1. Health Savings Account (HSA)
Brief Question and Answer Guide
What is an HSA and who is eligible? An HSA is a tax-exempt trust or custodial account established by an individual for
the purpose of paying qualified medical expenses in conjunction with a qualifying
high deductible health plan (HDHP) and generally with no other health coverage.
What is a HDHP? Plan must have an annual deductible of not less than $1,050 single, $2,100 family
and an out-of-pocket limit not to exceed $5,250 individual, $10,500 family. (2006)
Who can contribute? Employer and/or employee and/or family members can contribute to the HSA
Who owns contributions/account? Individual/employee
Lesser of 100% of qualified HDHP deductible or the IRS limit for 2006 - single
Annual contribution maximum? $2,700, family $5,450. Catch up contributions for individuals age 55+ (not enrolled
in Medicare) $700 for 2006. Maximum applies to all contributions combined.
Can the participant carryover and
Funds roll over from year to year. Funds used after age 65, tax-free for eligible
accumulate the account balance from
medical expenses or at your normal tax rate for any other reason
year to year?
Yes, employee can take the HSA and can rollover the account to another HSA or
Is the account portable?
an Archer MSA.
Must be quot;comparablequot; for all participating employees. Employer must contribute
Employer contribution methodology?
same dollar amount or same percentage of deductible to every Employee.
Tax-deductible – Contributions to HSA can be deducted from EE gross income.
Tax-deferred – HSA fund growth not subject to Federal taxes unless used for non-
Employee tax advantages? eligible medical expenses.
Tax-free – Funds in HSA are federally tax-free when used for eligible medical
Contributions made by Employer to EE HSA treated as employer-provided
coverage for medical expenses under an accident or health plan. Thus, are
Employer tax advantages?
excludable from gross income, not subject to withholding for income tax and not
subject to other employment taxes.
State tax? California must pass state legislation before HSAs receive tax benefit at state level.
Contributions can be made in one or more payments, at any time prior to the time
Contribution timing? prescribed by law, for filing the eligible individual's federal income tax return for that
year, but not before the beginning of that year.
Contributions should be made to the account by April 15 following the year of the
Contribution deadline? contributions. Contribution is determined monthly but maximum contribution may
be made on the first day of the year.
Eligible medical expenses? Eligible medical expenses described in Section 213(d) of the Internal Revenue
Code. IRS has also allowed some over-the-counter drugs to qualify as eligible
Funds may not be used to purchase health insurance, except if used to pay
Other eligible expenses? COBRA premium, long term care insurance, Medicare premium, and long term
Any amount not used exclusively to pay qualified medical expenses is includable in
the gross income. In addition amounts are subject to a 10% penalty.
Employer is not responsible or liable for employee accounts once opened. No
Employer liability? claims administration or adjudication process. EE is responsible for maintenance
of records for IRS.
An HSA generally will not constitute an ERISA covered employee welfare benefit
ERISA application? plan, provided employer involvement is limited. The employer provided HDHP
however, is generally an ERISA Plan.
Employer reporting? Contributions must be reported on the Employee's Form W-2
This material is provided by Baker, Thomsen Associates for informational purposes. It is not intended, nor should it be relied
upon to provide legal or tax advice.
2. Health Savings Accounts
March 8, 2006 – Newport Beach, CA – While still championed by the Bush Administration, Health
Savings Accounts (HSAs) have not yet been widely adopted by employers. These accounts have
been available since 2004, but only 16% of insured individuals use them. Why the lack of
interest? Many companies are hesitant to try these new, unproven plans.
What HSAs Entail
Health Savings Accounts require employees to pay health care expenses from their personal tax-
free health savings accounts until they satisfy the high deductible required by the health plan.
Employers may contribute to the underlying HSA account, or it may be entirely funded by the
The plan must satisfy requirements established by the IRS which for 2006 are:
• Minimum deductible (single/family) $1,050/$2,100
• Maximum out of pocket (single/family) $5,250/$10,500
• Maximum HSA contribution (single/family) $2,700/$5,450
This arrangement may save costs for employers, as the higher deductibles generally mean lower
premiums. These accounts are also intended to empower individuals, allowing them to decide
how their health care dollars are spent and providing tools to assist them in analyzing health care
Advocates believe these accounts will encourage individuals to spend wisely, since it is their own
money. If they use up their Health Savings Account dollars before they meet their deductible, they
pay the rest out of pocket. After they meet the deductible, the health plan coverage begins.
Another interesting aspect of these accounts is that they can be an investment vehicle. Generally,
contributions to the account are tax favored, interest earned is tax-free, and distributions are tax-
free. Funds must be held in a qualified trust or custodial account, and their balances roll over
each year. These funds are owned by the employee and could eventually be spent for payment of
Medicare or qualified long-term care policy premiums.
What are the Problems?
Critics raise these concerns:
• Will employees forgo needed health care in order to save money?
• Do employers lose out since these accounts’ funds are portable?
• Does it really solve the problem of rising health care costs?
Health care savings accounts don’t change the fact that Americans are growing older, more
obese, and sicker. In addition, treatments are growing more sophisticated and expensive. A
wellness check up (with full body scan) can cost $2,500 or more. Imagine if everyone in America
received one this year: it could add $700 billion in health care expenditures.
Is an HSA Plan Right for You?
That depends. Employees who are interested in managing their health care expenses can benefit
by accumulating tax-free money over time. Others don’t have the time or interest, and some
simply can’t afford the high deductibles. Most employers are introducing these plans as an option
of one or more health care plans, allowing the employee to choose whether the HSA Plan makes
sense for them.
BTA is a benefits consulting firm headquartered in Newport Beach, California. Specializing in
California and multistate benefit plan design, BTA benefits consultants will design a plan for your
organization that is both cost-effective and motivating to employees. Call 800.546.4015 to learn
more about BTA’s benefits consulting services.