Health Savings Accounts (HSA's) were passed as part of the new Medicare Reform Act. They became available in Connecticut in July, 2004. Currently in the individual and group market there are several insurance companies selling HSA's in Connecticut. HSA'S typically cost much less than traditional insurance plans.

What is an HSA?

An HSA is a savings account created for the purpose of paying medical expenses. It works in conjunction with high deductible medical insurance. High deductible medical insurance is a plan that has minimum annual deductibles and maximum deductible limits.

The minimum health insurance deductible for 2014 are:
$1,250.00 for individuals
$2,500.00 for families

The maximum (deductible contribution amount) for 2014 are:
$3,300.00 for individuals*
$6,550.00 for families*

* People age 55 and older can contribute an additional $800.00 per policy.

How does the plan work?

The HSA plan is based on the concept of taking a higher deductible plan where you will save a considerable amount of money on your premium. You can take these savings and invest them in your own Health Savings Account (HSA). The HSA money (savings) can be used to pay the medical insurance deductible and medical expenses not covered by the medical insurance plan.

If you meet the deductible with covered expenses, the medical insurance plan pays 100% for remaining covered expenses. Payment of all plan benefits is subject to all terms and conditions of the policy, including medical necessity determinations. Out-of-network benefits are also subject to reasonable and customary determinations. There are 80% plans also available.

Who can have an HSA?

The individual must be:

1. Covered by high deductible medical insurance
2. Not covered under other health insurance
3. Not entitled to Medicare

Exceptions: Other health insurance does not include coverage for the following: accidents, dental care, disability, long-term care and vision care.

Workers' compensation, specified disease, and fixed indemnity coverage is also permitted.

Can my spouse have their own HSA?

Yes, they may either be covered under a family HSA or take out their own high deducible HSA plan.

What are the tax benefits?

There are three major tax advantages to your HSA.
1. Cash contributions during a tax year to an HSA are deductible from your federal gross income.
2. Interest earnings accumulate tax-deferred.
3. Withdrawals from an HSA for "qualified medical expenses" are free from federal income tax.

What is a qualified medical expense?

A qualified medical expense is one for medical care as defined by IRS Code Section 213(d). The expenses must be primarily to alleviate or prevent a physical or mental defect or illness. Most expenses for medical care will fall under IRS Code Section 213(d).

Below are examples of both qualified and non-qualified medical expenses. For additional information, refer to IRS Publication 502 titled, "Medical and Dental Expenses", Catalog Number 15002Q. The publication is available at the IRS web site, or by calling 800-TAX-FORM (800-829-3676).

Examples of Qualified Medical Expenses

Examples of Non-Qualified Medical Expenses

-Alcoholism treatment
-Artificial limbs or
-Artificial teeth
-Birth control pills
(by prescription)
Breast reconstruction
-Car – special hand
controls or equipment
to accommodate a
disabled person
-Christian Science
-Contact lenses and
cleaning solutions
-Dental treatment
-Diagnostic devices
(blood sugar test kit)
-Drug addiction
-Fertility enhancement
-Guide dog or
assistance animal
-Hearing aids
and batteries
-Home Care
-Home improvements
to accommodate
a disabled person
-Hospital services
-Lab fees
-Laser eye surgery
-Lead paint removal
-Lodging (away from
home for prescribed
outpatient care)
-Long-term care
premiums (certain
limits apply)
-Long-term care
Nursing home
-Nursing services
(including board
and meals)
-Organ transplant
(including donor's
-Oxygen and
oxygen equipment
-Physician services
-Prescription medications
-Psychiatric care
-Special home for
the mentally retarded
-Special school costs
for the handicapped
programs (physician
-Telephone or TV
equipment to assist
the hearing impaired
(primarily for and
essential to medical care)
-Weight loss
programs to treat
an existing disease
-Athletic or health club membership
-Automobile insurance premium
allocable to medical coverage
-Babysitting and childcare
for a healthy baby
-Bottled water
-Cosmetic surgery and procedures
(unless for deformity)
-Cosmetics, hygiene products
and similar items
-Diaper service
-Domestic help
-Electrolysis or hair removal
-Funeral, cremation or
burial expenses
-Hair transplant
-Illegal operations
and treatments
-Maternity clothes
-Nutritional supplements
-Premiums for life insurance,
income protection, disability,
loss of limbs, sight or similar

This list contains examples and is not intended to be all inclusive.

What are the tax-deductible contribution limits?

The law. Annual contribution limits are based on:
1. Whether you have an individual or a Family HSA plan;
2. The maximum tax deductible contribution limits for 2010 are $3,050 for individuals and $6,150 for families*; and
3. Medicare eligibility. You may no longer contribute once you become entitled to Medicare.

* New for 2007. You can now have the minimum HSA plan deductible ($1,200 for individuals and $2,400 for families) and still contribute the maximum amount to your HSA account.

Excess contributions: If contributions exceed the amount you can legally deduct/exclude from your taxes – the excess is taxed as ordinary income and subject to a 6% additional excise tax.

Avoiding Penalties: You can avoid the additional tax by withdrawing the excess amounts and interest on it before the tax filing deadline.

How are deposits made?
Deposits are made through the insurance company and set up on the same payment plan as premiums for the medical insurance. Customers can also make a lump sum deposit.

What kind of reports will I get?
You will receive quarterly statements showing deposits and withdrawal activity with your account balance.

Miscellaneous Questions

1. Can I have an HSA and an IRA?

Yes, having an HSA in no way restricts your ability to have an IRA.

2. Are there adjustments for inflation?

Yes, the tax law requires an annual Cost of Living Adjustment (COLA) based on changes in the Consumer Price Index. This calculation, rounded to the nearest $50 increment, affects deductible limits, maximum out-of-pocket amounts, and the maximum annual HSA contribution limits.

3. Can HSA money be rolled into an IRA account?

No, it can only be rolled over into another qualified HSA without incurring tax consequences.

4. What happens to an HSA if I terminate the plan?

Your HSA balance is mailed to the customer. You can spend that amount tax free as long as it is for a qualified expense. If it is not a qualified expense, they would be subject to a 10% penalty plus taxes just as it is with an early withdrawal from an IRA.

5. Does anyone verify what the withdrawals from a HSA is used on?

It is based on an honor system. Though if someone gets audited by the IRS, they would have to provide documentation as to how they spent the money from the HSA. The insurance does not track the withdrawals from the HSA and is not responsible for how the money is sp

6. Is Maternity coverage included in an individual HSA
Maternity is included in all ACA plans.

7. What are there advantages to using a PPO?

The PPO premium is priced on average 17% less than a non-PPO plan. You never have to worry about reasonable and customary charges in a PPO plan. You receive discounts for medical services through the PPO plan.

8. Are there out-of-pocket maximums?

Yes. The maximum out-of-pocket for an individual is $5,400.00, and the maximum out-of-pocket for a family is $10,800.00. This type situation would most likely arise if someone chose a PPO plan and used out-of-network services. In this case the deductible doubles and the co-insurance is 75% versus 100% if they stayed in network.

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