Security
(FICA)1
Unemployment
Tax (FUTA)
State
Federal
Non-Taxable
for employer
and employee
Depends on
state or local
laws
Nontaxable for
employer
and
employee
Above-the-line
deduction on
employee’s
returns3
Depends on
state or local
laws
Taxable
• To own account
through cafeteria
plan4
Non-Taxable
Depends on
state or local
laws
NonTaxable
• To another
person’s account5
Above-theline deduction
on account
owner’s
returns
Depends on
state or local
laws6
Taxable
Not Applicable
Contribution by
self-employed
person, partner,
or S-corporation
shareholder7
Above-theline deduction
on account
owner’s return
Depends on
state or local
laws
Taxable
Not Applicable
Employer
Contribution
Depends
on State
NonTaxable
Employee
Contribution2
• To own account
8 - 16
Not Applicable
Depends
on State
NonTaxable
The HSA Law
1Or Railroad Retirement Fund, if applicable
2This table assumes that employee contributions are made out of earned
income such as salaries, wages, and self- employment earnings, or
partnership distributions. Income such as pensions or investment earnings is
not included in the payroll tax base.
3This deduction reduces the account owner’s adjusted gross income for the
tax purposes.
4Employee contributions to an HSA through a cafeteria plan are considered
employer contributions for federal income tax purposes.
5The person must not be eligible to be claimed as a dependent on another
person’s income tax return.
6This deduction reduces the account owner’s adjusted gross income for tax
purposes, but not that of the person making the contribution.
7These persons are generally not considered employees and cannot receive
an employer contribution
8 - 17
Appendix
4 Glossary of Health Care Coverage Terms
4 IRS Forms
4 Updates
4 How You Can Spend Your Tax-Free HSA Dollars
4 How You Cannot Spend Your Tax-Free HSA Dollars
4 Index
Glossary
Glossary of Health Care Coverage Terms
Above-the-line deduction. For income tax filing purposes,
one that is applied in arriving at adjusted gross income,
and thus is available to taxpayers whether or not they
itemize deductions.
Authorization. A health insurance plan’s permission to
proceed with a medical or surgical procedure.
Cafeteria plan. An employee benefit plan that allows
employees to choose benefits from a number of different
options, including pensions and savings, health, other
insurance and time off. The term “cafeteria plan” is often
used interchangeably with “flexible spending account”.
Calendar year. January 1 to December 31 of the same
year. The calendar year is distinguished from the plan
year; the latter may be any 12-month period established
by an employer or insurer for managing the plan and
accounting for benefit payments.
Certificate of Coverage. Evidence of prior health coverage.
It is required to be issued under HIPAA. An enrollee
may need to provide this certificate to be exempt from
limitations on coverage for pre-existing conditions.
Chronic condition. A condition that lasts a long time, or
recurs frequently and can be treated but not eradicated.
COBRA (for the Consolidated Omnibus Budget
Reconciliation Act of 1985, the law that instituted this
coverage). The law that provides for the temporary
A-1
Appendix
continuation of group health plan coverage available after
a qualifying event to certain employees, retirees and
family members who are qualified beneficiaries.
Coinsurance. The percentage of an insurance claim for
which the patient is responsible.
Conversion coverage. After employer-sponsored or
COBRA coverage ends, this coverage is purchased directly
from your insurance company or managed care plan.
Co-payments. Fixed-dollar payments the patient makes
per doctor visit or prescription filled. For example, many
HMOs and PPOs impose a co-payment (sometimes called
a “co-pay”) of $5 or $10 for an in-network physician visit.
Covered services. The medically necessary treatments your
plan undertakes to pay for, at least in part.
Custodian. An entity that is responsible for the
maintenance of an account but has no investment or
management responsibilities.
Deductible. The amount of covered expenses that an
individual must pay before any charges are paid by the
medical care plan.
Eligible individual (for HSA).
• The individual must be covered under an
HDHP on the first day of any month for
which eligibility is claimed;
A-2
Glossary
• With the exception of permitted coverage,
the individual may not also be covered
under any health plan that is not an HDHP;
• The individual must not be eligible for
Medicare coverage, either by virtue of
reaching age 65 or qualifying for Social
Security disability benefits; and
• The individual may not be claimed as a
dependent on another individual’s tax
return.
Emergency. The sudden onset of a condition or an
accidental injury requiring immediate medical or surgical
care to avoid death or permanent disability.
Employee Assistance Plan. An employee benefit that
covers all or part of the cost for employees to receive
counseling, referrals and advice in dealing with stressful
issues in their lives.
ERISA (Employee Retirement Income Security Act). A
federal law that governs private-sector employee benefit
plans.
Excess contribution. HSA contribution that is more than
allowed by law.
Exclusions. Medical coverages, services, or conditions for
which a particular health care plan or policy will not pay.
A-3
Appendix
First-dollar coverage. This term may mean different things
in different plans. For purposes of HSAs and HDHPs, it
refers to benefits that pay the entire covered or eligible
amount without the application of a deductible, or with
just the application of a co-payment or coinsurance
amount. An HDHP may not provide first-dollar coverage
except for certain specified benefits.
Flexible spending account. An arrangement that allows
employees to set aside pre-tax earnings to pay for
benefits or expenses that are not paid by their insurance
or benefit plans. A flexible spending account may be freestanding or part of a cafeteria plan.
Gatekeeper. The doctor, usually a primary care doctor,
pediatrician, or internist, responsible for overseeing and
coordinating all aspects of a patient’s care. In an HMO,
the gatekeeper must preauthorize all referrals, except
emergencies.
Grace period. A temporary extension of a tax law
provision, or a period during which an otherwise
applicable tax law provision does not apply. A grace
period generally differs from a transition rule in that
the latter provides for a gradual change from a prior
provision to a new provision, but the two terms may also
be used interchangeably.
Grandfathering. A tax law provision under which a plan
feature that exists as of a certain date would be allowed
to exist indefinitely, even if a new plan formed after
the date of the law would not be allowed to have this
A-4
Glossary
feature. The law and regulations governing HSA/HDHP
plans do not provide for grandfathering.
Gross misconduct. Not specifically defined in COBRA
or in regulations under COBRA, and will depend on
the specific facts and circumstances. Generally, it can be
assumed that being fired for most ordinary reasons, such
as excessive absences or generally poor performance,
does not amount to “gross misconduct.”
Health Insurance Portability and Accountability Act (HIPAA).
A federal law that limits pre-existing condition exclusions,
permits special enrollment when certain life or work
events occur, prohibits discrimination against employees
and dependents based on their health status, and
guarantees availability and renewability of health coverage
to certain employees and individuals.
HMO (Health Maintenance Organization). A corporate
entity (for-profit or not-for-profit) that provides or
arranges for coverage of certain health services for a
fixed, prepaid premium.
Health reimbursement arrangement (HRA). An employerfunded account from which the employee is reimbursed
for qualified medical expenses, such as co-payments,
deductibles, vision care, prescriptions, long-term care
and medical insurance and most dental expenses.
Reimbursements are not taxed to the employee, and are
deductible by the employer.
A-5
Appendix
Home health care. Skilled nursing and related care
supplied to a patient at home. Such care may be available
only to someone who was previously hospitalized and is
recovering without need of hospital care.
Hospice care. Care given to terminally ill patients,
generally those with six months or less to live, that
emphasizes meeting emotional needs and coping with
pain. Care may be given in the patient’s home or in a
separate facility.
Hospital outpatient department. A facility where a full
range of non-urgent medical care is provided under the
supervision of a physician.
Indemnity plan. A plan that pays health insurance benefits
in the form of cash payments rather than services.
Individual retirement account. An opportunity for
individuals to save for retirement on a tax-deferred
basis. Individuals may contribute up to $2,000 per year
in an individual account; for spousal accounts the limits
are $4,000 if both spouses work and $2,250 if one
spouse works. The amount that is tax deductible varies
according to an individual’s pension coverage, income
tax filing status and adjusted gross income. Account
balances distributed from one IRA or from an employersponsored retirement plan may be rolled over to another
IRA.
Managed care plan. A health plan that limits costs by
limiting the reimbursement levels paid to providers, by
A-6
Glossary
monitoring health care utilization by participants, or both.
Matching contributions. Employer contributions that are
paid to the employee’s account only if the employee also
contributes some specified amount.
Medically necessary treatments. Those treatments that
are appropriate for the diagnosis, care, or treatment of
a certain injury or condition involved. Check your plan’s
definition. Whether or not a given service is covered
may depend on where and by whom it is delivered.
Medicare. A health insurance program for people age 65
or older, the disabled and people with end-stage renal
disease who require dialysis or transplantation. Medicare
is part of the Social Security system.
Medicare Part A. Covers hospital insurance that pays for
inpatient hospital stays, care in a skilled nursing facility,
hospice care and some home health care.
Medicare Part B. Medical insurance that helps pay for
doctors’ services, outpatient hospital care, durable
medical equipment and some medical services that are
not covered by Part A.
Medigap insurance. Private insurance that supplements
Medicare. It reimburses out-of-pocket costs that are not
covered by Medicare and that are the beneficiary’s share
of health care costs.
A-7
Appendix
Network plan. A plan that generally provides more
favorable benefits for services provided by its network of
providers than for services provided outside the network.
Nondiscriminatory contributions. Employer contributions
are considered nondiscriminatory if the employer
makes comparable contributions on behalf of all eligible
employees with comparable coverage during the same
period. Contributions are considered comparable if
they are either the same dollar amount or the same
percentage of the deductible under the HDHP.
Open season or open enrollment. A period of time during
which employees may change health plans without
incurring costs or penalties.
Out-of-pocket limits. Most health insurance plans limit the
out-of-pocket expenses that you have to pay in a given
plan year. Amounts you pay as deductibles, co-payments,
or coinsurance, are included in your out-of-pocket
expenses, which are kept as a running total. Insurance
premiums are not counted toward out-of-pocket limits.
Once you have reached your plan’s limit for the year,
remaining eligible expenses are covered at 100 percent
regardless of the plan’s usual co-payment or coinsurance
arrangements. Some plans refer to this limit as the stoploss limit.
Permitted coverage. Coverage an individual may maintain,
in addition to an HDHP, without losing eligibility for an
HSA, even though the coverage may provide first-dollar
coverage for certain medical expenses.
A-8
Glossary
Plan administrator. The person or firm designated by your
health plan or employer to handle day-to-day details of
record keeping, claims handling and filing of reports.
Plan participant or beneficiary. An employee or dependent
of that employee who is participating, receiving benefits,
or eligible to receive benefits from an employee benefit
plan.
Plan year. The calendar year (January 1 to December
31), or some other twelve-month period your employer
or insurer chooses for managing your plan and keeping
track of deductibles and other limits.
Point of Service (POS). Managed care plan that allows
patients to see doctors not included in the plan for an
increased fee. Usually found as part of an HMO.
Portable account. One that can be carried from job to job
and from group plans to individual coverage.
Pre-existing condition. In general, a mental or physical
condition that began before the plan member became
covered under a particular plan. However, specific
plans may define pre-existing conditions differently; a
common definition includes conditions for which the
member received treatment during the 90 days prior to
enrollment in the plan.
PPO (Preferred Provider Organization). An arrangement
A-9
Appendix
between doctors and others who provide medical
services and an insurer to offer services at a discounted
rate in exchange for the insurer sending patients their
way. It usually has some utilization review.
Primary payor. The health care plan that pays its share of
covered expenses first, when a consumer has access to
two different health plans. While the secondary payor
pays some or all of the amounts left over, even if that
amount is less than the secondary plan would otherwise
pay. This applies to Medicare if you are still covered
under an employer plan.
Prohibited transaction. The sale, exchange or lease of
property, borrowing or lending money, furnishing goods,
services or facilities, transferring to or use by or for the
benefit of the beneficiary of any assets contained in the
account. Pledging account assets—as security for a loan,
for example—also constitutes a prohibited transaction.
Provider. Whoever provides health care from your health
plan, including doctors, therapists, nurse-practitioners
and anyone else who provides medical services.
Provider discount. A reduced rate a doctor, hospital, or
other health care professional or facility agrees to accept
when they enroll in a health plan’s network.
Prudent layperson standard. Under this standard,
emergency care is covered in a health care plan if the
decision to go to the ER was one that an average person
A - 10
Glossary
with average medical knowledge would make at the time.
Qualified medical expenses. Expenses paid by the account
beneficiary or owner, his or her spouse, or dependents,
for medical care as defined in section 213(d) of the
Internal Revenue Code. These are generally the same
expenses as those that individual taxpayers can deduct
on their federal income tax returns. Certain types of
health insurance premiums are also considered qualified
medical expenses for purposes of HSAs.
Referral. A recommendation of a medical professional. In
HMOs and other managed care plans, a referral is usually
necessary to see any practitioner or specialist other than
your gatekeeper physician, if you want the service to be
covered.
Release. Your permission for specified medical
information to be released to a specific person or entity.
State law limits sometimes information in a release.
Repricing. The adjustment of health care providers’
“sticker prices” to reflect discounts the providers may
have negotiated with your health plan.
Rollover contribution. Transfer of an account balance from
one financial institution to another or from one type of
account to another.
Safe harbor. If an activity is deemed to meet certain
authorized criteria, they will be safe from not being in
compliance with the law or regulation
A - 11
Appendix
Screening services. Medical tests designed to detect
treatable diseases or conditions.
Section 401(k) plan. A defined contribution retirement
plan that allows participants to have a portion of their
compensation (otherwise payable in cash) contributed
pre-tax to a retirement account on their behalf. The plan
is named after the section of the Internal Revenue Code
that establishes the rules for the plan.
Self-insured plan. One under which the employer pays for
medical claims as they arise rather than contracting for
coverage from an insurer.
Transition rule. Gradual change in a law that eases the
impact of a change on affected taxpayers.
Trust. Legal instrument allowing one party (the trustee)
to control property for the benefit of another.
Trustee. An entity that directs the investment of the funds
in a trust account and has management responsibilities.
Umbrella deductible. A stated maximum amount of
expenses a family could incur before receiving benefits.
Usual and customary charges. An insurance company’s
estimate of “the going rate” to be paid in a geographical
area for a given medical claim.
A - 12
How You Can Spend Your Tax-Free HSA Dollars
IRS Forms
Please check www.irs.gov for more details.
Relevant forms include:
W-2: the 2007 edition of this form with a block for HSA
reporting is available at the following link: http://www.
irs.gov/pub/irs-pdf/fw2.pdf
Form 1040/1040EZ – Individual tax return
Form 1099-SA: http://www.irs.gov/pub/irs-pdf/
f1099sa.pdf
Form 5498-SA: http://www.irs.gov/pub/irs-pdf/
f5498sa.pdf
Instruction for the above forms can be viewed at: http://
www.irs.gov/pub/irs-pdf/i1099sa.pdf
Form 5305b: http://www.irs.gov/pub/irs-pdf/f5305b.
pdf
Form 5305c: http://www.irs.gov/pub/irs-pdf/f5305c.
pdf
Updates
Please see www.hsaguidebook.com for recent updates.
A - 13
Appendix
Publication 502 Excerpt for tax year 2003
The IRS will provide direction on an annual basis
regarding which medical and dental expenses you can
and cannot deduct from your taxes and are therefore
payable from your HSA. Please refer to www.irs.gov for
up-to-date versions of Publication 502.
What Medical and Dental Expenses Are Included?
Following is a list of items that you can include in figuring
your medical expense deduction. The items are listed in
alphabetical order.
Abortion.You can include in medical expenses the
amount you pay for a legal abortion.
Acupuncture. You can include in medical expenses the
amount you pay for acupuncture.
Alcoholism. You can include in medical expenses
amounts you pay for an inpatient’s treatment at a
therapeutic center for alcohol addiction. This includes
meals and lodging provided by the center during
treatment.
You can also include in medical expenses amounts you
pay for transportation to and from Alcoholics meetings in
your community if the attendance is pursuant to medical
advice that membership in Alcoholics Anonymous is
necessary for the treatment of alcoholism.
A - 14
Ambulance. You can include in medical expenses
amounts you pay for ambulance service.
Artificial limb. You can include in medical expenses the
amount you pay for an artificial limb.
Artificial teeth. You can include in medical expenses
the amount you pay for artificial teeth.
Autoette. See Wheelchair, below.
Bandages. You can include in medical expenses the cost
of medical supplies such as bandages used to cover torn
skin.
Breast reconstruction surgery. You can include
in medical expenses the amounts you pay for breast
reconstruction surgery following a mastectomy for
cancer.
Birth control pills. You can include in medical expenses
the amount you pay for birth control pills prescribed by
a doctor.
Braille books and magazines. You can include in
medical expenses the part of the cost of Braille books
and magazines for use by a visually-impaired person that
is more than the cost of
regular printed editions.
Capital expenses. You can include in medical expenses
amounts you pay for special equipment installed in a
home, or for improvements, if their main purpose is
medical care for you, your spouse, or your dependent.
A - 15
Appendix
The cost of permanent improvements that increase
the value of your property may be partly included as
a medical expense. The cost of the improvement is
reduced by the increase in the value of your property.
The difference is a medical expense. If the value of your
property is not increased by the improvement, the entire
cost is included as a medical expense.
Certain improvements made to accommodate a home to
your disabled condition, or that of your spouse or your
dependents who live with you, do not usually increase
the value of the home and the cost can be included in full
as medical expenses. These improvements include, but
are not limited to, the following items.
• Constructing entrance or exit ramps for
your home.
• Widening doorways at entrances or exits to
your home.
• Widening or otherwise modifying hallways
and interior doorways.
• Installing railings, support bars, or other
modifications to bathrooms.
• Lowering or modifying kitchen cabinets and
equipment.
• Moving or modifying electrical outlets and
fixtures.
• Installing porch lifts and other forms of lifts
(but elevators generally add value to the
house).
• Modifying fire alarms, smoke detectors, and
A - 16
other warning systems.
• Modifying stairways.
• Adding handrails or grab bars anywhere
(whether or not in bathrooms).
• Modifying hardware on doors.
• Modifying areas in front of entrance and exit
doorways.
• Grading the ground to provide access to the
residence.
Only reasonable costs to accommodate a home to
a disabled condition are considered medical care.
Additional costs for personal motives, such as for
architectural or aesthetic reasons, are not medical
expenses.
Capital expense worksheet. Use Worksheet A to figure
the amount of your capital expense to include in your
medical expenses.
A - 17
Appendix
Worksheet A. Capital Expense Worksheet
Example. You have a heart ailment. On your doctor’s
advice, you install an elevator in your home so that you
will not have to climb stairs. The elevator costs $8,000.
An appraisal shows that the elevator increases the
value of your home by $4,400. You figure your medical
expense as shown in the filled-in example of Worksheet A.
A - 18
Worksheet B. Capital Expense Worksheet
Illustrated
Operation and upkeep. Amounts you pay for
operation and upkeep of a capital asset qualify as medical
expenses, as long as the main reason for them is medical
care. This rule applies even if none or only part of the
original cost of the capital asset qualified as a medical
care expense.
Example. If, in the previous example, the elevator
increased the value of your home by $8,000, you would
have no medical expense for the cost of the elevator.
A - 19
Appendix
However, the cost of electricity to operate the elevator
and any costs to maintain it are medical expenses as long
as the medical reason for the elevator exists.
Improvements to property rented by a
person with a disability
Amounts paid to buy and install special plumbing
fixtures for a person with a disability, mainly for
medical reasons, in a rented house are medical
expenses.
Example. John has arthritis and a heart condition.
He cannot climb stairs or get into a bathtub. On his
doctor’s advice, he installs a bathroom with a shower
stall on the first floor of his two-story rented house.
The landlord did not pay any of the cost of buying
and installing the special plumbing and did not lower
the rent. John can include in medical expenses the
entire amount he paid.
Car. You can include in medical expenses the cost
of special hand controls and other special equipment
installed in a car for the use of a person with a disability.
Special design. You can include in medical expenses
the difference between the cost of a regular car and a
car specially designed to hold a wheelchair.
Cost of operation. You cannot deduct the cost of
operating a specially equipped car, except as discussed
under Transportation, below.
A - 20
Chiropractor. You can include in medical expenses fees
you pay to a chiropractor for medical care.
Christian Science practitioner. You can include in
medical expenses fees you pay to Christian Science
practitioners for medical care.
Contact lenses. You can include in medical expenses
amounts you pay for contact lenses needed for medical
reasons. You can also include the cost of equipment and
materials required for using contact lenses, such as saline
solution and enzyme cleaner. See Eyeglasses and Eye
Surgery, below.
Crutches. You can include in medical expenses the
amount you pay to buy or rent crutches.
Dental treatment. You can include in medical expenses
the amounts you pay for dental treatment. This
includes fees paid to dentists for X-rays, fillings, braces,
extractions, dentures, etc. But see Teeth Whitening under
What Expenses Are Not Includible, below.
Diagnostic devices. You can include in medical
expenses the cost of devices used in diagnosing and
treating illness and disease.
Example. You have diabetes and use a blood sugar test
kit to monitor your blood sugar level. You can include
the cost of the blood sugar test kit in your medical
expenses.
A - 21
Appendix
Disabled dependent care expenses. Some disabled
dependent care expenses may qualify as either:
• Medical expenses, or
• Work-related expenses for purposes of
taking a credit for dependent care.
You can choose to apply them either way as long as you
do not use the same expenses to claim both a credit and
a medical expense deduction.
Drug addiction. You can include in medical expenses
amounts you pay for an inpatient’s treatment at a drug
treatment center. This includes meals and lodging at the
center during treatment.
Drugs. See Medicines, below.
Eyeglasses. You can include in medical expenses
amounts you pay for eyeglasses and contact lenses
needed for medical reasons. You can also include fees
paid for eye examinations.
Eye surgery. You can include in medical expenses the
amount you pay for eye surgery to treat defective vision,
such as laser eye surgery or radial keratotomy.
Fertility enhancement. You can include in medical
expenses the cost of the following procedures to
overcome an inability to have children.
A - 22
• Procedures such as in vitro fertilization
(including temporary storage of eggs or
sperm).
• Surgery, including an operation to reverse
prior surgery that prevented the person
operated on from having children.
Founder’s fee. See Lifetime care—advance payments,
below.
Guide dog or other animal. You can include in medical
expenses the cost of a guide dog or other animal to be
used by a visually-impaired or hearing-impaired person.
You can also include the cost of a dog or other animal
trained to assist persons with other physical disabilities.
Amounts you pay for the care of these specially trained
animals are also medical expenses.
Health institute. You can include in medical expenses
fees you pay for treatment at a health institute only if the
treatment is prescribed by a physician and the physician
issues a statement that the treatment is necessary to
alleviate a physical or mental defect or illness of the
individual receiving the treatment.
Health Maintenance Organization (HMO). You can
include in medical expenses amounts you pay to entitle
you, or your spouse or a dependent to receive medical
care from a health maintenance organization. These
amounts are treated as medical insurance premiums. See
Insurance Premiums, below.
Hearing aids. You can include in medical expenses
the cost of a hearing aid and the batteries you buy to
operate it.
A - 23
Appendix
Home care. See Nursing Services, below.
Home improvements. See Capital Expenses, above.
Hospital services. You can include in medical expenses
amounts you pay for the cost of inpatient care at a
hospital or similar institution if a principal reason for
being there is to receive medical care. This includes
amounts paid for meals and lodging. Also see Lodging,
below.
Insurance premiums. You can include in medical
expenses insurance premiums you pay for policies that
cover medical care. Policies can provide payment for:
• Hospitalization, surgical fees, X-rays, etc. or
• Prescription drugs or
• Replacement of lost or damaged contact
lenses or
• Membership in an association that gives
cooperative or so-called “free-choice”
medical service, or group hospitalization and
clinical care or
• Qualified long-term care insurance contracts
(subject to additional limitations). See
Qualified Long-Term Care Insurance
Contracts under Long-Term Care, below
If you have a policy that provides more than one kind of
payment, you can include the premiums for the medical
care part of the policy if the charge for the medical part
is reasonable. The cost of the medical part must be
A - 24
separately stated in the insurance contract or given to
you in a separate statement.
Note. If advance payments of the health coverage tax
credit were made on your behalf to your insurance
company, do not include any advance payments made
for you when figuring the amount you may deduct for
insurance premiums. Also, if you are claiming the health
coverage tax credit, subtract the amount shown on line
4 of Form 8885 (reduced by any advance payments
shown on line 6 of that form) from the total insurance
premiums you paid.
Employer-sponsored health insurance plan. Do
not include in your medical and dental expenses on
Schedule A (Form 1040) any insurance premiums paid
by an employer-sponsored health insurance plan unless
the premiums are included in box 1 of your Form W–2.
Also, do not include on Schedule A (Form 1040) any
other medical and dental expenses paid by the plan
unless the amount paid is included in box 1 of your Form
W–2.
Example. You are a federal employee participating in
the Federal Employee Health Benefits (FEHB) program.
Your share of the FEHB premium is paid with pre-tax
dollars. Because you are an employee whose insurance
premiums are paid with money that is never included
in your gross income, you cannot deduct the premiums
paid with that money.
A - 25
Appendix
Flexible spending arrangement.
Contributions made by your employer to provide
coverage for qualified long-term care services under
a flexible spending or similar arrangement must be
included in your income. This amount will be reported as
wages in box 1 of your Form W–2.
Health reimbursement arrangement (HRA).
If you have medical expenses that are reimbursed by a
health reimbursement arrangement, you cannot include
those expenses in your medical expenses. This is because
an HRA is funded solely by the employer.
Medicare A
If you are covered under social security (or if you are a
government employee who paid Medicare tax), you are
enrolled in Medicare A. The payroll tax paid for Medicare
A is not a medical expense. If you are not covered under
social security (or were not a government employee who
paid Medicare tax), you can voluntarily enroll in Medicare
A. In this situation the premiums you paid for Medicare
A can be included as a medical expense on your tax
return.
Medicare B
Medicare B is a supplemental medical insurance.
Premiums you pay for Medicare B are a medical expense.
If you applied for it at age 65 or after you became
disabled, you can deduct the monthly premiums you
paid. If you were over age 65 or disabled when you first
enrolled, check the information you received from the
Social Security Administration to find out your premium.
A - 26
Prepaid insurance premiums
Premiums you pay before you are age 65 for insurance
for medical care for yourself, your spouse, or your
dependents after you reach age 65 are medical care
expenses in the year paid if they are:
• 1. Payable in equal yearly installments or
more often, and
• 2. Payable for at least 10 years, or until you
reach age 65 (but not for less than 5 years).
Unused sick leave used to pay premiums
You must include in gross income cash payments you
receive at the time of retirement for unused sick leave.
You must also include in gross income the value of
unused sick leave that, at your option, your employer
applies to the cost of your continuing participation in
your employer’s health plan after you retire. You can
include this cost of continuing participation in the health
plan as a medical expense.
If you participate in a health plan where your employer
automatically applies the value of unused sick leave to
the cost of your continuing participation in the health
plan (and you do not have the option to receive cash),
do not include the value of the unused sick leave in
gross income. You cannot include this cost of continuing
participation in that health plan as a medical expense.
Insurance premiums you cannot include
You cannot include premiums you pay for:
• Life insurance policies,
A - 27
Appendix
• Policies providing payment for loss of
earnings,
• Policies for loss of life, limb, sight, etc.,
• Policies that pay you a guaranteed amount
each week for a stated number of weeks if
you are hospitalized for sickness or injury, or
• The part of your car insurance premiums
that provides medical insurance coverage for
all persons injured in or by your car because
the part of the premium for you, your
spouse, and your dependents is not stated
separately from the part of the premium for
medical care for others.
Health insurance costs for self-employed
persons
If you were self-employed and paid health insurance
costs, see Health Insurance Costs for Self-Employed Persons,
below.
Laboratory fees. You can include in medical expenses
the amounts you pay for laboratory fees that are part of
medical care.
Lead-based paint removal. You can include in medical
expenses the cost of removing lead-based paints from
surfaces in your home to prevent a child who has or has
had lead poisoning from eating the paint. These surfaces
must be in poor repair (peeling or cracking) or within
the child’s reach. The cost of repainting the scraped area
is not a medical expense.
A - 28
If, instead of removing the paint, you cover the area
with wallboard or paneling, treat these items as capital
expenses. See Capital Expenses, above. Do not include
the cost of painting the wallboard as a medical expense.
Learning disability. See Special Education, below.
Legal fees. You can include in medical expenses
legal fees you paid that are necessary to authorize
treatment for mental illness. However, you cannot
include in medical expenses fees for the management
of a guardianship estate, fees for conducting the affairs
of the person being treated, or other fees that are not
necessary for medical care.
Lifetime care—advance payments. You can include
in medical expenses a part of a life-care fee or “founder’s
fee” you pay either monthly or as a lump sum under
an agreement with a retirement home. The part of the
payment you include is the amount properly allocable
to medical care. The agreement must require that you
pay a specific fee as a condition for the home’s promise
to provide lifetime care that includes medical care. You
can use a statement from the retirement home to prove
the amount properly allocable to medical care. The
statement must be based either on the home’s prior
experience or on information from a comparable home.
Dependents with disabilities. You can include
in medical expenses advance payments to a private
institution for lifetime care, treatment, and training
of your physically or mentally impaired child upon
A - 29
Appendix
your death or when you become unable to provide
care. The payments must be a condition for the
institution’s future acceptance of your child and must
not be refundable.
Payments for future medical care. Generally,
you cannot include in medical expenses current
payments for medical care (including medical
insurance) to be provided substantially beyond the
end of the year. This rule does not apply in situations
where the future care is purchased in connection
with obtaining lifetime care of the type described
above.
Lodging. You can include in medical expenses the cost
of meals and lodging at a hospital or similar institution if
a principal reason for being there is to receive medical
care. See Nursing Home, below.
You may be able to include in medical expenses
the cost of lodging not provided in a hospital or
similar institution. You can include the cost of such
lodging while away from home if all of the following
requirements are met.
1. The lodging is primarily for and essential to
medical care.
2. The medical care is provided by a doctor in a
licensed hospital or in a medical care facility
related to, or the equivalent of, a licensed
hospital.
3. The lodging is not lavish or extravagant under
A - 30
the circumstances.
4. There is no significant element of personal
pleasure, recreation, or vacation in the travel
away from home.
The amount you include in medical expenses for lodging
cannot be more than $50 for each night for each person.
You can include lodging for a person traveling with the
person receiving the medical care. For example, if a
parent is traveling with a sick child, up to $100 per night
can be included as a medical expense for lodging. Meals
are not included.
Do not include the cost of lodging while away from home
for medical treatment if that treatment is not received
from a doctor in a licensed hospital or in a medical care
facility related to, or the equivalent of, a licensed hospital
or if that lodging is not primarily for or essential to the
medical care received.
Long-term care. You can include in medical expenses
amounts paid for qualified long-term care services and
premiums paid for qualified long-term care insurance
contracts.
Qualified long-term care services. Qualified longterm care services are necessary diagnostic, preventive,
therapeutic, curing, treating, mitigating, rehabilitative
services, and maintenance and personal care services
(defined below) that are:
1. Required by a chronically ill individual, and
A - 31
Appendix
2. Provided pursuant to a plan of care prescribed by
a licensed health care practitioner.
Chronically ill individual. An individual is chronically
ill if, within the previous 12 months, a licensed health
care practitioner has certified that the individual meets
either of the following descriptions.
1. He or she is unable to perform at least two
activities of daily living without substantial
assistance from another individual for at least
90 days, due to a loss of functional capacity.
Activities of daily living are eating, toileting,
transferring, bathing, dressing, and continence.
2. He or she requires substantial supervision to be
protected from threats to health and safety due
to severe cognitive impairment.
Maintenance and personal care services.
Maintenance or personal care services is care which has
as its primary purpose the providing of a chronically
ill individual with needed assistance with his or her
disabilities (including protection from threats to health
and safety due to severe cognitive impairment).
Qualified long-term care insurance contracts
A qualified long-term care insurance contract is an
insurance contract that provides only coverage of
qualified long-term care services. The contract must:
1. Be guaranteed renewable
A - 32
2. Not provide for a cash surrender value or other
money that can be paid, assigned, pledged, or
borrowed
3. Provide that refunds, other than refunds on the
death of the insured or complete surrender
or cancellation of the contract, and dividends
under the contract must be used only to reduce
future premiums or increase future benefits
4. Generally not pay or reimburse expenses
incurred for services or items that would be
reimbursed under Medicare, except where
Medicare is a secondary payer, or the contract
makes per diem or other periodic payments
without regard to expenses.
The amount of qualified long-term care premiums you
can include is limited. You can include the following as
medical expenses on Schedule A (Form 1040).
Qualified long-term care premiums up to the
amounts shown below.
a. Age 40 or under – $250.
b. Age 41 to 50 – $470.
c. Age 51 to 60 – $940.
d. Age 61 to 70 – $2,510.
e. Age 71 or over – $3,130.
Unreimbursed expenses for qualified long-term care
services.
Note. The limit on premiums is for each person.
Meals. You can include in medical expenses the cost
of meals at a hospital or similar institution if a principal
reason for being there is to get medical care.
You cannot include in medical expenses the cost of meals
that are not part of inpatient care.
A - 33
Appendix
Medical conferences. You can include in medical
expenses amounts paid for admission and transportation
to a medical conference if the medical conference
concerns the chronic illness of yourself, your spouse, or
your dependent. The costs of the medical conference
must be primarily for and necessary to the medical care
of you, your spouse, or your dependent. The majority of
the time spent at the conference must be spent attending
sessions on medical information.
The cost of meals and lodging while attending the
conference is not deductible as a medical expense.
Medical information plan. You can include in medical
expenses amounts paid to a plan that keeps medical
information in a computer data bank and retrieves and
furnishes the information upon request to an attending
physician.
Medical services. You can include in medical expenses
amounts you pay for legal medical services provided by:
• Physicians
• Surgeons
• Specialists
• Other medical practitioners
Medicines. You can include in medical expenses
amounts you pay for prescribed medicines and drugs. A
prescribed drug is one that requires a prescription by a
doctor for its use by an individual. You can also include
amounts you pay for insulin.
A - 34
Note. This rule applies only to the deduction for
medical expenses. It does not limit reimbursements
of medical expenses by employer-sponsored health
plans that reimburse the cost of both prescription
and nonprescription medicines.
Mentally challenged, special homes for. You
can include in medical expenses the cost of keeping
a mentally challenged person in a special home, not
the home of a relative, on the recommendation of a
psychiatrist to help the person adjust from life in a mental
hospital to community living.
Nursing home. You can include in medical expenses
the cost of medical care in a nursing home, home for
the aged, or similar institution, for yourself, your spouse,
or your dependents. This includes the cost of meals and
lodging in the home if a principal reason for being there
is to get medical care.
Do not include the cost of meals and lodging if the
reason for being in the home is personal. You can,
however, include in medical expenses the part of the cost
that is for medical or nursing care.
Nursing services. You can include in medical expenses
wages and other amounts you pay for nursing services.
The services need not be performed by a nurse as long
as the services are of a kind generally performed by a
nurse. This includes services connected with caring for
the patient’s condition, such as giving medication or
A - 35
Appendix
changing dressings, as well as bathing and grooming the
patient. These services can be provided in your home or
another care facility.
Generally, only the amount spent for nursing services is a
medical expense. If the attendant also provides personal
and household services, amounts paid to the attendant
must be divided between the time spent performing
household and personal services and the time spent
for nursing services. However, certain maintenance
or personal care services provided for qualified longterm care can be included in medical expenses. See
Maintenance and personal care services under Chronically
Ill Individuals, above. Additionally, certain expenses
for household services or for the care of a qualifying
individual incurred to allow you to work may qualify for
the child and dependent care credit. See Publication 503,
Child and Dependent Care Expenses.
You can also include in medical expenses part of the
amount you pay for that attendant’s meals. Divide the
food expense among the household members to find
the cost of the attendant’s food. Then divide that cost in
the same manner as in the preceding paragraph. If you
had to pay additional amounts for household upkeep
because of the attendant, you can include the extra
amounts with your medical expenses. This includes extra
rent or utilities you pay because you moved to a larger
apartment to provide space for the attendant.
Employment taxes. You can include as a medical
expense social security tax, FUTA, Medicare tax,
A - 36
and state employment taxes you pay for a nurse,
attendant, or other person who provides medical
care. If the attendant also provides personal and
household services, you can only include as a
medical expense, the amount of employment taxes
paid for medical services as explained above under
Nursing Services. For information on employment
tax responsibilities of household employers, see
Publication 926, Household Employer’s Tax Guide.
Operations. You can include in medical expenses
amounts you pay for legal operations that are not for
unnecessary cosmetic surgery. See Cosmetic Surgery
under What Expenses Are Not Includible, below.
Optometrist. See Eyeglasses, above.
Organ donors. See Transplants, below.
Osteopath. You can include in medical expenses
amounts you pay to an osteopath for medical care.
Oxygen. You can include in medical expenses amounts
you pay for oxygen and oxygen equipment to relieve
breathing problems caused by a medical condition.
Prosthesis. See Artificial Limb, above.
Psychiatric care. You can include in medical expenses
amounts you pay for psychiatric care. This includes the
cost of supporting a mentally ill dependent at a specially
equipped medical center where the dependent receives
A - 37
Appendix
medical care. See Psychoanalysis, next, and Transportation,
below.
Psychoanalysis. You can include in medical expenses
payments for psychoanalysis. However, you cannot
include payments for psychoanalysis that is part of
required training to be a psychoanalyst.
Psychologist. You can include in medical expenses
amounts you pay to a psychologist for medical care.
Special education. You can include in medical expenses
fees you pay on a doctor’s recommendation for a
child’s tutoring by a teacher who is specially trained
and qualified to work with children who have learning
disabilities caused by mental or physical impairments,
including nervous system disorders.
You can include in medical expenses the cost (tuition,
meals, and lodging) of attending a school that furnishes
special education to help a child to overcome learning
disabilities. A doctor must recommend that the child
attend the school. Overcoming the learning disabilities
must be a principal reason for attending the school,
and any ordinary education received must be incidental
to the special education provided. Special education
includes:
• Teaching Braille to a visually impaired person
• Teaching lip reading to a hearing impaired
person
A - 38
• Giving remedial language training to correct
a condition caused by a birth defect
You cannot include in medical expenses the cost of
sending a problem child to a school where the course
of study and the disciplinary methods have a beneficial
effect on the child’s attitude if the availability of medical
care in the school is not a principal reason for sending
the student there.
Sterilization. You can include in medical expenses the
cost of a legal sterilization (a legally performed operation
to make a person unable to have children).
Stop-smoking programs. You can include in medical
expenses amounts you pay for a program to stop
smoking. However, you cannot include in medical
expenses amounts you pay for drugs that do not require
a prescription, such as nicotine gum or patches, that are
designed to help stop smoking.
Surgery. See Operations, above.
Telephone. You can include in medical expenses the
cost of special telephone equipment that lets a hearingimpaired person communicate over a regular telephone.
You can also include the cost of repairing the equipment.
Television. You can include in medical expenses the cost
of equipment that displays the audio part of television
programs as subtitles for hearing-impaired persons. This
may be the cost of an adapter that attaches to a regular
set. It also may be the part of the cost of a specially
equipped television that exceeds the cost of the same
model regular television set.
A - 39
Appendix
Therapy. You can include in medical expenses amounts
you pay for therapy received as medical treatment.
“Patterning” exercises. You can include in
medical expenses amounts you pay to an individual
for giving “patterning” exercises to a mentally
retarded child. These exercises consist mainly of
coordinated physical manipulation of the child’s
arms and legs to imitate crawling and other normal
movements.
Transplants. You can include any expenses you pay for
medical care you receive because you are a donor or a
possible donor of a kidney or other organ. This includes
transportation.
You can include any expenses you pay for the medical
care of a donor in connection with the donating of an
organ to you. This includes transportation.
Transportation. You can include in medical expenses
amounts paid for transportation primarily for, and
essential to, medical care.
You can include:
• Bus, taxi, train, or plane fares or ambulance
service
• Transportation expenses of a parent who
must go with a child who needs medical care
• Transportation expenses of a nurse or other
person who can give injections, medications,
A - 40
or other treatment required by a patient
who is traveling to get medical care and is
unable to travel alone
• Transportation expenses for regular visits to
see a mentally ill dependent, if these visits are
recommended as a part of treatment
Car expenses. You can include out-of-pocket
expenses, such as the cost of gas and oil, when
you use a car for medical reasons. You cannot
include depreciation, insurance, general repair, or
maintenance expenses.
If you do not want to use your actual expenses, for
2008 you can use a standard rate of 12 cents a mile for
use of a car for medical reasons.
You can also include parking fees and tolls. You can
add these fees and tolls to your medical expenses
whether you use actual expenses or use the standard
mileage rate.
Example. Bill Jones drove 2,800 miles for medical
reasons during the year. He spent $200 for gas, $5
for oil, and $50 for tolls and parking. He wants to
figure the amount he can include in medical expenses
both ways to see which gives him the greater
deduction.
He figures the actual expenses first. He adds the
$200 for gas, the $5 for oil, and the $50 for tolls and
parking for a total of $255.
A - 41
Appendix
He then figures the standard mileage amount. He
multiplies the 2,800 miles by 12 cents a mile for a
total of $336. He then adds the $50 tolls and parking
for a total of $386.
Bill includes the $386 of car expenses with his other
medical expenses for the year because the $386 is
more than the $255 he figured using actual expenses.
Transportation expenses you cannot include.
transportation in the following situations.
• Going to and from work, even if your
condition requires an unusual means of
transportation
• Travel for purely personal reasons to another
city for an operation or other medical care
• Travel that is merely for the general
improvement of one’s health
Trips. You can include in medical expenses amounts
you pay for transportation to another city if the trip is
primarily for, and essential to, receiving medical services.
You may be able to include up to $50 per night for
lodging. See Lodging, above.
You cannot include in medical expenses a trip or vacation
taken merely for a change in environment, improvement
of morale, or general improvement of health, even if the
trip is made on the advice of a doctor. However, see
Medical Conferences, above.
Tuition. Under special circumstances, you can include
A - 42
charges for tuition in medical expenses. see Special
Education, above.
You can include charges for a health plan included in a
lump sum tuition fee if the charges are separately stated
or can easily be obtained from the school.
Vasectomy. You can include in medical expenses the
amount you pay for a vasectomy.
Vision correction surgery. See Eye Surgery, above.
Weight-loss program. You can include in medical
expenses amounts you pay to lose weight if it is a
treatment for a specific disease diagnosed by a physician
(such as obesity, hypertension, or heart disease). This
includes fees you pay for membership in a weight
reduction group and attendance at periodic meetings.
You cannot include membership dues in a gym, health
club, or spa as medical expenses, but you can include
separate fees charged there for weight loss activities.
You cannot include the cost of diet food or beverages in
medical expenses because the diet food and beverages
substitute for what is normally consumed to satisfy
nutritional needs. You can include the cost of special food
in medical expenses only if:
1. The food does not satisfy normal nutritional
needs
2. The food alleviates or treats an illness
3. The need for the food is substantiated by a
physician
A - 43
Appendix
4. The amount you can include in medical
expenses is limited to the amount by which the
cost of the special food exceeds the cost of a
normal diet. See also Weight-Loss Program under
What Expenses Are Not Includible, below
Wheelchair. You can include in medical expenses
amounts you pay for an autoette or a wheelchair used
mainly for the relief of sickness or disability, and not just
to provide transportation to and from work. The cost of
operating and keeping up the autoette or wheelchair is
also a medical expense.
Wig. You can include in medical expenses the cost of
a wig purchased upon the advice of a physician for the
mental health of a patient who has lost all of his or her
hair from disease.
X-ray. You can include in medical expenses amounts you
pay for X-rays for medical reasons.
What Expenses Are Not Included?
Following is a list of some items that you cannot include
in figuring your medical expense deduction. The items
are listed in alphabetical order.
Baby sitting, childcare, and nursing services for a
normal, healthy baby. You cannot include in medical
expenses amounts you pay for the care of children,
even if the expenses enable you, your spouse, or your
dependent to get medical or dental treatment. Also, any
expense allowed as a childcare credit cannot be treated
A - 44
How You Cannot Spend Your Tax-Free HSA Dollars
as an expense paid for medical care.
Controlled substances. You cannot include in medical
expenses amounts you pay for controlled substances
(such as marijuana, laetrile, etc.), in violation of federal
law.
Cosmetic surgery. Generally, you cannot include in
medical expenses the amount you pay for unnecessary
cosmetic surgery. This includes any procedure that is
directed at improving the patient’s appearance and does
not meaningfully promote the proper function of the
body or prevent or treat illness or disease. You generally
cannot include in medical expenses the amount you pay
for procedures such as face lifts, hair transplants, hair
removal (electrolysis), teeth whitening, and liposuction.
You can include in medical expenses the amount you
pay for cosmetic surgery if it is necessary to improve
a deformity arising from, or directly related to, a
congenital abnormality, a personal injury resulting from
an accident or trauma, or a disfiguring disease.
Example. An individual undergoes surgery that
removes a breast as part of treatment for cancer. She
pays a surgeon to reconstruct the breast. The surgery
to reconstruct the breast corrects a deformity directly
related to the disease. The cost of the surgery can be
included in her medical expenses.
Dancing lessons. You cannot include the cost of
A - 45
Appendix
dancing lessons, swimming lessons, etc., even if they
are recommended by a doctor, if they are only for the
improvement of general health.
Diaper service. You cannot include in medical expenses
the amount you pay for diapers or diaper services, unless
they are needed to relieve the effects of a particular
disease.
Electrolysis or hair removal. See Cosmetic Surgery,
above.
Funeral expenses. You cannot include in medical
expenses amounts you pay for funerals. However, funeral
expenses may be deductible on the decedent’s federal
estate tax return.
Future medical care. Generally, you cannot include
in medical expenses current payments for medical care
(including medical insurance) to be provided substantially
beyond the end of the year. This rule does not apply
in situations where the future care is purchased in
connection with obtaining lifetime care of the type
described under Long-Term Care, above.
Hair transplant. See Cosmetic Surgery, above.
Health club dues. You cannot include in medical
expenses health club dues, or amounts paid to improve
one’s general health or to relieve physical or mental
discomfort not related to a particular medical condition.
A - 46
membership in any club organized for business, pleasure,
recreation, or other social purpose.
Health coverage tax credit. You cannot include in
medical expenses amounts you pay for health insurance
that you use in figuring your health coverage tax credit.
Household help. You cannot include in medical
expenses the cost of household help, even if such help
is recommended by a doctor. This is a personal expense
that is not deductible. However, you may be able to
include certain expenses paid to a person providing
nursing-type services. For more information, see Nursing
Services, above. Also, certain maintenance or personal
care services provided for qualified long-term care can be
included in medical expenses. For more information, see
Qualified Long-Term Care Services, above.
Illegal operations and treatments. You cannot
include in medical expenses amounts you pay for illegal
operations, treatments, or controlled substances whether
rendered or prescribed by licensed or unlicensed
practitioners.
Insurance premiums. See Insurance Premiums under
What Medical Expenses Are Included, above.
Maternity clothes. You cannot include in medical
expenses amounts you pay for maternity clothes.
A - 47
Appendix
Medical Savings A ccount (MSA). You cannot include
in medical expenses amounts you contribute to an
Archer MSA. You cannot include medical expenses you
pay for with a tax-free distribution from your Archer
MSA. You also cannot use other funds equal to the
amount of the distribution and include the expenses. For
more information on Archer MSAs, see Publication 969,
Medical Savings Accounts (MSAs).
Nutritional supplements. You cannot include in
medical expenses the cost of nutritional supplements,
vitamins, herbal supplements, “natural medicines,” etc.
unless they are recommended by a medical practitioner
as treatment for a specific medical condition diagnosed
by a physician. Otherwise, these items are taken to
maintain your ordinary good health, and are not for
medical care.
Personal use items. You cannot include in medical
expenses the cost of an item ordinarily used for personal,
living, or family purposes unless it is used primarily to
prevent or alleviate a physical or mental defect or illness.
For example, the cost of a toothbrush and toothpaste is
a nondeductible personal expense.
Where an item purchased in a special form primarily to
alleviate a physical defect is one that in normal form is
ordinarily used for personal, living, or family purposes,
the excess of the cost of the special form over the cost
of the normal form is a medical expense (see Braille
Books and Magazines under What Medical Expenses Are
Includible, above).
A - 48
Swimming lessons. See Dancing Lessons, above.
Teeth whitening. You cannot include in medical
expenses amounts paid to whiten teeth that are
discolored as a result of age. See Cosmetic Surgery, above.
Veterinary fees. Except for the care of guide dogs for
the seeing-impaired or hearing-impaired, or for other
animals specially trained to assist persons with physical
disabilities, you cannot include veterinary fees in your
medical expenses.
Weight-loss program.You cannot include in medical
expenses the cost of a weight-loss program if the
purpose of the weight loss is the improvement of
appearance, general health, or sense of well-being. You
cannot include amounts you pay to lose weight unless the
weight loss is a treatment for a specific disease diagnosed
by a physician (such as obesity, hypertension, or heart
disease). This includes fees you pay for membership in
a weight reduction group and attendance at periodic
meetings. Also, you cannot include membership dues in a
gym, health club, or spa.
You cannot include the cost of diet food or beverages in
medical expenses because the diet food and beverages
substitute for what is normally consumed to satisfy
nutritional needs. You cannot include the cost of special
food in medical expenses unless all three of the following
requirements are met.
1. The food does not satisfy normal nutritional
needs.
A - 49
Appendix
2. The food alleviates or treats an illness.
3. The need for the food is substantiated by a
physician.
The amount you can include in medical expenses is
limited to the amount by which the cost of the special
food exceeds the cost of a normal diet.
A - 50
Index
Index of Terms Used in This Guidebook
Above-the-line deduction
2-18, 2-19, 7-10, 8-1, 8-2,
8-16, A-1
Adjusted gross income
2-18, 5-4, 7-10, 8-17
A-1, A-6
Administrator
xii, 1-7, 3-3, 3-5, 3-7, 5-6, 5-11, 5-16,
6-9, A-9
Authorization(s)
Bankruptcy
Beneficiary
4-11, 4-12, 7-2, A-1
1-12, 1-20, 7-12, 8-10, 8-12
1-9, 2-7, 2-11, 2-13, 3-3, 3-7, 7-6, 8-5 to 8-7
Cafeteria Plan 2-2, 2-18, 2-20, 2-21, 2-23, 2-24,
4-18, 4-19, 5-4, 8-11, 8-16, 8-17, A-1, A-4
Catch-up contributions
1-15, 2-4, 2-12, 2-13, 4-7
Certificate of coverage
3-4, 3-5, A-1
Checkbook
3-2, 3-3, 3-4, 4-15, 5-6, 5-7, 5-11
Children / Child
1-6, 1-9, 2-13, 2-28, 2-29, 4-21, 4-25,
6-3, 6-5, 6-11, 7-5, 7-6, 7-7, 7-8, 7-9, 7-10, A-22, A-23,
A-28, A-29, A-30, A-31, A-36, A-38, A-39, A-40, A-44
A - 51
Appendix
COBRA
viii, 2-26, 3-5, 4-9, 4-28, 7-7, 7-9, 7-10, 7-11,
7-12, 7-13, 7-15, A-1, A-2, A-5
Coinsurance1-4, 1-5, 1-8, 1-9, 2-21, 2-25, 4-6, 4-12, 4-14,
4-17, 4-19, 5-3, 6-1, 6-3, 6-5, 6-7, 6-12, 6-13, A-2, A-4, A-8
Comparability rules 2-20, 3-7, 8-11, 8-12
Comparable contributions (see also Comparability
rules)
2-14, 2-20, 2-23, 2-24, 8-11, A-8
Consumer Price Index (CPI) x, 1-2
Contributions, defined (see also Catch-up
contributions, Comparable contributions, Excess
contributions, Matching contributions, and Rollover
contributions)
vii, x, 1-11 to 1-16, 1-18, 1-22, 2-1 to 2-21, 2-23, 2-24, 2-27,
3-2, 3-6, 3-7, 3-8, 4-7, 4-18, 5-19, 5-1, 5-4, 5-5, 5-14, 6-3 to
6-9, 7-6, 7-8, 7-10, 7-11, 7-13, 7-14, 7-16, 8-1 to 8-5, 8-9,
8-11, 8-14, 8-16, 8-17, A-8, A-12, A-26
Co-payments
xii, 1-5, 1-8, 1-16, 2-15, 2-21, 2-25,
4-6, 4-7, 4-12, 4-14, 4-17, 4-19, 6-1, 6-5, 6-6 to 6-13, A-2,
A-4, A-5, A-8
Custodian
Death
A - 52
vii, 1-18, 1-19, 1-21, 2-8 to 2-10, 2-27, 4-9,
4-18, 5-5, 5-9, 5-16, 8-4 to 8-6, A-2
2-16, 2-17, 3-3, 7-4, 7-15, 8-8, A-3, A-30, A-33
Index
Debit card
3-2 to 3-4, 4-15, 5-6, 5-7, 5-11
Deductibles, defined (see also Embedded
deductibles and Umbrella deductibles)
vii, x, xii, 1-1 to 1-8, 1-10 to 1-14, 1-16, 2-12 to 2-14, 2-20
to 2-25, 3-1, 3-7, 4-1 4-6, 4-10 to 4-13, 4-15, 4-16, 4-19, 5-2,
5-3, 5-5, 5-6, 5-10, 5-16, 6-1, 6-3 to 6-5, 6-7 to 6-10, 6-12,
6-13, 7-1, 7-8, 8-3, 8-11, 8-13, A-2, A-4, A-5, A-8, A-9
Dental coverage -see permitted coverage
Dependent 1-11, 2-2, 2-14, 2-28 to 2-30, 4-7, 5-4, 7-6 to
7-9, 8-3, 8-12, 8-17, A-3, A-5, A-9, A-11, A-15, A-16, A-22,
A-23, A-27 to A-29, A-34 A-37, A-41, A-44
Disability xiii, 1-10, 2-1, 2-5, 4-2, 7-4, 7-14, 7-15, 8-12,
A-3, A-20, A-29, A-44
Discount cards
1-10
Distributions 1-18, 1-21, 2-10, 2-14, 2-15, 2-22, 2-25, 4-9,
4-16, 5-4, 5-5, 5-9, 5-10, 7-9, 8-4, 8-5, 8-7, 8-14, A-48
Divorce
2-29, 6-12, 7-6, 7-7
Eligibility
x, 2-1 to 2-6, 2-14, 2-16, 2-17, 2-27, 4-1, 4-7,
6-2, 7-7, 7-10, 7-12, 8-2, 8-3, 8-12, 8-14, A-2, A-8
Embedded deductibles
Emergency
1-2, 6-3
4-23, 7-4, 7-5, A-3, A-10
A - 53
Appendix
Employee assistance programs (EAPs)
2-23
Employee Retirement Income Security Act
(ERISA)
2-27, 8-8 to 8-12, A-3
Excess Contributions
1-13 to 1-15, 2-6, 2-10, 8-4,
8-7, A-3
Explanation of benefits (EOBs)
First-Dollar coverage
5-3, 5-6, 5-13, 5-15
1-8 to 1-10, 4-1, 4-4, 4-5, 4-7,
8-3, A-4, A-8
Flexible spending accounts (FSAs)
ix, 1-14 to
1-18, 2- 9 to 2-11, 2-21, 2-22, 2-24, 2-27, 2-28, 3-7, 4-6, 4-19,
5-6, 6-2, 8-3, A-1, A-4
Forms
1-19, 2-19, 3-3, 4-18, 5-4, 5-5, 5-13, 8-5, 8-7, 8-9,
8-15, A-13, A-25, A-26, A-33
Fund / funding (see also contributions) 1-14 to 1-16,
1-22, 2-2, 2-3, 2-9, 2-11, 3-7, 4-17, 5-1, 6-3, 8-1, 8-13, A-26
Grace periods
Health plan riders
2-22, A-4
1-10
Health reimbursement arrangements (HRAs)
ix, 1-14-1-17, 2-9 to 2-11, 2-21, 2-22, 2-27, 2-28, 3-7, 4-6,
4-19, 6-2, 8-3, A-5, A-26
A - 54
Index
High-risk pools
1-11
Health care providers
HSA providers
1-6, 1-7, 1-19, 3-3,
4-10, 4-20, 5-11, A-11
1-18 to 1-21, 3-2, 3-8, 4-15, 4-17,
4-20, 4-22, 5-4, 5-7
Individual retirement accounts (IRAs) viii, ix, 1-14 to
1-16, 1-18, 2-8, 2-11, 6-2, 8-3, 8-6, A-6
Insurance i, vii, xi to xiii, 1-1 to 1-5, 1-7 to 1-11, 1-16 to
1-19, 2-5, 2-16, 2-18, 2-23, 2-30, 3-1 to 3-6, 4-1 to 4-3, 4-5,
4-8 to 4-10, 4-13, 4-14, 4-16, 4-26, 4-28, 4-29, 5-9, 5-10, 6-3
to 6-5, 6-8, 6-10, 6-11, 6-13, 7-5, 7-13 to 7-15, 8-5, 8-6, 8-9,
8-12 to 8-14, A-1, A-2, A-4 to A-8, A-11, A-23 to A-28, A-30
to A-32, A-41, A-46, A-47
Internal Revenue Service (IRS) ii, x, 1-1 to 1-3, 1-9,
1-12 1-14, 1-18, 2-13 to 2-15, 2-19, 2-20, 3-3, 3-6, 3-7, 5-2,
5-4, 5-5, 5-7, 5-9, 5-15, 6-3, 8-5 to 8-8, 8-11, 8-13, 8-15,
A-13, A-14
Investments i, vii, ix, 1-16 to 1-21, 3-2, 3-6, 5-4, 5-14, 6-2,
8-4 and 8-7, 8-9, 8-10, 8-17, A-2, A-12
Long-term care
viii, 1-10, 1-16, 2-16, 4-2, 4-9, 4-27,
4-28, 5-1, 7-13, A-5, A-24, A-26, A-31 to A-33, A-36, A-47
Matching contributions
2-20, 2-23, 8-11, A-7
A - 55
Appendix
Medical Expenses (see also distributions) 1-2, 1-4,
1-11, 1-12, 1-16, 2-1, 2-13 to 2-18, 2-25, 2-29, 2-30, 4-1, 4-8,
4-26, 4-27, 5-2, 5-4, 5-16, 6-11, 6-13, 7-9, 7-12, 7-13, 7-15,
8-3, 8-4, 8-6 to 8-8, A-8, A-11, A-14 to A-50
Qualified Expenses, listing 4-26, A14 to A44
Non qualified Expenses, listing 4-27, A-44 to A-50
Medicare viii, x, 1-15, 1-16, 2-2, 2-4, 2-5, 2-13, 2-16, 4-7,
4-8, 4-28, 7-13 to 7-16, 8-1, 8-2, A-7, A-10, A-26, A-33, A-36
Medigap
2-16, 4-8, 7-14, A-7
Out-of-pocket 1-1, 1-4 to 1-8, 3-1, 4-8, 4-12 to 4-14,
5-2, 5-3, 5-5, 6-1 to 6-7, 7-2 to 7-4, 7-14, A-7, A-8, A-41
Permitted coverage
1-8 to 1-10, 2-1, 2-8, 2-15,
2-21, 2-22, 4-1 to 4-3, 4-6, 4-7, 4-24, 6-3, 7-10, A-3, A-8
Post-deductible
Pre-existing condition
1-4, 2-21, 3-7, 4-19
3-1, 3-4, 7-5, A-1, A-5, A-9
Premiums
viii, xii, xiii, 1-5, 1-11, 1-22, 2-13, 2-16, 2-26,
3-6, 3-7, 4-8, 4-9, 4-26, 4-28, 4-29, 5-1, 6-1, 6-4, 6-8, 7-9,
7-11 to 7-15, A-5, A-8, A-11, A-23 to A-28, A-31, A-33, A-47
Prescription drug x, 1-8 to 1-11, 1-16, 4-3, 4-7, 4-21, 4-26,
4-27, 6-5 to 6-9, 6-11, 6-12, 8-1, A-2, A-5, A-24, A-34, A-39
Preventive care
A - 56
1-8 to 1-10, 2-5, 3-6, 4-3 to 4-5,
4-24, 4-25, 8-3, 8-13
Index
Providers - see HSA providers and Health care
providers
Records / record keeping
1-18, 1-19, 3-7, 4-19, 4-24,
5-1, 5-7, 5-8, 5-10 to 5-13, 5-15, 5-16, 8-7, 8-12, A-9
Referral
2-23, 4-11, 4-12, 7-3, A-3, A-4, A-11
Reimbursement (see also distributions)1-8, 1-16, 2-4,
2-22, 4-11, 4-16, 4-18, 4-19, 5-1, 5-6, 5-16, A-5, A-6, A-35
Retire, retiree, retirement
viii, ix, xi, 2-4, 2-5,
2-16, 2-20, 2-22, 3-4, 4-9, 4-29, 5-11, 6-8, 7-7, 7-13, 7-14,
8-12, A-2, A-6, A-12, A-27, A-29
Rollover / rollover contributions ix, 1-14 to 1-16, 1-21,
2-9 to 2-11, 7-11, 8-3, A-11
Safe Harbor
4-3, 8-9, A-11
Screening services (see also Preventive care) 1-9,
1-10, 3-6, 4-4, 4-24, 4-25, A-12
Self-employed
Self-Insured plans
ix, x, 2-2, 2-12, 2-19, 8-2, 8-16, A-28
4-5, 8-13, A-12
Spouse
1-11, 1-15, 2-8, 2-11 to 2-15, 2-17, 2-30, 3-3,
5-4, 7-5 to 7-10, 7-16, 8-8, 8-12, A-6, A-11, A-15, A-16,
A-23A-27, A-28, A-34, A-35, A-44
A - 57
Appendix
Statements
1-19, 3-2, 3-8, 5-4 to 5-6, 5-9 to 5-11, 5-14,
5-16, 8-7, A-25, A-29
Students
2-3, 2-29, 4-6, 4-7, 7-9, A-39
Surgery
1-7, 4-1, 4-21, 4-26, 4-27, 5-3, 7-1 to 7-4,
A-15, A-21 to A-23, A-37, A-39, A-43, A-45, A-46, A-49
Tax deduction / Tax deductible xii, 1-11, 1-12, 1-17, 2-1,
2-3, 2-17 to 2-20, 2-27, 2-29, 4-8, 5-4 to 5-6, 6-2, 7-10, 8-1 to
8-3, 8-5, 8-9, 8-12, 8-16, 8-17, A-1, A-5, A-6, A-11, A-14, A-20,
A-22, A-25, A-26, A-34, A-35, A-41, A-44, A-46 to A-48
Transition rules
1-8, 1-14, 1-18 to 1-20, A-11
Trustee
vii, 1-18, 1-21, 2-8 to 2-11, 2-15, 2-27,
3-3, 3-6, 4-9, 4-18, 5-5, 5-9, 5-16, 7-11, 8-4 to 8-7, A-12
Umbrella deductibles Unemployment
1-2, 6-1, A-12
xiii, 4-28, 7-12, 7-13, 8-13
Usual and customary charges
Vision coverage - see permitted coverage
A - 58
4-13, 4-14, A-12
About
the
Authors
About the Authors
Stephen Neeleman, MD is a
board certified physician and
former assistant professor of
surgery at the University of
Arizona. Dr. Neeleman is a
cofounder of HealthEquity,
Inc. (www.healthequity.com),
an HSA and personal health
care financial services company
dedicated to helping people
manage the financial side of health care. HealthEquity
provides services for thousands of employers and
consumers nationwide. Dr. Neeleman currently chairs
the Council for Affordable Health Insurance HSA
Working Group and serves on the National Health Care
Reform Coalition. Dr. Neeleman completed his surgical
training at the University of Arizona, received a Medical
Doctor degree from the University of Utah School of
Medicine and a Bachelor of Arts degree from Utah State
University. Dr. Neeleman is married to Christine Lamb
Neeleman and they have five children.
A - 61
About the Authors
Sophie M. Korczyk,
Ph.D. is an economist and
consultant with a national
consulting practice specializing
in research and analysis on
employee compensation and
benefits, with special attention
to pensions, health care, and
government budget policies in
the U.S. and overseas. Some
of her clients include AARP, the World Bank, the
International Monetary Fund, and a number of not-forprofit associations dealing with employee benefits and
with insurance issues. She has published extensively
and is a frequent speaker on compensation, benefits,
and insurance issues, as well as on Social Security
reform. She has testified on these issues before the U.S.
Congress and several state legislatures and has served as
a consultant and expert witness in court cases dealing
with employee benefits and compensation. She has
discussed managed health care issues on The Montel
Show, PBS, and a number of radio stations. She is an
elected member of the National Academy on Social
Insurance, a nonprofit, nonpartisan organization made
up of the nation’s leading experts on social insurance; a
Fellow of the Employee Benefit Research Institute; and a
former officer of the Washington, D.C.-based National
Economists Club.
A - 62
About the Authors
Hazel A. Witte, J.D. is
an attorney and consultant
specializing in health science,
pension and benefit issues in
the U.S. and overseas. Her
clients have included The US
Department of Labor, The US
Department of Health and
Human Services, and the US
Small Business Administration,
the International Monetary Fund, health care companies,
universities and not-for-profit organizations. Ms.
Witte has actively contributed to health-related
judicial education conducted by the Einstein Institute
for Science, Health and the Courts for federal and
state courts and international judicial forums. She has
published extensively and is a frequent speaker on
health and benefit issues. In addition to client reports,
she has published articles in a number of professional
publications, including Benefits Quarterly, Quality
Review Bulletin, and Journal of Labor Economics. She
is a member of the District of Columbia Bar; a fellow
of the Employee Benefit Research Institute; a member
of the board of directors of the Einstein Institute for
Science, Health and the Courts; and the Vice President
of ASTAboard, a judicial science and education standards
and accreditation agency.
Sophie Korczyk and Hazel Witte have extensive
experience as consumer educators and authors,
particularly on health issues. They are coauthors of
A - 63
About the Authors
The Complete Idiot’s Guide To Managed Health Care
(New York: Alpha Books, 1998). Recommended by
The Washington Post as “… well worth a day’s readthrough…” for its consumer-friendly information, the
book is included in many consumer health education lists.
Their publication HIV/AIDS and Health Insurance was
featured in the Centers for Disease Control “Business
Responds to AIDS” Campaign. Their 2000 Executive
Compensation Deskbook (San Diego, CA: Harcourt
Brace Professional Publishing, 2000) is a comprehensive
source of information on data and analysis dealing with
executive compensation. In Managed Care Plans in
Rural Areas (Washington, D.C.: National Rural Electric
Cooperative Association, 1991), they compiled a series
of case studies detailing the challenges and opportunities
health plans face in rural communities.
A - 64

The Complete HSA Guidebook

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