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Details about the Health Savings Account (HSA)

A Health Savings Account (HSA) is an account employees can use for qualified healthcare expenses.

Both you and your employee can put money in the HSA. Once money goes into the account, it belongs to the employee - the HSA is in his or her name, just like a personal checking or savings account.

Why should employees use an HSA for healthcare expenses?

Because they fund the HSA with pre-tax money, they're using tax-free funds for healthcare expenses they would normally pay for out-of-pocket. HSA contributions don’t count toward the employee's taxable income for federal taxes. They’re not taxable in most states, as well.*

Another advantage is that the account can grow over time.

Since the money always belongs to the employee, even if he or she leaves the company, and unused funds carry over from year to year, the employee never has to worry about losing funds. If an employee doesn't use a lot of healthcare services now, the HSA funds will be there if he or she needs them in the future – even after retirement.

The HSA is also an investment opportunity.

With Humana’s HSA, the employee's account can grow tax-free* in an interest-bearing savings account, a money market account, a wide variety of mutual funds – or all three. Of course, funds are always available if needed for qualified healthcare expenses.

To be eligible to contribute to an HSA, the employee must have an IRS-qualified High Deductible Health Plan (HDHP).

In addition to the HDHP requirement, the IRS has set other rules about participating in an HSA.

An employee cannot have an HSA if any of the following is true:

  • The employee is covered by other insurance that pays for medical services, like coverage under a spouse's plan. This includes medical plans, Flexible Spending Accounts, and Health Reimbursement Arrangements. If the spouse has a comprehensive FSA (one that covers more than a "limited purpose" like vision and dental), the employee is not eligible for an HSA - even if the FSA dollars aren't used for the employee.
  • The employee is enrolled for Medicare benefits.
  • The employee can be claimed as a dependent on another person's tax return.

Generally, employees can put enough in the HSA to cover their entire deductible, and then the qualified High Deductible Health Plan helps pay for healthcare after they meet the deductible. The annual contribution limit is based on IRS rules. In general, the total amount that goes in the account each year - from both the employee and employer - cannot be more than the IRS annual contribution limit. Employees who are age 55 or older are allowed to make extra contributions each year.

To put money in the account, employers can allow paycheck deductions.

If not, employees can make contributions by sending the deposit directly to the account with personal funds.

Employees can spend only the money that's actually in the account.

If healthcare expenses exceed the HSA balance, the employee needs to pay the remaining cost another way, such as cash or personal check. He or she can request reimbursement after accumulating more money.

Employees can use HSA funds for spouses and dependents - even if they aren't covered by the employee's qualified High Deductible Health Plan.

Employees can use HSA funds for IRS-approved items

Examples include:

  • Doctor's office visits
  • Dental services
  • Eye exams, eyeglasses, contact lenses and solution, and laser surgery
  • Hearing aids
  • Orthodontia, dental cleanings, and fillings
  • Prescription drugs and some over-the-counter medications
  • Physical therapy, speech therapy, and chiropractic expenses

More information about approved items, plus additional details about the HSA, is available on the IRS Website at www.irs.gov.

Every time employees use HSA funds, they should save a receipt in case the IRS asks for expense substantiation. If an employee uses HSA funds for a nonqualified expense, he or she will have to pay taxes and penalties on the ineligible amount.

Employees with an HSA can have a "limited" Flexible Spending Account (FSA) for dental and vision care, as well as certain preventive care services.

*All mention of taxes is made in reference to federal tax law. Review your state's tax laws to determine the treatment of HSA contributions and earnings.

How it works example - single coverage

Lucy enrolls in a High Deductible Health Plan. Her plan is effective January 1, 2008 and has the following features:

  • $1,500 single deductible
  • 80 percent coinsurance for in-network providers

She also has a Health Savings Account. Even though Lucy and her employer can put up to $2,900 in a Health Savings Account, Lucy funds the account up to the deductible ($1,500):

  • $500 from her employer
  • $1,000 from Lucy's tax-free paycheck deductions
Year 1

Lucy's healthcare costs are higher than usual because she breaks her leg. Her expenses for the year total $2,715:

  • Hospital doctor's services - $650
  • Hospital facility cost - $350
  • X-rays at hospital - $200
  • Specialist office visit - $315
  • Six physical therapy sessions - $1,050
  • Two prescriptions - $150
Here's how Lucy uses her HSA to pay for healthcare
HSA funds $1,500
Total cost of services $2,715
Lucy uses HSA to pay deductible $1,500
Balance of cost of services $1,215
PPO plan pays 80% of costs $972
Lucy pays remaining 20% $243
HSA funds remaining $0
Summary

When the accident happened, Lucy used the HSA dollars deposited so far to cover her deductible. She wrote a check for the rest and then got reimbursed from her HSA when more money went into the account. After Lucy used the HSA to meet her $1,500 deductible, her health plan kicked in to help her pay the remaining $1,215. The plan paid 80 percent coinsurance, and Lucy paid the other 20 percent out of pocket. Because she used all the money in her HSA, Lucy has a zero balance at the end of the year.

Year 2

Lucy's healthcare costs aren't as high as last year. She has an illness that requires two doctor's office visits and two prescriptions. Her expenses for the year total $435:

  • Two doctor's office visits - $200
  • Two prescriptions - $235
Here's how Lucy uses her HSA to pay for healthcare
HSA funds $1,500
Total cost of services $435
Lucy uses HSA to pay deductible $435
HSA funds remaining $1065
Summary

Because her healthcare expenses were only $435, Lucy didn't use all of her HSA funds. She also didn't have to use any of her take-home pay to cover out-of-pocket costs. At the end of the year, she has $1,065 left - all of the money she put in, plus part of her employer's contribution. She can use the money tax-free for healthcare expenses in the future and even invest it tax-free.

These examples are for the purpose of illustration only. The amounts will vary, depending on the plan selected and whether the employee has single or family coverage.

How it works example - family coverage

Doug chooses a High Deductible Health Plan that covers himself, his wife Tina, and their two children - four-year-old John and newborn Julie. Their plan is effective January 1, 2008 and has the following features:

  • $2,500 family deductible
  • 80 percent coinsurance for in-network providers

Even though Doug and his employer can put up to $5,800 in a Health Savings Account, Doug funds the account up to the deductible ($2,500):

  • For the first year, Doug's employer contributes $500, and Doug adds another $2,000 in tax-free paycheck deductions.
  • For the second year, Doug's employer contributes another $500. Doug adds $2,000 to the account through tax-free paycheck deductions. He also has the $1,725 left over from Year 1.
Year 1

Both children get sick once during the year. Not surprisingly, they spread the illness to their dad - but Tina manages to avoid it. Doug, John, and Julie each visit the doctor once. Doug and John need a prescription to treat the illness, and John also gets some lab tests. The family's expenses for the year total $775:

  • Three doctor's office visits - $300
  • # Lab tests - $100
  • # Three prescriptions - $375
Here's how Doug uses an HSA to pay for healthcare
HSA funds $2,500
Total cost of services $775
Douguses HSA to pay deductible $775
HSA funds remaining $1,725
Summary

Because the family's healthcare expenses were only $775, Doug didn't use all of his HSA. He spent his employer's $500 contribution, plus $225 of the money he put in tax-free. At the end of the year, he's spent none of his take-home pay on out-of-pocket costs, and he still has $1,725 left to use for future healthcare expenses.

Year 2

This year, John is injured – leading to X-rays, a three-day hospital stay, knee surgery, and two prescription drugs. On top of that, both Tina and Julie get sick and have to go to the doctor. The family's expenses for the year total $7,710:

  • Hospital care - $3,000
  • X-rays - $250
  • Surgeon and anesthesiologist - $4,000
  • Two doctor's office visits - $200
  • Two prescriptions - $260
Here's how Doug uses an HSA to pay for healthcare
HSA funds $4,225
Total cost of services $7,710
Doug uses HSA to pay deductible $2,500
Balance of cost of services $5,210
PPO plan pays 80% of costs $4,168
Doug pays remaining 20% with HSA $1,042
HSA funds remaining $683
Summary

Doug used the $2,500 in his HSA to meet the plan's deductible, leaving $1,725 in his account. After meeting the deductible, the family's health benefits kicked in to pay 80 percent of the remaining healthcare costs. Doug paid the other 20 percent with his HSA. He didn't have to use any of his take-home pay to cover out-of-pocket costs, and he still has $683 left to use for future healthcare expenses.

These examples are for the purpose of illustration only. The amounts will vary, depending on the plan selected and whether the employee has single or family coverage.

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