This presentation focuses on the eligibility and distribution requirements of HSA's and a number of special rules are reviewed.

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By
Larry Grudzien
Attorney at Law

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• Similar to Archer Medical Savings Accounts
(MSAs) in structure and benefits, but there are
many important differences.
• Tax-exempt trust or custodial accounts created
exclusively to pay for the qualified medical
expenses of the account holder and his or her
spouse and/or dependents.
Source: Code §223
What is an HSA?

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• Funding flexibility-employer contributions, employee salary
reduction contributions and tax-deductible contributions
are all permissible.
• No use-it-or-lose-it rule-participants may accumulate funds
and self-direct investment in a tax-exempt trust or
custodial account.
• Ability to use funds for non-medical purposes without any
effect on the tax-free character of amounts used for
medical expenses.
• Account portability for employees changing jobs.
Why Consider an HSA?

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• Participant self-substantiation of expenses is
required.
• The tandem high-deductible plan that is required
is almost a mainstream-design.
• Family members, employers and any other third
party may make contributions to an HSA on behalf
of the eligible individual.
Why Consider an HSA?

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• For any month, an eligible individual is defined
as any individual who:
 is covered only by a high-deductible health plan (HDHP)
as of the first day of such month
 is not also covered by any other health plan that is not a
HDHP (with certain exceptions for plans providing
certain limited types of coverage)
 is not enrolled in benefits under Medicare
 may not be claimed as a dependent on another person’s
tax return.
Who is Eligible to Make or
Receive Contributions?

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• What is a High Deductible Health Plan
(“HDHP”)?
 It is a insured or self-insured health plan that satisfies
certain requirements with respect to deductibles and out-
of pocket expenses.
 In the case of individual coverage, the plan must have
an annual deductible of not less than, $1,250 for 2013
and 2014 and $1,300 for 2015.
 In the case of family coverage, the plan must have an
annual deductible of not less than $2,500 for 2013 and
2014 and $2,600 for 2015.
Who is Eligible to Make or
Receive Contributions?

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• What is a High Deductible Health Plan
(HDHP)?
 A health plan may contain the following features and still
be considered a HDHP:
• A reasonable lifetime limit on benefits. Any lifetime limit on benefits
designed to circumvent the maximum annual out-of pocket amount is not
reasonable. Under the Affordable Care Act, there are no longer lifetime
or annual limits on essential health benefits.
• Limitation of payments to usual, customary and reasonable (“UCR”).
• Uses amounts toward the deductible from a prior health plan if newly
adopted during the year.
• Different levels of payment of benefits depending on whether a participant
goes in or out of network.
Who is Eligible to Make or
Receive Contributions?

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• What is a High Deductible Health Plan
(HDHP)?
 In the case of individual coverage, the maximum out-of-pocket
expense limit on covered expenses cannot exceed $6,350 for 2014
and $6,450 for 2015.
 In the case of family coverage, the maximum out-of pocket expense
limit on covered expenses cannot exceed $12,700 for 2014 and
$12,900 for 2015.
 Out-of-pocket expenses include deductibles, co-payments, and
other amounts (other than premiums) that the individual must pay
for covered benefits under the plan.
Who is Eligible to Make or
Receive Contributions?

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• An individual who is covered under:
 a spouse’s or dependent’s employer’s health plan that is
not an HDHP;
 a comprehensive major medical individual insurance
policy; or
 a health FSA or HRA unless coverage under such HRA
or FSA is limited to “permitted benefits” or specific
benefits not provided by the high-deductible health plan.
Who is Not Eligible to Make or
Receive Contributions ?

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• H and W have family coverage covering each
other and one of the plans is not a HDHP.
• H and W have family coverage, but not covering
each other and one plan is not a HDHP.
• H and W have single coverage, but W participates
in a Health FSA.
Who is Not Eligible to Make or
Receive Contributions ?

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• Custodial or Trust Agreement
• Application and Eligibility Form
• Designation of Beneficiary Form
• Disclosure Statement
What Documents are Needed
to Establish an HSA?

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• No - No coverage can be provided below
deductible limits provided under a HDHP.
Can First Dollar Prescription
Drug Coverage Be Provided?

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• An employee may invest in investments approved
for IRAs (e.g., bank accounts, annuities,
certificates of deposit, stocks, mutual funds, or
bonds).
• HSAs may not invest in life insurance contracts, or
in collectibles.
Are There Any Restrictions on
the Types of Investments
Available Under an HSA?

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• Rules “similar” to those rules that apply to IRAs will apply
to HSAs .
• When would prohibit transactions occur?
 Loans,
 account beneficiary provides good or services to the HSA, and
 purchase of land – employee already has an interest.
• ERISA penalties would apply - 5% of the amount involved
in each transaction, but may increase to 100% if the
mistake is not promptly corrected.
Prohibited Transaction Rules

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• Employee Contributions: Contributions are deductible (within limits)
in determining adjusted gross income .
• Employer Contributions: These contributions (including salary
reduction contributions made through a cafeteria plan) are excludable
from gross income and wages for employment tax purposes to the
extent the contribution would be deductible if made by the employee.
• Other Contributions: Contributions may be made by family members
and other third parties. These contributions are deductible by the
eligible individual to the extent the contributions would be deductible if
made by the individual.
What Contributions are
Permitted and How are They
Treated for Tax Purposes?

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• Yes. They are treated as employer contributions and
are excluded from the employee’s income.
• Code § 125 has been amended to allow HSAs to be
offered under cafeteria plans.
• These contributions are not subject to:
 the "use-or-lose-it rule,"
 the "uniform coverage rule,” or
 the mandatory 12 month period of coverage requirement.
Can Salary Deferral
Contributions be Made?

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• The maximum aggregate annual contribution that
can be made to an HSA is the maximum
deductible limit for the year (as adjusted for
inflation):
 For individual coverage, the maximum amount is $3,300
for 2014 and $3,350 for 2015.
 For family coverage, the maximum amount is $6,550 for
2014 and $6,650 for 2015.
What are the Limits for
Contributions?

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• The contribution limits assumes eligibility for a full 12 month period.
• If eligibility is less than twelve months, limits are reduced by 1/12 for
each month.
• Annual contribution limits for individuals who have attained age 55 by
the end of the taxable year is by, $1,000.
• Contributions, including catch-up contributions, cannot be made once
an individual is enrolled in Medicare.
What are the Limits for
Contributions?

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• An individual, who becomes eligible to contribute to an HSA a month
other than January and who is eligible in December of that year, may
make a full deductible HSA contribution for the year if he or she has
HDHP coverage for the entire “testing period.”
• The testing period is the period beginning with the last month of the
taxable year and ending on the last day of the 12th month following
such month.
• If an individual does not remain an eligible individual during the testing
period, the amount of the contributions attributable to months
preceding the month in which the individual was not an eligible
individual (which could have not have been made but for the provision)
will be includible in the individual’s gross income.
What are the Limits for
Contributions?

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• The amount is includible for the taxable year of the first
day during the testing period that the individual was not an
eligible individual.
• A 10-percent additional tax also applies to the amount
includible.
• An exception applies if the individual ceases to be an
eligible individual by reason of death or disability.
What are the Limits for
Contributions?

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• Any contributions exceeding the limits are not
deductible.
• Contributions made by an employer over the limits
are included in the employee’s income.
• An eligible individual is responsible for
withdrawing any excess.
What Happens if the Limits are
Exceeded for any Year?

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• Excise tax applies to contributions in excess of the maximum
contribution amount.
• The excise tax is generally equal to 6% of the cumulative amount of
excess contributions that are not distributed from the HSA .
• If the excess contributions for a taxable year and the net income are
paid to the individual before the due date of tax return (including
extensions) for filing, then the net income is included in the individual’s
gross income for the taxable year in which the distribution is received
but the excise tax is not imposed on the excess contribution and the
distribution of the excess contributions is not taxed.
What Happens if the Limits are
Exceeded for any Year?

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• By the due date of your tax return for the year
(excluding extensions).
• Contributions may be made any time during
calendar year.
When Must Contributions be
Made for any Year?

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• Yes. Amounts can be rolled over into an HSA from a MSA
or another HSA on a tax-free basis.
• Rollovers need not be made in cash.
• Amounts can be rolled over into an HSA from another
HSA.
• Amounts transferred from another HSA or a MSA are not
taken into account under the annual contribution limits.
Can Amounts be Rolled Over
to Another HSA or Another
Type of Account?

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• An individual may make only one rollover
contribution to an HSA during a 1 year period.
• To qualify as a rollover, any amount paid or
distributed from an HSA to an eligible individual
must be paid over to an HSA within 60 days after
the date of receipt of the payment or distribution.
Can Amounts be Rolled Over
to Another HSA or Another
Type of Account?

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• Yes. You are allowed to make a one-time contribution to an HSA of an
amount distributed from his or her IRA.
• The contribution must be made in a direct trustee-to trustee transfer.
• Amounts distributed from the IRA are not includible in the individual’s
income to the extent that the distribution would otherwise be includible
in income.
• Such distributions are not subject to the 10-percent additional tax on
early distributions.
Can Amounts be Rolled Over
from an IRA to your HSA?

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• The amount that can be distributed from the IRA and
contributed to an HSA is limited to the otherwise maximum
deductible contribution to the HSA computed on the basis
of the type of coverage under the HDHP at the time of the
contribution.
• For the IRA rollover to be nontaxable, you must continue to
be eligible to make contributions to HSA for 12 months
following the rollover.
• If not, then the rollover becomes taxable to you.
Can Amounts be Rolled Over
from an IRA to your HSA?

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• Yes The employer must satisfy the following “comparability
rules” or be subject to an excise tax.
• If an employer makes contributions to employees’ HSAs,
the employer must make available comparable
contributions (e.g. the same amount or the same
percentage of deductible) on behalf of all employees with
comparable coverage during the same period (e.g.
single/family) with certain exceptions.
Are there any
nondiscrimination rules for
employer contributions?

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• Distributions for qualified medical expenses of the individual and his or
her spouse or dependents generally are excludable from gross
income.
• Amounts in an HSA can be used for qualified medical expenses even
if the individual is not currently eligible for contributions to the HSA.
• Qualified medical expenses generally are defined as under Code §§
105 and 213(d) and include expenses for diagnosis, cure, mitigation,
treatment, or prevention of disease, including prescription drugs,
transportation primarily for and essential to such care, and qualified
long term care expenses.
When Can Distributions
Be Made?

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• Example:
 Ann establishes an HSA in 2012 and makes a contribution of
$2,000.
 She has an medical expense in 2013 of $10,000 which is not
reimbursed by her health plan or can a deduction on her Form 1040.
 She continues to contribute $2,000 each year during 2013, 2014,
2015 and 2016.
 In 2016, she withdraws $10,000 from her HSA tax free.
When Can Distributions
Be Made?

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• General rule is health insurance premiums cannot be paid
from HSA .
• Exceptions are for long-term care, COBRA, Medicare Part
A and B, Medicare HMOs, and employer-sponsored
retiree health insurance.
• Distributions from an HSA that are not for qualified medical
expenses are includible in gross income .
• These taxable distributions are also subject to an
additional 20% tax unless made after death, disability, or
the individual attains the age of Medicare eligibility (i.e.,
age 65).
When Can Distributions
Be Made?

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• Example:
 Eric, age 35. establishes and contributes $3,000 to his HSA in
March 2014.
 Later, he withdrawals to $1,500 to buy a big screen TV.
 When Eric later files his tax return for 2014, he must report $1,500
as income and pay an excise tax of $150.
 Would the answer be different if Erie had eligible medical expense of $1,500 later in
2014?
When Can Distributions
Be Made?

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• It is the eligible individual because he or she
claims treatment on Form 1040.
• The HSA custodian are not permitted to
substantiate claims.
• The employer is not permitted to substantiate.
Who Substantiates if Paid for
Medical Expenses?

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• Any balance remaining in the decedent’s HSA is
includible in his or her gross estate.
• If the HSA holder’s surviving spouse is the named
beneficiary of the HSA, then, after the death of the
HSA holder, the HSA becomes the HSA of the
surviving spouse and the amount of the HSA
balance may be deducted in computing the
decedent's taxable estate, pursuant to the estate
tax marital deduction.
What Happens to an
Individual’s HSA Upon his or
her Death?

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• If, upon death, an HSA passes to a named beneficiary
other than the decedent’s surviving spouse, the HSA
ceases to be an HSA as of the date of the decedent's
death, and the beneficiary is required to include the fair
market value of HSA assets as of the date of death in
gross income for the taxable year that includes the date of
death.
• A non-spouse beneficiary may reduce the taxable amount
by payments made from the HSA for qualified medical
expenses incurred by the decedent before death, but only
if the payments are made within one year after the death.
What Happens to an
Individual’s HSA Upon his or
her Death?

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• Yes. An individual’s interest in a HSA may be
transferred to an HSA established for the spouse
(or ex-spouse) under a decree of divorce or
separate maintenance or a written instrument
incident to such decree.
• Such distribution is not taxable or subject to a
20% excise tax and the spouse (or ex-spouse)
becomes the holder of the HSA.
Can Amounts be Transferred
Because of Divorce?

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• An HSA custodian may not accept annual contributions to
any HSA that exceed the sum of:(1) the maximum family
dollar limit for the year, plus (2) the catch-up contributions.
• All contributions must be in cash, other than rollover
contributions or trustee to trustee transfers.
• The HSA custodian is responsible for determining whether
contributions to an HSA exceeds the maximum family
statutory dollar limit for a particular account beneficiary.
What Responsibilities Does an
HSA Custodian Have?

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• No. Since employees own the HSA, an employer, trustee or custodian
may not place limitation on withdrawals.
• An HSA custodian may place reasonable restrictions on both
frequency and the minimum amount from an HSA.
• The HSA custodian may prohibit distributions for amounts of less than
$50 or only allow a certain number of distributions per month.
• An HSA custodial agreement may not restrict the account holder’s
ability to rollover or transfer an amount from that HSA.
May the Employer, HSA
Custodian put any Restrictions
on the Withdrawals from an
HSA?

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• Eligible individuals will report contributions to their HSAs,
contributions to their spouse’s HSAs, any employer
contributions and distributions on Form 8889.
 Form 8889 is an attachment to eligible individual’s Form 1040.
• Employer contributions are required to be reported in Box
12 on the Form W-2 of the employee, using code W.
• In addition, the HSA custodian must report contributions to
an HSA for a year on Form 5498-SA and distributions for
the year on Form 1099-SA.
What Reporting is Required?

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• When you contribute to an HSA, you must:
 Determine whether he or she is eligible.
 Determine the proper amount to contribute.
 Remove any excess contributions.
 Make distributions.
 Determine whether distributions are taxable or
nontaxable.
Individual’s New
Responsibility

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Questions?

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Contact Information
Larry Grudzien
• Phone: 708-717-9638
• Email: larry@larrygrudzien.com
• Site: www.larrygrudzien.com