HEALTH SAVINGS ACCOUNTS (HSA Plans)

The new year brings new limits on maximum HSA contributions and minimum deductibles for qualified high-deductible health plans (HDHPs).

In addition, President Bush signed HSA legislation that had a positive impact for all HSAs. The highlights of this legislation include:

• Allowing people to take their health savings accounts with them if they move from job to job.
• Raising contribution limits and allowing for a one-time transfers from IRA accounts.
• Allowing a contribution up to an annual limit of $3,100 for individuals and $6,250 for families in 2012, regardless of the deductible for their insurance plan.
• Allowing the option to fully fund their HSAs regardless of what time of year they sign up for the plan

Eligibility

• Individuals under the age of 65 are eligible to contribute to an HSA if they have a qualified health plan in 2012.
  • For self-only policies, a qualified health plan must have a minimum deductible of $1,200 with a $6,050 in 2012 cap on out-of-pocket expenses (indexed annually).
  • For family policies, a qualified health plan must have a minimum deductible of $2,400 with a $12,100 in 2012 cap on out-of-pocket expenses (indexed annually).
• Preventive care services are not subject to the deductible. In addition, coverage for accidents, disability, dental care, vision care, and long-term care is not subject to the deductible.

Contributions

• Contributions are allowed up to a maximum annual contribution is $3,100 in 2012 for self-only policies and $6,250 in 2012 for family policies (indexed annually).
• Individuals age 55 – 65 may make additional “catch- up” contributions of up to $1,000 annually. A married couple can make two catch- up contributions as long as both spouses are at least 55. Catch-up contributions will help individuals accumulate assets for retiree health expenses.
• Contributions may be made by individuals, family members and employers.
  • Contributions made by individuals and family members are tax-deductible (for the account beneficiary) even if the account beneficiary does not itemize. Employer contributions are made on a pre-tax basis and are not taxable to the employee. Employers will be allowed to offer HSAs through a cafeteria plan.
• Investment earnings accrue tax-free.

Distributions

• HSA distributions are tax- free if they are used to pay for qualified medical expenses, such as:
  • Amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease,
  • Prescription drugs,
  • Qualified long-term care services and long-term care insurance,
  • Continuation coverage required by Federal law (i.e., COBRA),
  • Health insurance for the unemployed,
  • Medicare expenses (but not Medigap), and
  • Retiree health expenses for individuals age 65 and older (Note: retiree health plans would not have to meet the $1,200/$2,400 minimum deductible requirements.)
• Distributions made for any other purpose are subject to income tax and a 10% penalty. The 10% penalty is waived in the case of death or disability. The 10% penalty is also waived for distributions made by individuals age 65 and older.

HSA Rules for Dependents Under Age 26

While the Patient Protection and Affordable Care Act of 2010 (PPACA ) allows parents to add their dependent children (up to age 26) to their health plans, the IRS has not changed its definition of a dependent for health savings accounts. This means that a person could have their 25-year-old child covered on their HSA -qualified high-deductible health plan, but not be eligible to use their HSA funds to pay for medical bills for that 25-year-old. Reimbursements issued in violation of this rule will be taxed and could be subject to the 20% HSA penalty for an early withdrawal. For all HSA plans, group or individual, the IRS definition of a dependent is used when determining whether a dependent qualifies and how benefits are administered for dependents. The account holder must be able to "claim" the child/relative as a dependent on their tax return, and if they cannot, they are not allowed to spend HSA dollars on services provided to that child/relative. The IRS defines a qualifying child dependent as follows:

• Daughter, son, stepchild, sibling or stepsibling (or any descendant of these)
• Has same principal place of abode for more than one-half of taxable year
• AND not yet age 19 (not yet age 24 if student)
• OR permanently and totally disabled.

We at CDA Insurance encourage HSA account holders to seek advice from their financial advisor or tax consultant if they have questions.

Treatment at Death

• Upon death, HSA ownership may transfer to the spouse on a tax-free basis.

Effective Date

• January 1, 2012.