A quick summary of various elements of Health Savings Accounts. With healthcare being more in the public discussion, HSA's can be very beneficial.

1. Health Savings Accounts
(HSAs)
A Tax-Advantaged Program for meeting medical costs

2. HSAs - Background
• Established as a part of the Medicare Prescription Drug Improvement
and Modernization Act
• Signed into law by George W Bush, on December 8th, 2002
• Designed to replace MSAs (Medical Savings Accounts)
• Created for taxpayers who have HDHPs (High-deductible health plan)

3. HSA – What is this?
• Tax-exempt trust or custodial account
• Not meant to replace health insurance
• Available to anyone enrolled in a HDHP
• Pays reimbursements/out-of-pocket medical expenses
• Participants or their employers can make contributions
• Participant (not employer) contributions are deductible
• Distributions are not taxable
• Think – “Medical Expense IRA”

4. Benefits of HSAs
• Contributions are deductible (except employer contributions)
• Employer contributions are excluded from participant income
• Earnings on HSA account funds are tax-free
• Employee contributions, can be made through employer (like
Cafeteria Plan)
• Not required to use current year contributions – can be carried
forward
• Distributions are tax-free (if used for medical expenses)
• HSA is portable – can change employer & take it with you

5. Benefits of HSAs - continued
• Once participant reached age 65, non-qualified distributions can be
made without penalty (but may be subject to tax)
• Encourages taxpayers to save for future health care expenses

6. Disadvantages of HSAs
• Must have a High-Deductible Health Plan (HDHP) in order to
participate – these plans tend to be more costly for participant
• If funds in HSA are invested in stocks, bonds, or mutual funds – they
are subject to market fluctuations – account balances could decline
• These accounts usually have fees associated with them
• Distributions that are not qualified medical expenses are subject to
tax a possible a penalty (unless 65 or older)
• Need to have some financial acumen to gauge if it is worth
contributing to a HSA on yearly basis

7. Disadvantages of HSAs - continued
• Hard to budget for amount to contribute
• Funds may not be available to fund HSA at any given time
• Available funds in HSA may prompt participant to spend on
unnecessary medical expenses

8. How do you Qualify for an HSA?
• You are eligible if covered by a “high-deductible” health plan
• Defined as plan having a specified minimum and maximum deductible level during the year
(adjusted for inflation)
• 2016 Minimum and Maximum (single filers) is $1,300 and $6,550
• 2016 Minimum and Maximum (married filers) is $2,600 and $13,100
• 2017 Minimum and Maximum (single filers) is $1,300 and $6,550
• 2017 Minimum and Maximum (married filers) is $2,600 and $13,100
• You are eligible for entire year, if you become eligible on 1st day of last month of
your tax year (December 1st for most people)
• However if you use the “last-month rule” you have for remain eligible for subsequent 12-
months into next year
• Not eligible if on Medicare
• Not eligible if you “can” be claimed on someone else’s return as a dependent
exemption (exemption does not need to be taken)

9. How do you Qualify for an HSA (continued)
• Eligible even if spouse is covered by another plan that is not a high-
deductible health plan (as long as you are not covered under the
plan)
• Contributions must be made in cash
• Contributions limited to – 2016 (single) $3,350 and (family) $6,750
• Contributions limited to – 2017 (single) $3,400 and (family) $6,750
• Contributions can be made up to April 15th of following year
• Participants age 55 or older can contribute an additional $1,000
• Employer contributions reported on employee Form W-2

10. What happens if too much is contributed?
• Defined as contributions greater than allowed limits
• Not deductible
• If participant made contribution – picked up as income on Form 1040,
Other Income line
• If employer made – picked up as taxable income on employee W-2
• Potential 6% excise tax (can be cured, if done before April 15th)

11. Funding Distributions
• Can make a “funding” distribution from a Tradition or Roth IRA
• Only trustee-to-trustee transfers allowed
• Not allowed for SEPs or SIMPLEs
• Only once per lifetime
• Limited to yearly contribution limitations
• Not taxable, but not deductible
• Has to be eligible for HSA

12. Rollovers
• Rollovers are allowed
• From HSA to another HSA
• From Archer MSA to a HSA
• Tax free (if funds taken personally, r/o has to be completed within 60
days)

13. Distributions
• Tax-free if for qualified expenses
• Same as defined for Schedule A medical expense deduction
• Insurance can qualify, if for long-term care
• If unemployed, COBRA qualifies
• Expenses have to have been incurred “after” establishment of HSA
• If not qualified expenses – distribution is taxable and subject to 20%
penalty (if under 65 year old)
• Flexibility in method of distribution (check, debit card,
reimbursements, et al)

14. Distributions (continued)
• Participant will receive a Form 1099-SA
• Distributions are “not” required in any given year
• Tax-free distributions can happen in future, even if participant no longer
qualifies for HSA (qualification only matters for contributions and
establishment)
• All distributions are reported on Form 8889 (Health Savings Account)
• Each HSA gets its own Form 8889 reporting

15. Deemed Distributions (Unintended)
• If HSA account is used as security for a loan
• Prohibited transactions with HSA –
• Exchange (sale/lease) of property between plan and disqualified person
• Lending of money between plan and disqualified person
• Furnishing goods and services between plan and disqualified person
• Transfer of assets and/or income of plan to disqualified person
• Consideration from plan to disqualified person
• Disqualified person – participant/fiduciary

16. Death of HSA holder
• If spouse is a beneficiary, then he/she holder HSA
• If beneficiary is not spouse, account is no longer an HSA and
beneficiary has to include FMV of the HSA in their income in the year
account holder died

17. Employer - Issues
• In order to be able to offer an HSA to employees, must offer a HDHP
to employees
• Cannot discriminate
• If discrimination – 35% excise tax
• Notice requirements to employees to prevent discrimination
• Contributions are reported on employees Form W-2 in Box 12, with a
Code “W”