Health Savings Accounts

Health Savings Accounts

As health insurance premiums continue to increase, individuals continue to look for ways to minimize their costs through tax favorable health plans. One of those tax advantages is through a Health Savings Accounts (“HSA”). An HSA is an account set up with a qualified trustee by an eligible individual who has a high deductible health plan (“HDHP”) to pay for qualified medical expenses. HSA qualified trustees include banks and insurance companies that are not necessarily the same as your healthcare provider.

BENEFITS

There are many benefits to having an HSA. Individuals are eligible for a tax deduction for contributions made to an HSA by either themselves or someone other than their employer, even if they do not itemize deductions. Individuals may also exclude contributions made to their HSA by employers from gross income. It is not a “use or lose situation” from year to year, as contributions made to an HSA account remain in the account until such time as distributed for qualified medical expenses. Interest or other earnings on the assets in the account accumulate tax free. HSA distributions are tax free to the extent utilized for qualified medical expenses. Also, an HSA is portable, therefore it goes with the participant if they change employers or stop working.

ELIGIBILITY

In order to be eligible, individuals must satisfy certain requirements. They must be covered by a HDHP on the first day of the month and may not be claimed as a dependent on another individual’s tax return.

A HDHP has higher annual deductibles than typical plans and has a maximum limit on the sum of the annual deductible and out-of pocket expenses that you must pay for covered expenses. For 2013, a qualifying HDHP is defined as one that must have a deductible of at least $1,250 for self-only coverage or $2,500 for family coverage and must limit annual out-of-pocket expenses to $6,250 for self-only coverage and $12,500 for family coverage. Individuals with HSAs may generally not have any other health coverage with certain exceptions.

CONTRIBUTIONS – INDIVIDUALS

Contributions to an HSA may be made by any eligible individual, their employer or a combination of both. A family member may also make contributions on behalf of an eligible employee. All contributions must be made in cash. Contributions of stock or other property are not allowed.

For 2013, for self-only HDHP coverage, generally, contributions into an HSA for the tax year cannot exceed $3,250. For a family plan, the contributions, generally, cannot exceed $6,450. An additional $1,000 contribution amount is available for individual who are age 55 and older at the end of the tax year.

A copy of the IRS 2012 Forms 8889 and 5329 and their respective instructions can be accessed at the healthcare services section of our Firm’s Website.

Contributions in excess of these limits are deemed to be excess contributions and, thus, are not deductible. Employer made excess contributions are required to be included in an individual’s Form W-2, Box 1 as taxable wages subject to Federal income tax withholding requirements, If an employer fails to report these excess contributions in Box 1 of Form W-2, the taxpayer has the responsibility to report them as “Other Income” on their individual income tax return. As a general rule, there is a six percent excise tax on excess contributions. Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, should be used to calculate the excise tax. The excise tax applies for each year that the excess contribution amount remains in the HSA account. Under the following circumstances the excess amount may be withdrawn from the HSA account and not subject to the excise tax.

• Excess contributions are withdrawn by the due date, including extensions, of individual’s income tax return, for the year in which contributions were made.
• Income earned on excess contributions is withdrawn and included as “Other Income” on the individual’s income tax return for the year the amounts are withdrawn from the HSA account.

Individuals must report all contributions to an HSA on Form 8889, Health Savings Accounts (HSAs). Individuals should receive Form 5498-SA, HSA, Archer MSA or Medicare Advantage MSA Information, from the trustee reflecting their annual contribution amounts. Accordingly, the amount calculated should be reflected as a deduction of the individual’s income tax return.

CONTRIBUTIONS – EMPLOYERS

Employers need to be aware that nondiscrimination rules generally apply to contributions made to employees’ HSA accounts. An employer’s contribution amount must be comparable for all employees who have comparable coverage during the same period. Otherwise, the employer will be subject an excise tax equal to 35% of the amount contributed to all employees’ HSA accounts.

The Tax Relief and Health Care Act of 2006 allows employers to make an exception to the nondiscrimination rules which allows employers to make larger contributions for non-highly compensated employees than for highly compensated employees. For 2013 a highly compensated employee is one who meets either of the following tests.

• The employee was a 5% owner at any time during the preceding year, or
• The employee received more than $115,000 in compensation for the preceding year. Note that this test may be ignored if the employee was not also in the top twenty percent of employees when ranked by pay in the preceding year.

Employers must report contributions, including any amounts the employee elected to contribute using an Internal Revenue Code §125 cafeteria plan, to an employee’s HSA in box 12 of Form W-2 using code W.

ROLLOVERS

It is important to note that rollover contributions are not included in an individual’s income, are not deductible and do not reduce the HSA contribution limit. In order to facilitate a rollover from an existing HSA account to a new HSA, an individual does not have to be an eligible individual. Rollover contributions do not need to be in cash and are not subject to the annual contribution limits. Rollovers must be completed within sixty days after the date of receipt and individuals are permitted to have only one rollover contribution to an HSA during a one year period.

DISTRIBUTIONS

Individuals will generally pay their own medical expenses until they reach their respective annual health insurance deductibles. Once the deductible is met, they may receive tax-free distributions from the HSA to pay or be reimbursed for qualified medical expenses incurred. The trustee will report any distributions on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA, to the individuals.

Qualified medical expenses are expenses that would generally qualify for the medical or dental expense deduction on an individual’s income tax return. For HSA purposes, a medicine or drug will be a qualified medical expense if it requires a prescription. Insurance premiums generally are not qualified medical expenses unless they are for long-term care insurance (based on age limitations which are adjusted annually), healthcare continuation
coverage (such as coverage under COBRA), Medicare and other healthcare coverage (if over age 65).

Qualified medical expenses must be incurred by the individual, spouse or dependents claimed on the individual’s income tax return (or could have been claimed on the return).

HSA distributions are required to be reported by individuals on Form 8889. If the distributions were used for qualified medical expenses, they are reportable, but not taxable. If distributions are made for anything other than qualified medical expenses they could potentially be subject to an additional 20% penalty. These distributions would also be reportable on Form 8889 and as taxable income on an individual’s income tax return.

For more information on the topics discussed or services we can provide, please contact:
Scott Mariani, JD, Partner
Practice Leader
973.898.9494 ? [email protected]

Questions or comments?
E-mail us at [email protected]

To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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