Health Savings Account Sales Guidelines: Eligibility, Eligible Expenses, Contributions, Distributions and Taxes

Eligibility for Health Savings Accounts
Any individual under age 65 who is covered by a high deductible health insurance plan and who is not entitled to or covered by Medicare or other health insurance—including an unlimited health reimbursement account (HRA) or health financial savings account (FSA)—can qualify.  To qualify, individuals cannot be claimed as a dependent on someone else’s tax return.

Eligible expenses for Health Savings Account's
HSAs can be used to pay for many types of qualified medical expenses, even some which are often excluded on health insurance plans. These include: 

• Health insurance plan deductibles, copayments and coinsurance paid for qualified medical expenses 
• Prescription and over-the-counter drugs
• Dental services, including braces, bridges and crowns
• Vision care, including glasses and Lasik eye surgery
• Psychiatric and certain psychological treatments
• Qualified Long-term care services and insurance premiums (subject to certain limits based on age are adjusted annually) 
• Medically-related transportation and lodging (subject to certain limitations)
• IRS Code section 213 expenses
• Premiums paid for health care continuation coverage, e.g. COBRA premiums and certain health insurance premiums (check with a tax advisor or IRS for specifics)^†

NOTE: Generally, an HSA may not be used to purchase health insurance unless specifically excepted. Expenses that are not qualified medical expenses include premiums paid for Medicare supplemental coverage and Medigap. To be sure if a medical expense qualifies as eligible, check with a tax advisor or the IRS.

Health Savings Account Contributions

• Annual contribution limitations: individuals, lesser of annual deductible or $2,850; families, lesser of annual deductible or $5,650 (these are 2007 contribution amounts and may increase based upon IRS guidelines)
• Additional catch-up contributions ($800 in 2007) are allowed for individuals aged 55-64
• Married couples may be able to make two catch-up contributions under separate HDHPs with family coverage
• Catch-up contributions will be increased by $100 per year until they reach $1,000 in 2009
• Contribution deadline is due date of individual’s federal income tax return
• Contributions may be made by any person, (an employer, a family member or any other person) on behalf of the eligible individual
• Rollover contributions are allowed from another health savings account or medical savings account (MSA)

Health Savings Account Distributions

• Distributions are tax-free for qualified expenses of covered individual, spouse and dependents (cannot have joint health savings account but expenses for both can come out of one account)
• Expenses must be incurred after the HSA has been set up
• Distributions for expenses or reimbursements other than qualified medical expenses are subject to income tax and a 10 percent tax penalty will apply
• Removing funds from account does not have to occur at same time as the actual medical expense
• Distributions may occur even if the individual is no longer eligible to contribute to the HSA
• HSA funds may accumulate for use after retirement
• The HSA holder is entirely responsible for determining the eligibility of the expense as well as for maintaining records and reporting

Tax Guidelines for Health Saving Accounts

• Within limits contributions may be tax deductible
• Within limits employer contributions made on behalf of an eligible employee may be excluded from taxable income
• HSA investment earnings accumulate on a tax-free basis
• Clients should always be directed to consult a tax advisor for their own specific facts and circumstances

Consult these resources for more information about HSAs:

www.treas.gov/offices/public-affairs/hsa/technical-guidance

This site includes technical information and basic information about HSAs. It also includes a comprehensive Frequently Asked Questions section.

www.ama-assn.org

This site provides a comprehensive report by the American Medical Association on the history and development of HSAs. It also includes a comparison with medical savings accounts and information about the demand for HSAs by individuals and employers.