Health savings accounts or HSAs were created to give the consumer an alternative to pay for high health insurance costs. An HSA also provides tax breaks to give individuals an incentive to save money that can be used to pay for out-of-pocket medical expenses. The IRS provides specific guidelines and requirements for eligibility for employees. There are also rules for employers including the maximum amount of employer contributions that can be made to an HSA.
Health savings accounts can only be set up when an individual or employee has a high-deductible health plan in place. The deductible for a high-deductible health plan for 2009 must be a minimum of $1,150 for an individual coverage and $2,300 for family coverage. Out-of-pocket expenses for plan members must be limited to $5,800 for individual coverage and $11,600 for family coverage. There are currently no income limits that apply to eligibility for an HSA.
Individuals are not considered a qualified person for a health savings account if they can be claimed as a dependent on a tax return. Individuals also do not qualify for a health savings account if they participate in a flexible spending arrangement (FSA) or a health reimbursement arrangement (HSA). An employer is typically not allowed to contribute to a health savings account when these contributions are being made.
Employers and employees are able to exclude their contributions to a health savings account from certain taxes up to a specified dollar amount. Contributions are excluded from federal income tax withholding, Social Security tax, Medicare tax and Federal Unemployment Tax Act (FUTA) tax. Contributions for 2009 include $3,000 for individual coverage and $5,950 for family coverage to a qualified HSA. Contributions for 2009 and beyond have been increased by $1,000 for individuals who are age 55 or older.
Contributions to an HSA by an employer must be nondiscriminatory. This means that the amount that has been contributed to an HSA must be comparable to all employees who have similar coverage provided by a high-deductible health plan. Contributions that are not comparable will result in a 35 percent excise tax on the amount of all contributions to employees' health savings accounts.
Exceptions to nondiscrimination rules became available with the passage of the Tax Relief and Health Care Act of 2006. The Act allowed employers to make a larger contribution to an HSA for employees who are not highly compensated compared with highly compensated employees. Highly compensated employees include anyone who received more than $105,000 of wages and pay during the previous calendar year.
Employers must report their contributions to an employee's HSA using a W-2 Form. Distributions from an HSA are reported by a bank or insurance company using a Form 1099-SA.