HSAs ~ In A Nutshell
-
You save money on personal taxes since annual contributions to
the Savings Account component of an HSA are tax-deductible
-
You save money on current and future day-to-day medical costs
by using tax-free dollars to meet those expenses, and an insurance company to pay the catastrophic
bills
-
You also save money through lower rates on your health
insurance since an HSA allows you to purchase the health plan component of the
plan using a lower cost, high deductible, while protecting your higher
deductible exposure through the tax-deductible Savings Account component of
the HSA
-
Your unused, Savings Account funds, grow tax-deferred - what
you don't spend you keep year after year (a lot like an Individual Retirement
Account, except that you use it to pay for medical expenses).
HSA Eligibility:
-
You must be or get covered by a qualified High
Deductible Health Plan (HDHP) - the Minimum & Maximum Deductibles can be
found here (see charts):
All About HSAs
-
You must not be covered by other health insurance
(exceptions: vision, dental, long term care, disability, life and accident
insurance are okay)
-
You must not be enrolled in Medicare
-
You must not be claimed as a dependent on another's tax
return
A.
For a complete explanatory article about HSAs first - Click Here
B. Legislative updates -
Click
Here
C. Tax Deductibility Issues
of GROUP HSAs - - the HDHP and the Savings Account
HSA
Component
1: Health Insurance (High Deductible Health Insurance)
HSA
Component 2: Savings Accounts (Equal to 100% of the Deductible)
How GROUP HSAs Work for Employers:
Employers
current health insurance cost is divided into two piles of money. One is
used to buy a qualified high-deductible health plan ("HDHP), the
other is used to create a cash account for the employee to spend
on routine day-to-day medical care expenses.
The
money in the cash account is used for expenses that are below the deductible.
The cash account is commonly called a Health Savings Account (HSA).
Satisfied
Employees - HSAs create great employee satisfaction. Long-term
savings for the employer are the real benefit. Employees become smart shoppers
for medical care when they realize the money in the cash account at year's
end is theirs to keep (no so with flexible spending accounts or FSAs). Costs controlled
because of cost-conscious employees. Employees feel good about the insurance
coverage because you have returned to the day when the employee can pick
the doctor. It's the
employee's doctor, not the insurance company's doctor.
How Health Savings Accounts Work For Employees (2 Components):
I.
HEALTH SAVINGS ACCOUNT - (Cash Savings Account)
-
Dental
-
Vision
-
Chiropractic
-
Psychological
-
Acupuncture
HSAs provide
first-dollar benefits, and the Employee keeps any unused money left in HSA at year's
end.
II.
MAJOR MEDICAL PLAN - (High Deductible Health Plan)
-
Employer
purchases Major Medical - High Deductible Health Plan (premiums for such plans
are typically far lower than traditional low deductible or rich benefits low
co-pay HMO plans).
-
The HSA
Savings Account funds are used for expenses that are below the deductible.
-
When the HSA Savings Account funds are used up, and the deductible is met, the catastrophic
HSA Major Medical Health Plan kicks in.
-
Major Medical
typically provides a lifetime maximum of $1 million plus per covered person.
Tax Deductibility Issues of
Group HSAs - - the HDHP and the Savings Account
The only "individuals" who can take
an above-the-line tax-deduction for both the HSA-HDHP premiums and Savings
Account deposits they make are Sole-Proprietors, and 2% or greater Owners in an
S-Corporation or Partnership.
Other persons,
and especially Owners/Officer employees of traditional C-Corporations are not
permitted, under current tax law, a personal tax-deduction for such HDHP premium
payments.
Employee
contributions can be made to HSAs on either an after-tax or pre-tax basis. If
made on an after-tax basis they should be counted as an above-the-line deduction
on their tax return, effectively making their contributions tax-free. If they
want to make the contribution pre-tax it can be done through a Cafeteria Section
125 Plan. If your employer offers a 'salary reduction' plan (also known as a
'Section 125 Plan' or 'Cafeteria Section 125 Plan'), you (the employee) can make
contributions to your HSA-HDHP on a pre-tax basis (i.e., before income taxes and
FICA taxes). If you can do so, you cannot also take the 'above-the-line'
deduction on your personal income taxes noted above. Contributions (both from
employer and/or employee) must meet the 'non-discrimination' rules of such plans
that require the employer to ensure that contributions do not favor higher
compensated employees.
When employers pay all or a
percentage of either the HDHP premiums or the Savings Account deposits of their
employees, such "contributions" are fully deductible to the entity, and not
considered income to the employee, except in the case of traditional
C-Corporation Owner/Officer employees as noted above. Therefore, the best
approach for such Owners/Officer employees is to install a Cafeteria Section 125
Plan to at least move any employer contributions on their personal coverage to
their HDHP from an after-tax to a pre-tax basis (resulting in greater
take home pay for the employee and reduced FICA taxes and Workers Compensation
Rates for the employer).
Direct deposits
into one's own personal Savings Account of an HSA by the covered person are
fully tax-deductible (can be written off against AGI, or Adjusted Gross Income,
on line 33 of one's personal 1040 federal tax form as an above-the-line
deduction, or deductions that allow one to reduce taxable income by the amount
they contribute to their HSA), whether an individual or employee of any form of
business entity. One does not have to "itemize deductions" to benefit, and
contributions can also be made to your HSA-Savings Account by others (e.g.,
relatives; employers; etc.); however, you alone receive the benefit of the
tax-deduction.
Can I claim both the
'above-the-line' deduction for an HSA and the itemized deduction for medical
expenses?
You may be
able to claim the medical expense deduction even if you contribute to an HSA;
however, you cannot include any contribution to the HSA or any distribution from
the HSA, including distributions taken for non-medical expenses, in the
calculation for claiming the itemized deduction for medical expenses.
Can I take a
tax-deduction for my HDHP premium?
Not at this time
unless, as noted above, you are a Sole-Proprietor or a 2% or greater Owner in an
S-Corporation or a Partnership. President Bush has proposed also allowing individuals,
not covered by an employer plan, to deduct their HDHP premiums; however, this proposal will not be effective until enacted by
Congress.
[Note:
contributions made by a business into an employees' HSA Savings Account, while
Federally tax-deductible to the corporation, and not considered income to the
HSA Savings Account owner, are nonetheless taxable by the State of CA to
the employee]. Health
Savings Accounts put you back in control of your health care
...and
you reap the considerable rewards!
NO
rationing of care and NO HMO "gatekeeper" doctor(s)!
With HMO's
closing in, we are all on the verge of losing our freedom of choice for
medical care. Health Savings Accounts (HSAs) give control
back to you - the way it should be. With the right HSA you decide which
doctor to visit and you are free to seek the care you need, and you have
the money to pay for it.
HSAs
empower you to make decisions that reflect your own best interests. Personal
decisions - like whether to get a second opinion - are best made by individuals,
not by bureaucrats. HSAs involve you in your own health care delivery,
and in turn provide long-term satisfaction for your family.
HEALTH SAVINGS ACCOUNT
+
MAJOR
MEDICAL
=
MORE
COVERAGE !
To
obtain a quote please complete the census information in the
Quotes
page of this Website, or simply submit your Company
Census and info to us online or via email to:
(Info@LeagueFinancial.com).
Please include a copy of your current plans benefits & rates and any
information regarding health risks within your group (i.e. pre-existing health
conditions or ongoing medical problems).
+
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Legislative Updates:
IRS Clarifies HSA Grace Periods and Cafeteria FSA Grace Period
Connections - 11/22/05
The IRS provided welcome relief and clarification this week
related to the intersection between Health Savings Accounts (HSAs) and Health
Flexible Spending Arrangement (Health FSA) grace periods. This is good and
timely news for employers taking a first-time dip in the pool of
Consumer-Driven Health Care (CDHC) next year.
IRS Notice 2005-86,
released on Nov. 22, 2005 actually offers guidance on two important issues:
HSA-Health FSA Interaction
When
IRS Notice 2005-42 modified the
“use-it-or-lose-it” rule, it provided Health FSA plans the ability to carry
over unused account balances for a grace period of up to two months and 15
days. This created a problem for employers who wanted to offer an HSA and a
Health FSA grace period at the same time.
The problem is that a general-purpose Health FSA constitutes
impermissible coverage that prohibits an individual from participating in an
HSA. In Tuesday’s Notice, the IRS identified three arrangements (one available
for a transitional time only) in which an individual can participate in both
an HSA and a Health FSA grace period:
-
The
employer may amend its Health FSA to make it a limited-purpose FSA.
-
The
employer may amend its Health FSA to make it a post-deductible FSA.
-
For
plan years ending on June 4, 2006 or earlier, employers may have a
general-deductible FSA and an HSA if:
-
The
individual is covered under a High Deductible Health Plan (HDHP) and does
not have any other impermissible health coverage; and
-
The
individual has either a zero-balance on his/her Health FSA account or the
employer amends the Health FSA to make the grace period unavailable for
individuals who elect HDHP coverage.
If these rules are not applied, an individual who has
coverage in a general-purpose Health FSA that offers a grace period will not
be eligible to participate in an HSA until the first day of the month
following the date that the grace period ends (e.g., for calendar-year plans
extending the maximum 2½-month grace period: April 1).
Grace Period Clarifications
The IRS also confirmed its position on other issues related
to the grace period. First, a grace period must be offered to all participants
(including those on COBRA) who were covered by the Health FSA on the last day
of the plan year. Second, an employee who terminates employment during a grace
period is still eligible for the full amount of time of the grace period.
Third, an employer may offer a grace period for some Cafeteria Plan benefit
options (e.g., a Health FSA), but not others (e.g., a Dependent Care FSA).
Finally, the maximum grace period ends on the 15th day of the third calendar
month after the month in which the plan year ends.
September 21,
2005 - Comparability Rules Clarified for HSAs
The IRS and Treasury released proposed regulations on August 25, 2005,
implementing comparability requirements that must be met for employer
contributions to eligible employee’s Health Savings Accounts (HSAs). The
proposed regulations generally follow the previously issued guidance on
comparability rules along with additional clarification with respect to a few
issues not previously addressed. Employers who fail to follow comparability
rules could be penalized with an excise tax. These rules will not affect HSA
contributions made through section 125 cafeteria plans.
An employer is not required to contribute to the HSAs of its employees,
however may choose to contribute. Under the proposed rules, employers who
elect to make contributions to the employees’ HSAs are required to do so
comparably for all employees who:
-
Are eligible
individuals enrolled in a high-deductible health plan (HDHP),
-
Are in the same
category of employment, and
-
Have the same
category of coverage
Comparability
rules would apply separately for three (and only these three) categories of
employees:
-
Current
full-time employees,
-
Current
part-time employees, and
-
Former
employees.
Collectively
bargained employees are not a separate group, nor are management and
non-management employees. But if the employer offers separate types of HDHPs,
separate comparability rules could apply for each type of HDHP. In addition,
the comparability rules do not apply to amounts rolled over from an employee’s
HSA or Archer Medical Savings Account.
Unlike many other employer-provided tax-advantaged benefits, HSAs do not have
nondiscrimination rules restricting the amount of benefits provided to highly
compensated employees. Instead, the HSA regulations requires that all employer
pre-tax contributions to employee HSAs must be the same amount or the same
percentage of the HDHP deductible for all employees with the same category
(self or family) of HDHP coverage.
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