A Health Savings Account (HSA) is a tax advantaged account that participants can use to pay for qualified health expenses they incur while covered by a high deductible health plan. HSA dollars, contributed by the employee, employer or another qualified party, accumulate over time with interest tax deferred , and also can be used to pay for non-health expenses on a taxable basis plus an excise tax.

When were Health Savings Accounts approved?

HSAs were developed as part of the recent Medicare legislation and signed into law in late 2003. They became effective January 1, 2004.

Can a Personal Benefit Account or Flexible Spending Account also be offered along with a Health Savings Account?

Generally HSAs cannot be offered in conjunction with these other tax-advantaged accounts. However, according to the preliminary IRS guidance, an HSA could be offered with the healthcare portion of the FSA if the latter was limited to benefits not covered by the high deductible health plan, or limited to benefits such as dental or vision. This question is expected to be addressed further in additional IRS guidance due soon.

Who is eligible to participate in a Health Savings Account?

An eligible individual is one who: - Is an active employee covered by a high deductible health plan

- Is not covered by any other medical plan that is not a high deductible (e.g., on a spouse's plan)

- Is not entitled to benefits under Medicare

- May not be claimed as a dependent on another person's tax return.

What are the advantages to a participant enrolled in a Health Savings Account?

HSAs allow full tax advantage to funds saved for qualified medical expenses: contributions are tax deductible; interest accrues tax-deferred; distributions (if made for qualified expenses) are tax-free. Participants can use the funds for non-health expenses on a taxable basis plus an additional 10% tax. Additionally, funds can accumulate for future medical expenses and are portable from one employer to the next. The employee has full choice and control over how to spend the money.

What should the employer consider when offering a Health Savings Account?

Each customer should carefully weigh all consumer plan options before choosing the one(s) that best fit their needs. HSAs allow for future health expense planning, offering opportunities to support retiree benefit strategies, and/or the needs of employers interested in portability of coverage. The tax advantages of the accounts will represent a value to both employer and employee alike. Some attributes of HSAs should be carefully understood by employers:

- Money contributed to the account is immediately owned by the employee. There is no vesting and the funds follow the employee after termination of employment.

- Employers do not control how the money is used. Qualified health expenses include all services listed under IRS Section 213(d) - the same section governing FSA coverage.

- Employees can also use the funds for non-health expenses; however, they are subject to tax plus an additional excise tax.The excise tax does not apply following death, disability or Medicare eligibility

Can Health Savings Accounts also be offered to an individual who is not enrolled in a group plan?

Yes, HSAs are currently being sold on an individual basis through many different companies.

What are the requirements for the high-deductible health plan?

Currently, for single coverage, the plan must have an annual in-network deductible of at least $1,000 and an annual in-network, out-of-pocket maximum of no more than $5,000. For family coverage, the annual in-network deductible must be at least $2,000 and the annual in-network out-of-pocket maximum can be no more than $10,000.

Are preventive care services covered under a high-deductible health plan?

Yes, though it is not required that the preventive care services accumulate toward the deductible. Preventive care services also may have a separate, lower deductible than other coverage's under the high-deductible health plan.

Can the health plan be a network-based plan?

Yes, as long as the plan has a deductible tied to network-based services. For example, a plan would qualify if it has both in-networkand out-of-network coverage, as long as there is a deductible tied to in-network services, and that deductible meets the $1,000 threshold for single, or $2,000 for family coverage. A separate out-of-network deductible can be applied to out-of-network services and could be greater, but not less than, the in-network deductible.

Who can contribute to a Health Savings Account?

Eligible employees or employers can contribute to a Health Savings Account. In addition, family members can make contributions to a Health Savings Account; however, that account must be established by an individual and funded according to IRS rules.When an employer contributes to the Health Savings Account, the funded amount is excluded from the employee's gross income. As a result, contributions are not subject to withholding from wages for income tax, FICA tax, State and Local taxes, Federal Unemployment Tax or the Railroad Retirement Tax. Contributions to an employee's Health Savings Account through a cafeteria plan are treated as employer contributions. The employee cannot deduct employer contributions on his/her federal income tax return as Health Savings Account contributions or as medical expense deductions under IRS Code Section 213 (d). When employees contribute to the Health Savings Account, the amount is deducted from their gross income. This lowers their taxable income, and, in turn, saves them money. These individuals also cannot claim contributions as medical expense deductions under Section 213 (d).

What are the tax rules of a Health Savings Account?

Health Savings Account is generally deferred from tax, and its use is exempt from tax if used for qualified expenses. Earnings on amounts in a Health Savings Account are not eligible to be a part of the employee's gross income amounts.

When can contributions be made to the Health Savings Account?

Contributions can start to be made on the first day of the month that the participant is enrolled in a high deductible health plan.

How much can be contributed to the Health Savings Account during 2004?

Employers, employees and/or their family members can contribute tax-deductible funds each year up to the amount of the high-deductible health plan policy's annual deductible. However, this amount cannot exceed $2,600 for individuals and $5,150 for families. If the full amount has not been funded in the calendar year, additional contributions can be deposited through the April 15 th tax deadline.

Is there an exception to these contribution maximums?

Yes, individuals between the ages of 55 and up to 65 can contribute an additional monthly "catch-up contribution." The HSA contribution limit for 2004 is $500; however, this "catch-up" amount will increase by $100 each year until it reaches a cap of $1,000 in 2009.

Do Health Savings Accounts earn interest?

Yes. In addition to the savings associated with pre-tax contributions, the funds are deposited in interest-bearing accounts. In addition, plan participants are 100 percent vested in both the employee and employer contributions in their accounts.

Are rollover contributions to Health Savings Accounts permitted?

Yes, rollover amounts from Archer Medical Savings Accounts (MSAs) and other Health Savings Accounts are permitted. However, rollovers from an IRA, a Health Reimbursement Account (Arrangement) or from a Flexible Spending Account to a Health Savings Account are not permitted.

How are distributions from a Health Savings Account taxed?

Distributions from the Health Savings Account are not taxed if they are used exclusively to pay for qualified health expenses for the account beneficiary, covered spouse or covered dependents. Any amount not used for qualified health expenses for individuals noted above, is included in gross income of the account beneficiary and is subject to an additional 10 percent tax. No excise tax applies if the distributions are made after the account beneficiary's death, disability or 65th birthday.

Does the employer need to verify that distributions from the Health Savings Account are for qualified services?

No. The participant needs to make that determination and should maintain records of their medical expenses to verify the expenses are for qualified services and therefore excludable from their gross income. This self-substantiation guideline is used for MSAs and applies to HSAs. The Internal Revenue Service may request receipts during a tax audit. Employers and plan administrators are not responsible or liable for misuse of HSA dollars by plan participants.

What forms does the employer need to file for their contributions to the Health Savings Account?

Information reporting for Health Savings Accounts will be required. The IRS will release forms and instructions on how to report Health Savings Account contributions, deductions and distributions.

Are the funds in a Health Savings Account portable?

Yes. The participant can take all of the funds in their Health Savings Account with them when they leave their employer. They are not forfeited after termination of employment.

Does the use-it-or-lose-it rule apply to a Health Savings Account?

No. Any unused amounts in the Health Savings Account will be carried over to the next plan year and can be used at any time. Can the participant use their Health Savings Account for services that were obtained prior to their enrollment in the HSA?

No, the expense must be incurred only after the participant is enrolled in the HSA to be eligible for reimbursement.

Does the participant have to put the funds in another Health Savings Account when they take their funds with them?

Participants must transfer funds to another eligible account within 60 days to avoid paying taxes on the savings.