Health Savings Account (HSA) Frequently Asked Questions

Q. What is a Health Savings Account?
A. A Health Savings Account, or HSA, is a savings account which can be used to pay medical expenses not covered by insurance. Contributions made by individuals and family members are tax-deductible (for the account beneficiary) even if the account beneficiary does not itemize. Employer contributions are made on a pre-tax basis and are not taxable to the employee. Employers will be allowed to offer HSAs through a cafeteria plan.

Q. Do I still need medical insurance?
A. Yes. Under the legislation passed by Congress, the HSA must be coupled with a high-deductible medical insurance plan. Individuals pay small medical bills out of their own pocket (or out of their HSA account) up to the deductible but have medical coverage in case of serious illness or accident.

Q. For the purpose of HSAs, what is a high deductible plan?
A. A minimum deductible $1,000 for an individual and a $2,000 deductible for a family.  Total out of pocket maximum of $5,000 for an individual and a maximum of $10,000 out-of-pocket for families.

Things that cause a common health insurance plan not to qualify as HSA eligible:

• A plan that has an individual deductible lower than $1,000
• A plan that has a "family out of pocket maximum" that is greater than $10,000
• A plan that has a separate prescription benefit (ie - 50% not subject to deductible)
• A plan that has a doctor visit copay for "non-preventative" services.

Q. What is the maximum HSA deposit amount?
A. If you have an individual policy covering only yourself, you can contribute up to 100% of the deductible per calendar year or $2,600 whichever is less. For a family covered by an individual plan, up to 100% of the family deductible per calendar year or $5,150 whichever is less, can be contributed.  Additional contributions for individuals 55 years and older (before the close of the taxable year) can be made. A married couple can make two catch- up contributions as long as both spouses are at least 55. Catch-up contributions will help individuals accumulate assets for retiree health expenses.

For taxable years beginning in:	The additional contribution amount is:
2005	$600 per adult, per year
2006	$700 per adult, per year
2007	$800 per adult, per year
2008	$900 per adult, per year
2009 and thereafter	$1,000 per adult, per year

Q. What happens to the money in the HSA Account?
A. The money can be carried over for medical expenses the following year, and you can continue contributing up to the maximum deposit each year. HSA funds can be used to pay post-retirement healthcare expenses not covered by employers or by Medicare, or to purchase long-term care insurance and possibly Medicare Advantage (formerly known as Medicare + Choice plan) premiums.

Q. Can I withdraw funds from the HSA for non-medical expenses?
A. Distributions made for any other purpose are subject to income tax and a 10% penalty. The 10% penalty is waived in the case of death or disability. The 10% penalty is also waived for distributions made by individuals age 65 and older.

Q. How much money will this save me on taxes? Is an HSA preferable to just deducting medical expenses on my income tax?
A. Most individuals save on taxes using HSAs because of the IRS limits on deducting medical expenses. How much will depend on your income bracket, any state taxes in your area, whether your state allows a deduction for HSA funds.

Q. When can I start depositing money into an HSA account?
A. Immediately after you start a qualified Major Medical Plan.

Q. Can I make a lump sum Deposit at the beginning of the year?
A. You may make an annual lump sum Deposit, or if you wish you can set up Deposits on a monthly basis.

Q. Are there administration fees?
A. This can vary from company to company. HSAs are available with no administration fee.

Q. Does the account pay interest?
A. Some companies also offer accounts that pay interest. This interest is normally tax deferred. Some companies allow you to invest your HSA funds in Mutual Funds.

Q. How will my HSA account pay claims?
A. Some companies give you a debit card to pay your claims with, others may combine the processing with insurance claims processing. Some may require you to fill out claims forms. Check the companies you are thinking of buying from to see how they pay claims.