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Health Insurance Alternatives-The Basics about HSA's

   


The Basics:
- What is a Health Savings Account?
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A Health Savings Account is an alternative to traditional health insurance; it is a savings product that offers a different way for consumers to pay for their health care. HSAs enable you to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.

An HSA works like an IRA (individual Retirement Account), except that money is used to pay health care costs.  Participants enroll in a less expensive high deductible insurance plan.  Then, a tax-deductible savings account may be opened to cover current and future medical expenses.  The money deposited, as well as the earnings, is tax-deferred. The money can then be withdrawn to cover qualified medical expenses tax-free.  Unused balances roll over from year to year.

You must be covered by a High Deductible Health Plan (HDHP) to be able to take advantage of HSAs. An HDHP generally costs less than what traditional health care coverage costs, so the money that you save on insurance can therefore be put into the Health Savings Account.

You own and you control the money in your HSA. Decisions on how to spend the money are made by you without relying on a third party or a health insurer. You will also decide what types of investments to make with the money in the account in order to make it grow.

 

- Why High Deductible Health Insurance?
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To get the benefits of an HSA, the law requires that the savings account be combined with High Deductible Health Insurance. High Deductible Health Insurance costs less than traditional low deductible coverage, because the insurance company does not have to process and pay claims for routine, low-dollar medical care.

For 2011, a High Deductible Insurance Plan is a health plan with a minimum deductible of $1,200 for self-only coverage and $2,400 for family coverage.  The maximum out-of-pocket expenses for allowed costs must be no more than $5,950 for self-only coverage and no more than $11,900 for family.

- How does a Health Savings Account work?
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You obtain coverage under a qualified health insurance plan with a minimum deductible of $1,200 for singles and $2,400 for families.  You are then allowed to deposit up to $3,050 for singles or $6,150 for families into your Health Savings Account for 2010.  Older Americans can save even more.  You do not have to itemize your deductions on your federal income taxes to deduct your contributions to an HSA.  You can use the savings account to pay for your lower-dollar medical expenses, or those that are not covered by the health plan.  Once you meet the deductible, the health insurance covers your medical expenses as defined in the policy.

- How much does HSA-qualified health insurance cost?
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Because HSA-qualified health plans all have high deductibles, they typically have much lower premiums than traditional health insurance plans.  The plans are individually priced based on the group's age, location, health history, deductible, PPO network options selected, billing method and other services.  

- When you are paying for your medical expenses from your HSA account, how does your insurance company know when you have paid up to your deductible?
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There are two options...

If you use an in-network provider, they can file your claim for you.  This is the smart way to work things, as it will ensure that you receive the company's discounted PPO price, instead of having to pay the full price.

Or, you could simply save the bills and submit them to the company yourself, either all at once, or after you have reached a certain limit in bills.

- How does the new health care reform law affect my coverage and HSA?
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Many provisions of the health care reform law are increasing costs to insurance companies, thus leading to even higher insurance rates.  Thus, we are seeing more people than ever who are switching to an HSA-qualified plan, which not only provides lower premiums but also significant tax advantages.  The new law does increase the penalty for non-medical fund withdrawal from your HSA, and makes over-the-counter medicines no longer an eligible expense which can be paid from your HSA. 

- My employer offers an FSA, can I have both an FSA and an HSA?
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You can have both types of accounts, but only under certain circumstances.  General Flexible Spending Arrangements (FSAs) will probably make you ineligible for an HSA.  If your employer offers a “limited purpose” (limited to dental, vision or preventive care) or “post-deductible” (pay for medical expenses after the plan deductible is met) FSA, then you can still be eligible for an HSA.

- How much can I contribute to my HSA each year?
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For 2007 and forward, your maximum annual HSA contribution is based on the statutory limit for your type of coverage. For 2007, if you have self-only HDHP coverage, your contribution is $2,850; $5,650 if family HDHP, no matter what your HDHP deductible is. Before 2006, the contribution could not exceed the deductible of your HDHP. If you are age 55 or older, you can also make additional “catch-up” contributions (see below).

- Do my HSA contributions have to be made in equal amounts each month?
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No, you can contribute in a lump sum or in any amounts or frequency you wish. However, your account trustee/custodian (bank, credit union, insurer, etc.) can impose minimum deposit and balance requirements.

- Can my employer contribute to my HSA?
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Contributions to HSAs can be made by you, your employer, or both. All contributions are aggregated to determine whether you have contributed the maximum allowed.
If your employer contributes some of the money, you can make up the difference.

- Do my contributions provide any tax benefits?
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Your personal contributions offer you an “above-the-line” deduction. An "above-the-line" deduction allows you to reduce your taxable income by the amount you contribute to your HSA. You do not have to itemize your deductions to benefit. Contributions can also be made to your HSA by others (e.g., relatives). However, you receive the benefit of the tax deduction.

- If my employer contributes to my HSA, does that also provide me any tax benefit?
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If your employer makes a contribution to your HSA, the contribution is not taxable to you the employee (excluded from income).

- I’m over 55 and would like to make catch-up contributions to my HSA, like I’ve done with my IRA. Is that possible?
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Yes, individuals 55 and older who are covered by an HDHP can make additional catch-up contributions each year until they enroll in Medicare. The additional “catch-up” contributions to HSA allowed are as follows:

        2008 - $900
        2009 and after - $1,000

- I turned 55 this year. Can I make the full “catch-up�� contribution?
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If you had HDHP coverage for the full year, you can make the full catch-up contribution regardless of when your 55th birthday falls during the year. If you did not have HDHP coverage for the full year, you must pro-rate your “catch-up” contribution for the number of full months you were “eligible”, i.e., had HDHP coverage. However, if you are covered on December 1, you are treated as an eligible individual for the entire year and get the full contribution.

- If both spouses are 55 and older, can both spouses make “catch-up” contributions?
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Yes, if both spouses are eligible individuals and both spouses have established an HSA in their name. If only one spouse has an HSA in their name, only that spouse can make a “catch-up” contribution.

- Does tax filing status (joint vs. separate) affect my contribution?
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Tax filing status does not affect your contribution.

- Does an HSA pay for the same things that regular insurance pays for?
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HSA funds can pay for any “qualified medical expense”, even if the expense is not covered by your HDHP. For example, most health insurance does not cover the cost of over-the-counter medicines, but HSAs can.  If the money from the HSA is used for qualified medical expenses, then the money spent is tax-free.

- How do I know what is included as “qualified medical expenses”?
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Unfortunately, we cannot provide a definitive list of “qualified medical expenses”.  A partial list is provided in IRS Pub 502 (available at www.irs.gov). There have been thousands of cases involving the many nuances of what constitutes "medical care" for purposes of section 213(d) of the Internal Revenue Code. A determination of whether an expense is for "medical care" is based on all the relevant facts and circumstances. To be an expense for medical care, the expense has to be primarily for the prevention or alleviation of a physical or mental defect or illness. The determination often hangs on the word "primarily."

- Do unused funds in a Health Savings Account roll over year after year?
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Yes, the unused balance in a Health Savings Account automatically rolls over year after year. You won’t lose your money if you don’t spend it within the year.

- What happens to the money in a Health Savings Account after you turn age 65?
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You can continue to use your account tax-free for out-of-pocket health expenses.  When you enroll in Medicare, you can use your account to pay Medicare premiums, deductibles, copays, and coinsurance under any part of Medicare.  If you have retiree health benefits through your former employer, you can also use your account to pay for your share of retiree medical insurance premiums.  The one expense you cannot use your account for is to purchase a Medicare supplemental insurance or “Medigap” policy.

Once you turn age 65, you can also use your account to pay for things other than medical expenses.  If used for other expenses, the amount withdrawn will be taxable as income but will not be subject to any other penalties.  Individuals under age 65 who use their accounts for non-medical expenses must pay income tax and a 10% penalty on the amount withdrawn.

- Can I use my HSA to pay for medical expenses incurred before I set up my account?
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No.  You cannot reimburse qualified medical expenses incurred before your account is established.  We recommend you establish your account as soon as possible.

- Who will be the “bookkeeper” for my HSA?
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It is your responsibility to keep track of your deposits and expenditures and keep all of your receipts. If you run out of HSA funds (and therefore need to use your HDHP), you may need to send those receipts to your insurer.

- How do I use my HSA to pay my physician when I’m at the physician’s office?
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If you are still covered by your HDHP and have not met your policy deductible, you will be responsible for 100% of the amount agreed to be paid by your insurance policy to the physician.  Your physician may ask you to pay for the services provided before you leave the office.  If your HSA custodian has provided you with a checkbook or debit card, you can pay your physician directly from the account.  If the custodian does not offer these features, you can pay the physician with your own money and reimburse yourself for the expense from the account after your visit. 

If your physician does not ask for payment at the time of service, the physician will probably submit a claim to your insurance company, and the insurance company will apply any discounts based on their contract with the physician.  You should then receive an "Explanation of Benefits" from your insurance plan stating how much the negotiated payment amount is, and that you are responsible for 100% of this negotiated amount.  If you have not already made any payment to the physician for the services provided, the physician may then send you a bill for payment.

- Who has control over the money invested in a Health Savings Account?
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The account holder controls all decisions over how the money is invested. You can also choose not to invest your funds.

- Can the funds in an HSA be invested?
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Yes, you can invest the funds in your HSA. The same types of investments permitted for IRAs are allowed for HSAs, including stocks, bonds, mutual funds, and certificates of deposit.

- Can I borrow against the money in my HSA?
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No. You may not borrow against it or pledge the funds in it. For more information on prohibited activities, see Section 4975 of the Internal Revenue Code.

- What happens to the money in my HSA when I die?
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What happens depends on how the HSA is designed. If your spouse is designated as the beneficiary by you, your spouse becomes the owner of the HSA when you die. If you provide that it goes to your estate or other entity, the value of the HSA at death is income to the estate or other entity.

- Additional Information can be found at the following links:
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