Health Savings Account

A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers who enroll in a High Deductible Health Plan (HDHP), often referred to as a Consumer Driven Health Plan (CDHP).
Unlike a Flexible Spending Account (FSA), funds roll over and accumulate year after year if not spent.  HSAs are owned by the individual.  Funds are available to pay for qualified medical expenses at any time without federal tax liability.  These accounts are components of consumer driven health care.  An individual contributing to an HSA must recognize their responsibility as an individual taxpayer when choosing any product that reduces their tax liability.  Ultimately, the individual is responsible for determining whether to itemize or take the standard deduction.  It they itemize, they must be willing to maintain appropriate records required to substantiate the deductions and to complete a more complicated Form 1040 and associated Schedule A for itemized deductions.
HSAs encourage saving for future health care expenses and make consumers more responsible for their own health care choices through the required High-Deductible Health Plan.

How they work

Deposits

Any individual enrolled in an eligible high-deductible health plan may make deposits to a Health Savings Account.  Employee contributions are deducted on a pre-tax basis through an employer’s Section 125 Plan. Contributions may also be made on a post-tax basis and then used to decrease gross taxable income on the following year's Form 1040. Regardless of the method or tax savings associated with the deposit, the deposits may only be deducted for persons covered under an HSA-eligible high-deductible plan, with no other coverage beyond certain qualified additional coverage.
All contributions to an HSA, regardless of source, count toward the annual maximum. A catch-up provision also applies for plan participants who are age 55 or over, allowing the IRS limit to be increased.  Contribution limits for 2010 are $6150 for Family, $3,050 for individual, and $1,000 for catch-up contributions.
All deposits to an HSA become the property of the policyholder, regardless of the source of the deposit. Funds deposited but not withdrawn each year will carry over into the next year. If the policyholder ends their HSA-eligible insurance coverage, he or she loses eligibility to deposit further funds, but funds already in the HSA remain available for use.
The Tax Relief and Health Care Act of 2006 signed into law on December 20, 2006, added a provision allowing a one-time rollover of IRA assets that can be used to fund up to one year's maximum HSA contribution.

Contribution Limits

According to IRS Publication 969, "Health Savings Accounts and Other Tax-Favored Health Plans", you can contribute to your HSA to meet a tax-year’s maximum until April 15 of the following year.

Investments

Funds in an HSA can be invested in a manner similar to investments in an Individual Retirement Account (IRA). Investment earnings are sheltered from taxation until the money is withdrawn (and can be sheltered even then, as discussed in the section below).
While HSAs can be "rolled over" from fund to fund, an HSA cannot be rolled into an IRA or a 401(k), and funds from these types of investment vehicles cannot be rolled into an HSA, except for the one time IRA transfer allowed above. Unlike some employer contributions to a 401(k) plan, all HSA contributions belong to the participant immediately, regardless of the deposit source. A person contributing to an HSA is under no obligation to contribute to his or her employer-sponsored HSA, although employers may require that payroll contributions be made only to the sponsored HSA plan.

Withdrawals

HSA participants do not have to obtain advance approval from their HSA trustee or their medical insurer to withdraw funds, and the funds are not subject to income taxation if made for qualified medical expenses. These include costs for services and items covered by the health plan but subject to cost sharing such as a deductible and coinsurance, or co-payments, as well as many other expenses not covered under medical plans, such as dental, vision and chiropractic care; durable medical equipment such as eyeglasses and hearing aids; and transportation expenses related to medical care. Non-prescription, over-the-counter medications are also eligible.
There are different withdrawal methods available.   Some HSAs include a debit card, some supply checks for account holder use, and some allow for a reimbursement process similar to medical insurance. Most HSAs have more than one possible method for withdrawal. The exact method of withdrawal varies from HSA to HSA and is dependent on the marketing design. Checks and debits do not have to be made payable to the provider. Funds can be withdrawn for any reason, but withdrawals that are not for documented qualified medical expenses are subject to income taxes and a 10% penalty. The 10% tax penalty is waived for persons who have reached the age of 65 or have become disabled at the time of the withdrawal. Then, only income tax is paid on the withdrawal, and in effect the account has grown tax deferred (similar to an IRA). Medical expenses continue to be tax free.
Account holders are required to retain documentation for their qualified medical expenses. Failure to retain and provide documentation could cause the IRS to rule withdrawals were not for qualified medical expenses and subject the taxpayer to additional penalties. When a person dies, the funds in their HSA are transferred to the beneficiary named for the account. If the beneficiary is a surviving spouse, the transfer is tax-free.

Benefits

The premium for a CDHP generally is less than the premium for traditional health insurance. A higher deductible lowers the premium because the plan will require the consumer to pay the first dollar coverage.  When the consumers see a relationship between medical cost and their bank accounts, they will consume less medical care, shop for bargains, and be more vigilant against excess and fraud in the health care industry. Introducing consumer-driven supply and demand and controlling inflation in health care and health insurance were among the government's goals in establishing these plans.
With CDHPs, in catastrophic situations the maximum out-of-pocket expense liability can be less than that of a traditional health plan. This is because a qualified CDHP can cover 100% after the deductible, involving no coinsurance.
HSAs also give the flexibility not available in some traditional health plans to pay on a pre-tax basis for qualified medical expense not covered in standard or HSA insurance plans. This may include dental, orthodontics, vision, and non-prescription medications such as aspirin.
HSA accounts also have an advantage over Flexible Spending Accounts since deposits are not necessarily tied to expenses in a particular plan or calendar year. Balances automatically roll over for future medical expenses, or are used to reimburse qualified expenses from prior years as long as the expense was qualified under an HSA plan at the time incurred. Over time, if medical expenses are low and contributions are made regularly to the HSA, the account can accumulate significant assets that can be used for health care tax free or used for retirement on a tax-deferred basis.

Criticisms

HSAs, if invested in market driven products, are subject to market risk, as is any investment. While the potential upside from investment gains can be viewed as a benefit, the subsequent downside and possibility of capital loss may make the HSA a poor option for some.
EPISD’s Health Savings Account
An HSA will complement the Consumer Driven Health Plan (CDHP) Option by allowing employees to participate in a tax-free savings account to help off-set medical expenses that would be incurred by employees prior to meeting the deductible.  Included in the proposal offered by Aetna in response to RFP # 05-07, Aetna confirmed the ability to administer a CDHP and an HSA account.  The Account Maintenance Fee applicable to the administration of the Health Savings Account includes :

• Designated HSA Account Team
• Implementation Support
• Member Services
• Debit Card
• Reporting (Plan Sponsor and Member)
• Integrated claim processing (HSA Auto Debit)
• All funding activity
• Tax Reporting

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