Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) R. Bruce McCommons Harford County, MD TrC 12/4/2013 rbrucemcc@comcast.net

Health Savings Accounts (HSA)... An HSA is... • A tax-exempt trust or custodial account... • Set up with a qualified HSA trustee... • To pay or reimburse certain medical expenses HSAs are individually owned—there is no such thing as a joint HSA... HINT: Think IRA

Health Savings Accounts (HSA)... Benefits of an HSA... • The taxpayer can claim a tax deduction for contributions they or someone other than their employer make to the HSA (i.e., Form 1040, line 25)even if they do not itemize on their tax return... • Contributions made to the taxpayer’s HSA by their employer are excluded from the taxpayer’s gross income... • Contributions remain in the owner’s account from year to year until used up... • Interest or other earnings generated by the HSA are tax free... • Distributions used to pay qualified expenses are tax free... • An HSA is “portable...” Setting up an HSA does not require permission from the IRS, but certain eligibility requirements must be met

Health Savings Accounts (HSA)... To set up or contribute to an HSA, an individual must meet ALL of the following requirements... • Be covered by a high deductible health plan (HDHP) on the first day of any month of the year... • Have no other health coverage except for allowable “other health coverage,” i.e., • Liability insurance... • Insurance against specific disease/illness... • Fixed per day hospitalization expenses... • Accident, Disability, Dental, Vision... • Long term care... • Prescription drugs as long as the plan does not provide benefits until the minimum annual deductible of the HDHP has been met... • Not be claimed as a dependent on someone else’s tax return... • Not be covered by Medicare

Health Savings Accounts (HSA)... A high deductible health plan (HDHP) is health coverage with... • A higher annual deductible than typical health plans, and a... • A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses... • Out-of-pocket expenses include co-payments, but not insurance premiums... • An HDHP can cover certain types of preventive care without a deductible, or with a deductible lower than the annual deductible... • The high deductible requirements do not apply to dental or vision coverage

Health Savings Accounts (HSA)... HDHP Deductible Limits for 2013... Type of Coverage Self-Only Family Minimum Annual Deductible $1,250 $2,500 Maximum Annual Deductible and Other Out-of-Pocket Expenses $6,250 $12,500

Health Savings Accounts (HSA)... HSA Contribution Limits for 2013 (includes taxpayer, third party*, and employer contributions)... Type of Coverage Self-Only Family Annual Contribution Limit $3,250 $6,450 Catch-up Contribution (55 or older) $1,000 $1,000 *Anyone can contribute to the taxpayer’s HSA

Health Savings Accounts... Contribution Rule Limits... • If an eligible individual on the first day of every month in the calendar year, the full contribution amount is allowed... • If not an eligible individual for the entire year, or they changed their coverage during the year, the contribution limit is the greater of the amount allowed under one of the following rules... • Last-month rule—if enrolled in an HDHP on 1 December, the taxpayer is considered eligible for the entire year and can deduct the maximum plus any catch-up provisions (however, they must remain eligible from 1 December of the current year until 31 December of the following year, i.e., the “testing period”)... • Sum of the monthly contributions rule—if only eligible in some months of the year not including December, is calculated by multiplying the maximum annual contribution (e.g., $3,250 for a self-only policy held by a taxpayer under the age of 55) by the number of months eligible and dividing the result by 12

Health Savings Accounts, Form 8889, Part, Distributions... Example: Tom has a self-only HSA ($3,250 annual limit) and turns 55 on 1 September which makes him eligible for a $1,000 catch-up; his annual limitation using the “Sum of the monthly contributions” rule is calculated using the worksheet at the bottom of the Form 8889, Page 1... Enter the allowed annual limit for each eligible month TaxWise will total, divide by 12, and send the result to the 8889, line 3...

Health Savings Accounts... Important HSA-related forms... • Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information—used to report TOTAL, i.e., taxpayer, employer, and third party, contributions to the taxpayer’s HSA for the tax year... • W-2, Wage and Tax Statement—used to report employer contributions to an employee’s HSA; included in Block 12 as a code “W...” • Form 1099-SA, Distributions from an HSA, Archer MSA, or Medicare Advantage MSA—used to report TOTAL distributions from the taxpayer’s HSA regardless of whether they were used to pay “qualified medical expenses...” • Form 8889, Health Savings Accounts, used to... • Report HSA contributions (employee, third party, and employer)... • Figure the taxpayer’s HSA deduction.. • Report HSA distributions... • Figure taxable distributions and penalties

13 Health Savings Accounts, Form 5498-SA... Box 2 shows total contributions to the taxpayer’s HSA and includes any qualified distributions (trustee to trustee transfers) from their IRA to fund the HSA... T Rowe Price 123 Elm Street Owings Mills, MD 21276-1234 $2,050 from the taxpayer, $1,000 from the employer X 3,050.00 Tom T Smith 1 Employee or self-employed person’s Archer MSA contributions made in 2011 and 2012 for 2013 123 Main Street 2 Total contributions made In 2013 Bel Air, MD 21014-1234 3 Total HSA or Archer MSA contributions made In 2012 for 2013

13 Health Savings Accounts... Total contributions to an HSA are reported annually on form 5498-SA... 2013 2013 T Rowe Price 123 Elm Street Owings Mills, MD 21276-1234 2013 Be careful—must subtract employer contributions made from January 1, 2014 through April 15, 2014, that were for 2013. X 3,050.00 2050 3250 Tom T Smith 1 Employee or self-employed person’s Archer MSA contributions made in 2011 and 2012 for 2013 123 Main Street The Box 2 amount less employer contributions is entered on Form 8889, line 2 2 Total contributions made In 2013 Bel Air, MD 21014-1234 3 Total HSA or Archer MSA contributions made In 2012 for 2013

$25,000.00 $2,500.00 $25,000.00 $1,050.00 $25,000.00 $363.00 W $1,000.00 Tom T Smith 123 Main Street Bel Air, MD 21014-1234 2013 Health Savings Accounts, Form W-2...

Health Savings Accounts... Employer contributions to an employee’s HSA are reported on the W-2 as a Code “W” in Box 12, and entered on the TW W-2 input form... When TW “sees” a Code W in Box 12 of the W-2 input form, it opens a Form 8889 in the Forms Tree, and the amount entered in Box 12 flows to the 8889, line 9

Health Savings Accounts, Form 8889, Part 1, Contributions... Select coverage... Enter employee and third party contributions from the Form 5498-SA... Limitation... Complete line 6... Employer contributions from TW W-2 Input form, Block 12... HSA deduction to 1040, line 25

Health Savings Accounts, Form 8889, Part 1, Contributions... If there were no employer contributions, i.e., only the taxpayer and/or a third party made contributions to an HSA... Link to the Form 8889 from the 1040, line 25... Complete lines 1, 2, and 6... And the HSA deduction calculated on line 13 will flow back to the 1040, line 25

Health Savings Accounts, Form 8889, Part 1, Contributions... Suppose Tom didn’t understand the rules and contributed too much to his HSA e.g., $3,050... He would then have an excess contribution on which he would have to pay a penalty... To get rid of the penalty, override and set to -0- However, if he withdrew the excess by April 15, 2014, he could avoid the penalty

T Rowe Price 123 Elm Street Owings Mills, MD 21276-1234 13 1,350.00 1 Tom T Smith X 123 Main Street Bel Air, MD 21014-1234 Health Savings Accounts, Form 1099-SA, Distributions...

T Rowe Price 123 Elm Street Owings Mills, MD 21276-1234 13 1 Tom T Smith X 123 Main Street Bel Air, MD 21014-1234 Health Savings Accounts, Form 8889, Part II, Distributions... Distributions from an HSA are reported on form 1099-SA, Box 1... 1,350.00 Normal distribution and on the 8889, Part II, line 14a

Health Savings Accounts, Form 8889, Part II, Distributions... Enter the total distributions received from Form(s) 1099-SA on line 14a.. Enter the total unreimbursed qualified medical expenses on line 15... If line 15 is equal to or greater than line 14a, there are no tax consequences

Health Savings Accounts, Form 8889, Part II, Distributions... If line 15 is less than line 14a, the difference is taxable, and the amount in line 16, Taxable HSA distributions, will flow to the 1040, line 21, Other income...” Line 21 will show the taxable distribution, and the Type of Other income will indicate “HSA” if no other sources have already been reported…

Health Savings Accounts, Form 8889, Part II, Distributions... Additionally, if the taxpayer is alive, under 65, and not disabled, there is an additional 20% tax which is calculated on line 17b, and flows to the 1040, line 59, Other taxes...

Health Savings Accounts, Form 8889, Part II, Distributions... If the taxpayer is deceased, 65 or older, or disabled, check the box on line 17a, and the additional tax will disappear...

Health Savings Accounts, Part III, Income and Additional Tax... There are consequences when the taxpayer fails to maintain HDHP coverage during the testing period... Part III is used to figure penalties under various circumstances... However, Part III is out of scope for the TCE program

Health Savings Accounts... Qualified medical expenses... • Qualified medical expenses are pretty much the same as if doing a Schedule A—exception is that over the counter medicines are also deductible but, beginning with TY 2011, only with a doctor’s prescription (this change does not apply to insulin)... • If a taxpayer is considered eligible for the entire year under the “Last Month Rule,” then only those expenses incurred after the actual establishment of the HSA are qualified expenses... • Insurance premiums are not considered qualified medical expenses unless paid to purchase... • Long term care insurance... • Health care continuation coverage, e.g., COBRA... • Health care coverage while receiving unemployment compensation... • Medicare if the taxpayer was 65 or older

That's All Folks for now...

Health Savings Accounts (HSAs)