What is a Health Savings Account (HSA)?
- An HSA is like a bank account that is funded with pre-tax or tax-deductible dollars that can be used to pay for qualified medical expenses. Balances roll over from year to year and earn interest tax-free.
How do qualified high-deductible health plans and HSAs work together?
- To participate in an HSA, a person must be enrolled in a qualifying high-deductible health plan, one that meets federal guidelines. HSAs let an individual or family covered by a high-deductible health plan deposit tax-deductible contributions into the HSA account, make tax-free deductions from the account to pay for IRS-defined qualified medical expenses, and realize tax-free growth of the funds invested over time.
What are the advantages to offering such a plan?
- Combined with an HSA, a qualified high-deductible health plan encourages employees to make wiser health care decisions. Since employees are essentially using “their own money” to pay for health care expenses, they will use the funds more carefully. The result of employees knowing the cost of care may mean reduced health plan costs in the future. HSAs represent an important way to save for future health care expenses. Employees may use HSA funds to subsidize the expenses associated with a high-deductible plan, or save the money for the future.
How does this type of coverage differ from other types of plans?
- With qualified high-deductible health plans, all benefits, except for preventive services, are subject to a deductible, including prescription drugs. Depending on the plan you choose there may be one shared deductible for family coverage, where the entire family deductible must be met before any non-preventive benefits are paid, or an embedded deductible for family coverage, where benefits are paid once one person in the family meets the individual deductible. After that, other members of the family must meet the full family deductible. An office visit copay will apply to most preventive services, including wellness exams. Preventive services include items such as physical exams, well-child care, some routine screenings and immunizations, and prescription medications on the Preventive Drug List.
Who can establish an HSA?
- Most individuals or employers enrolled in a qualified high-deductible health plan may establish an HSA. However, to be eligible, a person cannot be covered by a health plan that provides coverage for a benefit that is covered by the high-deductible health plan except for permitted insurance. In addition, a person:
- Cannot be enrolled in Medicare.
- Cannot be claimed as a dependent on another person’s tax return.
Who can contribute to an HSA?
- Both employers and employees may contribute to an HSA.
When can HSA funds be accessed?
- Account holders may withdraw funds from their HSAs at any time and for any purposes, although taxes and some penalties apply if the funds are not used for qualified medical expenses.
What is a “qualified medical expense”?
- Qualified medical expenses include the portion of costs associated with services typically covered by a health care plan, such as office visits, emergency room services, and hospitalizations that are not reimbursed by insurance. These include medical plan deductibles and coinsurance. Qualified medical expenses also include costs for prescription drugs and many over-the-counter drugs, vision expenses including eyeglasses and contact lenses, and non-cosmetic dental expenses. Qualified medical expenses are defined by IRS code 213(d) and are listed in IRS Publication 502.
How do the deductibles and out-of-pocket maximums work?
- Some of the qualified high-deductible health plans have a “shared family deductible,” which means the entire family deductible must be met before any non-preventive benefits are paid. After the deductible is met, coinsurance applies to covered benefits. The shared family deductible amount is included in the out-of-pocket maximum, and out-of-pocket maximums are shared for all family members. However, with the Embedded Deductible plans, once an individual meets their portion of the deductible, services are paid for that person without the entire family deductible being met. The other family members then pay toward the family deductible amount.
Can HSA funds be used to pay medical insurance premiums?
- Generally, HSA funds cannot be used to pay premiums for health insurance coverage. Exceptions include COBRA premiums, qualified long-term care premiums or premium payments that allow the account holder to retain health coverage while he or she is receiving unemployment compensation. Members can also use HSA funds for Medicare premiums, except for Medigap.
Who owns the HSA?
- The employee, as the account holder, owns the HSA. Funds in the HSA are portable and move with the employee if he or she changes jobs.
Is there a limit to the amount of HSA contributions?
- Contributions can be made up to a maximum of $3,050 single/$6,150 family for 2010 and 2011. HSA holders age 55 and older may make catch-up contributions. The maximum contribution amount is indexed each year. For 2010-2011, it is an additional $1,000.
Are there rules that apply to employer contributions?
- Employers who choose to make contributions to HSA accounts typically must make comparable contributions for all HSA participating employees. In most cases, this means the employer must deposit the same amount or same percentage (if offering different deductible plans) into each and every HSA participating employee’s account; however, matching contributions can be made through a cafeteria plan, and Section 125 non-discrimination tests apply. New legislation allows employers to make higher contributions to non-highly compensated employees. This exception to the comparability rules helps employers who do not currently run HSA contributions through a cafeteria plan.
Who is responsible for keeping records on the HSA?
- The account holder is responsible for maintaining all the paperwork for eligibility and expenses. Additionally, the account holder is responsible for ensuring funds are used for qualified medical expenses or reporting other uses to the IRS.
Are HSAs required in order to offer a qualified high-deductible health plan?
- No. High-deductible health plans may be offered with or without an accompanying HSA account. Employers may set up an HSA at the workplace for employees, or employees may choose to establish an HSA on their own.
Does enrolling in a qualified high-deductible plan instantly qualify a person for an HSA?
- No. Although qualified high-deductible health plan coverage is required with HSAs, enrollees must meet certain requirements in order to qualify.
Can a person have other health coverage and still be eligible for an HSA?
- Only in certain instances. Permitted insurance includes workers’ compensation, property insurance, insurance for a specific disease, such as cancer coverage, and insurance that pays a fixed amount per day of hospitalization. Coverage for dental, vision, long-term care, accidents, and disability are also permitted.
What happens to unused funds in the HSA?
- Unused funds roll over from year to year and may earn interest, tax-free. Employees may also continue to use funds after high-deductible health plan coverage terminates and/or at retirement.
Do carryover deductible amounts apply?
- No. Qualified high-deductible health plans do not include fourth-quarter carryover provisions.
What if HSA funds are used to pay for items other than qualified medical expenses?
- That amount needs to be reported as income when the HSA holder files taxes. It will be taxed as regular income and, if the account holder is less than age 65, it will also be subject to a 10 percent tax penalty. Account holders 65 and older can use the money for non-qualified expenses; they will be taxed but the 10 percent penalty will not apply.
Will deductible or out-of-pocket maximum amounts change?
- Under federal regulation, minimum deductible and maximum out-of-pocket amounts are indexed annually. However, some indexing is already built into our qualified high-deductible health plans. The deductible and out-of-pocket maximum amounts currently available with BlueCross BlueShield of Tennessee’s qualified high-deductible health plans will be valid for several years.
What is the Preventive Drug List and when can it be used?
- The Preventive Drug List includes prescription drugs approved by the FDA to help prevent certain medical conditions as defined by the IRS. According to the Preventive Care Safe Harbor guidance of the Internal Revenue Code, the Preventive Drug List can be used with an HSA-compatible high-deductible health plan and be covered outside of the deductible.
Why are medications on the Preventive Drug List able to bypass the required deductible in an HSA-qualified plan?
- The Medicare Modernization Act, which enabled HSAs, also emphasizes and encourages preventive care to help maintain overall health and avoid the need for costly chronic care. Guidelines for high-deductible health plans stipulate that preventive care – including prescription medications used for preventive purposes – can be excluded from the deductible.
How are medications on the Preventive Drug List processed and paid?
- If a plan benefit is attached to the Preventive Drug List, any drug on the list will be processed at the appropriate copay. All other drugs covered under the plan benefit will be subject to the deductible until it is met. A copy of the Preventive Drug List is available on the BlueCross BlueShield of Tennessee Web site at bcbst.com/pharmacy.
What are the advantages of using the Preventive Drug List option?
- Using the Preventive Drug List with an HSA-qualified plan can:
- Help employees stretch their pre-tax funds
- Encourage employees to fill and take preventive medications as prescribed
- Promote medication compliance, reducing the risk of future medical services
- Improve employee adoption and satisfaction of the HSA-qualified plan with preventive care medications available at the appropriate copay and not subject to the deductible (first-dollar coverage)
- Smooth the transition in converting from a traditional benefit plan to an HSA-qualified plan
What was the approval process for placing medications on the Preventive Drug List?
- Physicians, pharmacists and clinicians at BlueCross BlueShield of Tennessee worked in conjunction with our pharmacy benefits manager to evaluate and develop the Preventive Drug List. Suggested drug classes were evaluated to ensure that the indications for which the drugs are commonly prescribed are considered preventive based on guidance provided by the IRS. Each drug within the suggested classes was individually reviewed for inclusion, and the entire list also underwent external clinical validation. Cost or formulary status was not a factor in the evaluation and approval process.
How does a person set up an HSA?
- HSAs can be established through banks or financial institutions. BlueCross BlueShield of Tennessee has teamed up with financial partners to help those who wish to set up an HSA. For details, talk with your broker or call a BlueCross BlueShield of Tennessee representative at 1-800-565-9140.
What other legislative changes have added advantages to offering and using HSAs?
- Recent rulings have made it possible for an employer to allow their employees to make a one-time transfer from a health FSA or HRA to an HSA; for an employee to make a one-time, tax-free rollover from an IRA to an HSA; and for a mid-year enrollee to make a full-year HSA contribution. Though certain restrictions must be met for these and other recent changes, the new laws make it even easier for employees to quickly build and fund their HSA.