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Frequently Asked Questions about Health Savings Accounts

Do you have a Health Savings Account question that is not addressed below? Please send it by e-mail to for consideration as an additional entry on this page. \

Questions are divided into the following topics:

General Issues  |  Eligibility  |  Insurance  |  Tax Issues  |  Employee Benefit Plans  |  Account Administration  |  Financial Planning Issues

General Issues

Gen1 Who is eligible? Individuals are eligible for a health savings account if they meet all four of the qualifying criteria: 1) are enrolled in a specifically qualified health insurance plan known as a "HDHP", 2) are not covered by another disqualifying health plan (whether insurance or an uninsured health plan), 3) are not eligible for Medicare benefits, and 4) are not a dependent of another person for tax purposes.

Most people are not eligible for a health savings account because of failure to meet the first requirement. Most health insurance policies are not an HSA-qualified "HDHP". While most medium and large companies offer an HSA option under their health plan, only a relatively small percentage of employees have opted for this insurance coverage.

Gen2 What if I am not eligible? We suggest that you consider other alternatives to HSAs that cut health costs and reduce taxes. See the article "Alternatives to Health Savings Accounts" on the Resources page.

Gen3 Where are HSA plans available? HSAs are technically available everywhere in the United States, but the IRS has taken the position that policies issued in accordance with state laws requiring first dollar coverage for certain benefits may not qualify as HDHP See "All Abbout HSAs" at from the Department of Treasury, Office of Consumer Affairs. Accordingly, HSA-qualified insurance may not be available in all states.

Health savings accounts are available everywhere in the United States but the underlying required health insurance may not be available or may not be offered at attractive terms in all areas.

Direct online enrollment in HSA-qualified health insurance may not yet be available in HI, MA, ME, NJ, NY, RI, VT and WA.

In some areas there does not appear to be any significant cost savings associated with health savings accounts and in some cases the total health care cost would be higher using an HSA than with the traditional health plans that currently exist in these markets.

As a practical matter, HSAs are a viable option only where HSA-qualified health insurance is available and attractively priced compared to the other available coverage options.

Gen4 Do HSAs require a certain health insurance company? No, but not all insurance companies offer HSA-qualified health insurance plans so it is important to use an insurance company that does offer this type of qualified insurance plan. The insurance company will clearly label the title page and description of the insurance policy that it is qualified for a health savings account. The absence of such a label should be presumed to mean that the insurance is not HSA-qualified.

As a practical matter, when the goal of adapting an HSA plan is to reduce overall health costs, then most insurance companies are not viable choices.

Gen5 Can HSAs be used in combination with self-insured health plans? Generally no, a Health Savings Account requires qualifying insurance and most self insured health plans do not meet this requirement. The IRS restricted the use of HSAs with self-insured health plans in May 2004 with Revenue Ruling 2004-45. There are exceptions and a self-insured health plan could be designed as a special purpose health plan that qualifies as a high deductible health plan as required by law. We do not know of any currenlty offered.

Gen6 What type of medical expenses can be covered under a health savings account? Any ordinary medical, dental or ordinary health care expense that would otherwise be a tax-deductible item can be covered by a HSA. Items like doctor's and dentist's bills are examples of covered items. Items like cosmetic surgery, imported prescription drugs, vitamins and gym memberships would be examples of items that can not be covered. The definitive guide of what may be covered is IRS Publication 502.

Gen7 Are Health Savings Accounts better than Medical Savings Accounts? Yes, the benefits of HSAs exceed the benefits of MSAs in every aspect where there are differences between these two types of health plans. Some of the advantages are: 1) HSAs are available to employees of larger businesses and unemployed people whereas MSAs were available only to small businesses, 2) HSAs may be funded by a combination of employer and employee contributions, 3) HSAs offer larger maximum tax-deductions, 3) HSAs offer a wider range of insurance options, 4) HSAs offer more liberal withdrawal or rollover options, 5) HSAs are permanent and portable, whereas MSAs were a limited term program with limited use of funds other than the stated purpose. Medical Savings Accounts continue to be available through 2008 (as allowed under the Tax Relief and Health Care Act of 2006), but we expect that there will be little interest in these older plans.

Gen8 Are Health Savings Accounts better than Health Reimbursement Accounts? For employees whose health benefits are provided by am employer, better overall results are obtained through the use of HRAs. Self-employed persons are not eligible for HRAs, so the HSA is preferred by default. See the articles at http://www/ for more information on this topic.

Gen9 What are the major benefits of the Health Savings Account program? The unique benefits for those who qualify are:

1) a significant annual tax deduction for a deposit into savings that is available "above the line" without regard to other tax considerations.

2) tax-free interest or investment income

3) tax free withdrawals for health care expenses, retiree health care, long term care insurance, COBRA health insurance and alternative health insurance during periods of unemployment.

4) lower health insurance costs

5) liberal allowances to integrate with an employee benefit plan.

Gen10 What are the major flaws of the HSA program? The HSA program is suffering from a number of issues that are keeping the program from being more successful, including:

1) Lack of enthusiasm from insurance companies. Few health insurance companies offer qualified plans and those that do not price the plans attractively compared with other plans that they offer. The HSA program is not in sync with the managed care philosophy of many of our nations largest health care firms. Health insurance companies that do offer HSA-qualified plans not promote these plans and often do not pay agents or brokers to help enroll members in these plans.

2) Lack of enthusiasm from banks and financial companies. Only a few specialized firms currently offer HSA trust or administrative service. There are not enough HSA account owners with significant account balances to make this an attractive market for banks.

3) Lack of affordable health insurance. An HSA does not help if an applicant cannot afford the underlying qualifying health insurance. The high deductible HSA-qualified insurance plans are only about 35% less expensive than typical full coverage health insurance. Many members do not feel that this discount is enough to warrant the additional risk. The cost of this coverage usually rises by more than 20% per year.

4) Misinformation. Many have presumed that any high deductible health plan that meets the requirements of Section 223 of the revenue code will qualify for an HSA but most high deductible health insurance plans do not.

5) Administrative issues are unresolved. The wording of the law itself is misleading in that it entirely omits the administrative functions of the Treasury and the IRS.

6) Slow corrections. The IRS has been slow to address specific areas of confusion, including the qualification issues, reporting issues and HSA account audit procedure.

7) Inferior insurance. Some of the more widely marketed HSA-qualified insurance plans offer inferior coverage as compared with other brands of health insurance that are not as readily available.

8) Disappointing overall savings. An HSA account owner (or employer sponsoring a health plan) averages an overall long term savings of about 10% of health care costs as compared with traditional health plan designs. Some wonder if the results are worth the effort.

Gen11 Who can use this Web site? The website is open to the public and anyone can use the online resources but some of the personal support features are available only through OnlineAdviserTM services. Details are posted at or .

Gen12 Who can use the free OnlineAdviser services? Anyone can use the OnlineAdviserTM telephone or e-mail service with or without another financial adviser. Some requests come from accountants, attorneys, advisers and insurance agents on behalf of their clients. The free service does not cover group or employer-sponsored benefit plans or investment-related issues. These excluded services are covered by for a fee. More information is posted at

Gen13 Can I use another agent or broker in conjunction with this service? Yes, as long as this is allowed by the company handling your account and contracting & licensing issues have been addressed.

Gen14 What is the source of information used in these FAQs? Other than the resources specifically listed, the assumption is made that HSAs will be handled in the same manner as Medical Savings Accounts (MSAs) so the published and publicly available information on MSAs was used to prepare these FAQs. Additional information on audit procedures was provided by an employee of the Treasury who requested to be not named.

Gen15 How Can I get more information on additional services? See for more information on additional free and paid services. Service for employee benefit plans including opinion letters, consultations, plan design, claim administration and professional witness services are available at . Contact Tony Novak at for more information.


Eligibility Issues

E1 Who is eligible? Individuals are eligible for a health savings account if they meet all four of the qualifying criteria: 1) are enrolled in a specifically qualified health insurance plan known as a "HDHP", 2) are not covered by another disqualifying health plan (whether insurance or an uninsured health plan), 3) are not eligible for Medicare benefits, and 4) are not a dependent of another person for tax purposes.

E2 Who is not eligible for an HSA? An HSA may not be used by a person who is: 1) covered by any non-qualified individual or group health insurance plan, 2) not covered by any insurance 3) eligible for Medicare, 4) a dependant on another person's tax return.

E3 Is a person over 65 eligible for a health savings account? An individual who is old enough to be enrolled in Medicare Part A or Part B, but is not enrolled is eligible to contribute to an HSA and may also contribute an additional catch-up contribution if they are covered by a qualifying high deductible health insurance plan. Those who are covered by both Part A and Part B of Medicare or are covered by a health insurance plan that is not qualified are not eligible for a health savings account. This clarification was part of IRS Notice 2004-50, released July 23, 2004 and 2004-67, released September 9, 2004.

E4 Is the HSA tax deduction limited by my income, filing status, employment or other factors? No, except that deductions are limited if you are not enrolled in a qualifying health plan for the full 12 months of the tax year. Also note that it is possible to be a "single" taxpayer for tax filing purposes but take a "family" HSA deduction if qualified, or vice versa.

E5 Are employees of a business eligible for HSAs? Yes, as long as they meet the same eligibility requirements. At this time, few group health insurance plans are HSA-qualified so employees covered by group health insurance are generally not eligible for HSA accounts. Employers may update their health plans to be HSA-qualified or provide HSAs as an optional coverage. See for more information on employer-sponsored HSA plans.

E6 Do you mean that my business' legal form, my business ownership interest or the employee benefits I provide or receive do not have any effect on HSA eligibility?

Correct, none of these issues matter for purpose of determining eligibility for a HSA. All business formats are eligible, owners are eligible alone or with employees, either groups or individuals, either employer paid or individually paid. The only factor affecting eligibility is the underlying insurance plan.

E7 Am I eligible for a HSA if...(fill in the blank with anything)...? Yes, every U.S. taxpayer who meets the requirements above in question E1 above is eligible. No other factors affect eligibility for an HSA.

E8 Do these eligibility rules replace other former employee benefit rules? No, these HSA provisions are added in addition to all other employee benefit laws and operating procedures. The HSA program is an additional health plan option in addition to the health plans that were available before. For example, a business owner may now be eligible for an employer-provided HSA but his employer-provided health benefits may also still be subject to the non-discrimination rules.

E8 My spouse and children are covered by a group health insurance that is not qualified for a health savings account but I am not covered under that health plan. Am I eligible for a health savings account? Yes, as long as 1) you have individual HSA-qualified insurance, 2) are not covered under the spouse's insurance plan and 3) your spouse and dependents are not included in your HSA.


Insurance Issues

Ins1 What is a "Qualifying High Deductible Health Plan"? A qualifying health plan is: 1) an individual or group insurance plan that meets the requirements for deductible, co-insurance, supplemental coverage and reporting requirements established by the IRS, or 2) an uninsured health plan that meets these same requirements.

Ins2 What "Qualifying High Deductible Health Plan" choices are available in my state? Private enrollment assistance firms like make available to clients a list of Qualifying High Deductible Health Plans in each local health insurance market. This Web site does not list qualifying health insurance plans since a listing might be considered as an endorsement.

Ins3 Are all Qualifying High Deductible Health Plans basically the same? No, in fact some concerns have been raised that some low cost HSA-qualified health insurance plans may be lower quality than other similar non-qualified health plans. We suggest that you check the quality and consumer satisfaction ratings of a health plan from an independent source. OnlineAdviser service makes this service available to customers, or you can check with your sate insurance department.

Ins4 How do I know if my health plan is a "Qualifying High Deductible Health Plan"? The words "Qualifying High Deductible Health Plan" or a reference to IRC Section 223 are usually included in the declaration page of the insurance policy or another official communication from the insurance company that accompanies your policy.

Ins5 What makes a health insurance plan HSA-qualified? The plan must meet the deductible and other design requirements that are adjusted each year and the health insurance company must agree to report the list of qualifying policyholders to the IRS. The primary considerations are: 1) policy deductible must be more than the minimum and less than the maximum, 2) policy deductible must be "per year", 3) policy deductible must be "per policy" and not "per person", 4) maximum out-of-pocket costs must be more than the minimum and less than the maximum, and 5) coverage available must be above the minimum requirement. The IRS will publish these specific health insurance limits each year as adjusted for inflation. Not all high-deductible health insurance plans are HSA-qualified even if the policy meets the deductible and out-of-pocket requirements. The Treasury may review and qualify health plans at the request of the sponsoring organization.

Ins6 Why are all health insurance policies that meet the stated requirements for High Deductible Health Plans not considered HSA-qualified? Health insurance companies must be willing to meet both the federal requirements as well as the state insurance requirements. Some sticking points are "per person deductibles" and state "mandated coverage" that may be required under state insurance laws but are disallowed under the federal HSA laws. A policy that has a per person deductible is not HSA-qualified. A policy that has a maximum out-of-pocket per person is not qualified. Likewise a policy that has a maximum individual or family out-of-pocket expense above the current HSA limit is not qualified.

Ins7 What does the IRS say about whether my health plan is a Qualified High deductible health plan? At this time the official IRS position is summarized as: "Treasury is currently determining what plans are HSA qualified. There is not a company out there that can at this point say that their plans are or aren't HSA qualified. We expect to have some determination this month (January)".On December 8, 2003, Treasury Secretary Snow said "Treasury is committed to ensuring that taxpayers get the full benefit of HSAs as quickly as possible. We will be releasing basic information and guidance about HSAs shortly, and will request suggestions about how the rules should be applied. In addition, we expect to issue more detailed guidance." Additional guidance was expected in early 2005 but was not issued. No further guidance has been issued as of the last revision of this Web page. As a result of the lack of IRS guidance, we suggest that HSA owners rely on an affirmative written statement of the health insurance company with regard to its HSA-qualified status and presume that the lack of such a statement means "not qualified".

Ins8 I want to keep my current health insurance company. Can I open a HSA account separately? It might be possible to convert a high-deductible health insurance policy to a HSA-qualified health insurance policy; ask your health insurance company for details. At this time, only a few health insurance companies have announced that they intend to offer HSA-qualified insurance plans. Other health insurance companies are likely to follow in the near future. Get a written verification of the health plan's HSA-qualified status.

Ins9 My health insurance company does not provide any written verification that my policy is a qualifying High Deductible Health Plan but I believe that it is qualified and so I want to open a HSA account anyway. Can I do it? Yes, anyone can open an HSA account. But in the event of a future IRS audit, you may be required to provide evidence (usually the declaration page of the policy) to support your HSA deduction. Without such evidence, the deduction would be denied and additional taxes would be due. An IRS examiner is not required to consider a health insurance policy as HSA-qualified where the policy declaration page does not make this affirmative statement.

Ins10 I do not have written verification of HSA-qualified status of my health insurance plan. Can I open a HSA anyway? Same answer as "Ins9" above.

Ins11 My accountant, financial adviser or insurance adviser told me that I am eligible for an HSA. Is that correct? Same answer as "Ins9" above.

Ins12 Why is low cost insurance not available in my state? Many people are surprised to learn that the availability of health insurance is governed by state law. A policy that is available to the citizens of one state may not be available to the citizens of a neighboring state. Some states (primarily HI, MA, ME, NJ, NY, RI, VT and WA) restrict the availability of low cost high deductible health insurance plans that are typically used with HSAs in other states. Apparently in an effort to protect their citizens, some states have prohibited the least expensive and most popular types of limited coverage commercial health insurance plans. HSA-qualified health insurance may be available through managed care plans in the future. While these managed care plans may be more expensive than HSA-qualified insurance in other states, they are generally less restrictive in regard to medical eligibility requirements. Since the primary motivation of most HSA customers is to save money, an HSA-qualified health insurance plan that does not save money is not likely to be successful. Recognizing this, health insurers in these eight states are unlikely to actively promote a HSA-qualified health insurance plan. HSA-qualified health insurance plans in these eight states will be posted at www.Freedom Benefits as they become available.

Ins13 What HSA-qualified insurance do you recommend? This site does not recommend insurance companies but specific recommendations are available on other links within the OnlineAdviser system. The insurance plans should have better than average indications of member satisfaction. If you travel, coverage should be available nationwide or worldwide. If choosing your own doctor or hospital is important, the insurance plan should not restrict you to participating providers. The cost should be 30% to 50% less than the prevailing cost of a full coverage plan in your area to compensate for the higher deductible.

Ins14 What HSA-qualified insurance plans should be avoided? Health plans with a higher than average consumer complaint ratio should be avoided. (See for more information on health insurance company complaint ratios). Most complaints against the issuers of HSA qualified insurance plans are based on pre-existing medical conditions, so we suggest that individuals with pre-existing medical conditions should not use these heath insurance plans. Also, many people who are candidates for HSA plans prefer to avoid managed care health plans in order to retain maximum control of medical treatment and choice of medical providers. It would not be appropriate to name specific health insurance plans that might be considered to be of inferior quality here on this Web site, but specific recommendations are available from your enrollment adviser who has experience with the customer satisfaction ratings of the health plan choices in your area.

Ins15 How much does HSA-qualified health insurance cost? Each plan is individually priced based on your age, location of residence, health history, build, date of enrollment, type of plan, deductible, PPO network options selected, billing method and other personal preferences.Rates are available online for most HSA-qualified health insurance plans. Some HSA-qualified health insurance plans send the rates and enrollment forms by e-mail. On average, HSA-qualified insurance should cost about 40% less than comparable lower deductible health insurance plans. The lower cost is attributable to the higher policy deductible. Some HSA-qualified health insurance companies charge a small non-refundable application fee.

Ins16 I have some medical history. How do I know if I will qualify for a high deductible HSA insurance plan? When you apply online for HSA-qualified insurance, the insurance underwriter responds within a few days later with an indication of eligibility. But if you are not eligible, a decline can damage your ability to qualify for other health plans in the future. We recommend that you do not risk a "decline". If you want an informal response to eligibility, submit a health insurance application marked "TRIAL" on the top of the first page without any money. (Application forms can be downloaded from the links listed at www.Freedom Benefits. The insurance underwriter will likely ask you to send a copy of your medical records, so it makes sense to obtain a copy from your doctors in advance. Also, see the note in question Ins14 above.

Ins17 How do I apply for HSA-qualified Insurance?See, or www.Freedom Benefits (for individuals and families) or (for businesses) to get prices and apply online for HSA-qualified insurance.

Ins18 Can I get HSA-qualified health insurance through a broker or agent? Maybe, but since most HSA-qualified insurance plans pay little or no commission to an agent or broker, many insurance agents and brokers do not offer this type of insurance or limit selections to the commissioned plans. Some users of this Web site report that agents in their community are not well-versed in health savings accounts. Many HSA plans are direct-marketed by the insurance company without an agent. Other plans are issued online through Websites like those listed on the left hand column of this Web page. A few plans are offered through agents and brokers.

Ins19 How long does it take to enroll for HSA-qualified health insurance? After submitting a written application online, by mail or fax, a full review usually takes 3-10 days. A telephone follow-up clarification of application details may be necessary. Approved online enrollments are confirmed by e-mail within one business day and an immediate binder of coverage is usually available. You will be notified by e-mail of any additional requirements. The HSA account is opened anytime after the HSA-qualified insurance is in force.

Ins20 What might cause a health insurance plan to not be HSA-qualified? The most common reason is that the insurance company has not elected to follow the procedures established by the U.S. for maximum out-of-pocket expenses. There is no requirement for health insurance companies to offer HSA-qualified insurance plans or to continue to offer these plans in the future if they are currently offered now. Again the best measure is to get a written statement on an annual basis from the health insurance company regarding HSA compliance.

Other common reasons for a health insurance plan to fail to be HSA-qualified are: 1) "per individual" deductibles (as opposed to "per policy" deductibles), 2) co-pays (as opposed to deductible), 3) co-insurance (that might affect out-of-pocket amounts), 4) maximum benefits (particularly for self-insured plans), 5) state coverage mandates (that may conflict with federal law), and 6) state filing requirements (that may be expensive and time-consuming).

Ins21 If I start a health savings account insurance plan in October that has an annual deductible of $5,000, it would be less likely that I get the benefit of the insurance as opposed to starting the plan in January. Should I wait? To compensate for the annual deductible issue for applicants changing health plans late in the year, insurers typically offer “deductible credits”. One method is to credit the expenses you incurred under a former policy deductible. Another method is to give a flat credit, so that a $5,000 deductible is really only a $2,500 deductible in the first year. Details vary by specific insurance plans but will clearly be spelled out in the policy.


Tax Issues

Tax1 How does the IRS know who is eligible to use an HSA? Reporting and compliance details are not available at this time we presume that a procedure similar to what was used under the former MSA program will be used. Eventually, insurance companies will likely be required to report the social security numbers of those enrolled in qualifying plans to the IRS for an electronic audit program similar to the system used for IRA accounts. It is not known how compliance with enrollment in ineligible plans will be enforced in the future but currently there are no known compliance reporting system in place for the current tax year.

Tax2 How much can I deposit in my HSA account?

for 2007 - The maximum contribution for 2007 is $2,850 if you are single coverage or $5,650 if you have family coverage. If you are over age 55 then an additional contribution of $800 regardless of whether you have single or family coverage.

for 2008 - The maximum contribution for 2008 is $2,900 if you are single coverage or $5,800 if you have family coverage. If you are over age 55 then an additional contribution of $900 regardless of whether you have single or family coverage.

Note that these amounts are the maximum you may deposit into a HSA. This limit is not to be confused with the HSA account balance that is not limited and may accumulate to a much larger amount. Also, these HSA contribution limits have nothing to do with the insurance costs or policy limits that are governed separately.

Tax3 What adjustment is made if I am not enrolled for the whole year? When the eligible person is covered by a high deductible health plan in the month of December then you may still contribute the maximum amount listed above as if you had been enrolled for the whole year. If you are not covered by by a high deductible health plan in the month of December then an HSA contribution is allowed only for an amount of 1/12 of the maximum for each whole month the eligible person is enrolled in the high deductible health plan. (This is a change to IRC Section 305 effective for 2007 that is essentially creates a tax loophole by allowing enrollment in a full coverage health plan for the first 11 months of the year and then a switch to a high deductible health plan for December only with minimal risk exposure but still allow the eligible person to enjoy the full HSA contribution tax deduction).

Tax4 Are HSA deposits tax-deductible and must they always be deducted on a tax return? Yes, HSA deposits are tax deductible and yes they must be deducted on the tax return if an HSA contribution is made. There is no such thing as a "non-deductible HSA contribution".

Tax5 Can HSA deposits be after-tax? No. Of course, anyone can open a regular taxable savings/investment account and call it "my health savings account". Some business employee benefit plans actually do this for employees but the terminology might lead to confusion with regard to tax issues. These accounts are not "health savings accounts" as the term is used in the tax law or on this Web site but may be considered as another type of health benefit plan.

Tax6 Is the interest or investment income in a HSA taxable? No.

Tax7 Are withdrawals from an HSA taxable? No, if used for payment or reimbursement of health care expenses incurred. Yes, if used for other purposes.

Tax8 Are salary-deducted contributions subject to federal income tax? No, both employer contributions and voluntary employee contributions are exempt from federal income tax.

Tax9 Do HSA contributions reduce FICA taxes? Employer contributions to a HSA account are not wages, and therefore are not subject to wage taxes like FICA. Employees' voluntary contributions to a HSA are wages, and therefore are subject to FICA taxes. Self-employed people are not subject to FICA taxes, but pay a self-employment tax instead. An HSA plan does not help reduce the self employment tax.

Tax10 If I open an HSA account any time during the year, are medical expensive incurred in the same year but prior to opening the HSA account and funding it eligible for the pretax treatment? Expenses incurred after the health savings account has been funded may be paid with tax-free HSA funds. It is the date that the expense is incurred that matters for this purpose, not the date that you made the payment to the medical provider.

Tax11 What is the earliest date I can deposit my HSA contribution? After your HSA-qualified insurance is approved, you may send the HSA deposit along with the new account application.

Theoretically, you could open a HSA account before the insurance is approved but you would not be eligible for free account administration and may have trouble with your HSA deduction if the IRS notification is not sep up properly. It is always better to open the HSA account after the HSA-qualified insurance is issued in order to properly complete the new account application form which references the insurance policy.

Tax12 What is the latest date I can deposit my HSA contribution? The HSA contribution must be made by the filing date of your tax return. Normally the latest date is April 15 of each year unless you file for an extension.

Tax13 Can I make a non-deductible contribution to my HSA account? No, not in a regular HSA but you can open a different type of account called a non-qualified HSA that is not tax deductible.

Tax14 Are HSA trustees required to report the social security numbers of individuals who are enrolled in HSA accounts to the IRS? Yes, HSA contributions are reported to IRS electronically. See for an example of the information reported to IRS by MSA trustees.

Apparently Treasury officials realize that the tax reporting issues used by MSA and IRA administrators are not sufficient for HSA accounts and so we anticipate that new compliance reporting procedures will be developed.

Tax15 What does the IRS do with this information? An automated compliance audit known as a matching program is designed to check the HSA deductions allowed (as reported by the insurance companies) with the HSA deposits made (as reported by the trustees) and the HSA deductions taken (as reported by taxpayers).

Tax16 Will the IRS check individual tax returns to verify HSA deductions? Yes.

Tax17 Does the IRS match the list of taxpayers enrolled in a Qualifying High Deductible Health Plan with those who take a deduction for an HSA account? Yes.

Tax18 Is there an indication that taxpayers not eligible for the HSA tax deduction are taking the tax deduction anyway? Yes. In the first year of the HSA program (2004) several industry sources observed that the majority of the HSA accounts opened were by individuals who were not actually eligible for the HSA tax deduction. HSA industry sources stated that a significant percentage of these account owners indicated that they were aware of the problem, but chose to ignore it, perhaps because IRS guidance was inconclusive. Apparently a significant number of current HSA account owners believe that they will get away with taking the HSA tax deduction without meeting the strict eligibility requirements, and they are probably correct.

Tax19 What happens if automated tax reporting information does not match? The IRS may issue a "mismatch" letter denying the HSA tax deduction an requesting the payment of additional taxes, interest and penalty. This is similar to the process used for IRA accounts. The taxpayer must respond to prove eligibility for the HSA or lose the tax benefits of the account.

Tax20 Other than "matching" problems, how does the IRS select HSA accounts for audit? This is not specified in the Internal Revenue Manual, so there may not be a reliable answer to this question. However, there does seem to be evidence that the IRS has some "intelligence" when it comes to spotting high risk HSA accounts.

Tax21 What procedures does the IRS follow when handling a HSA problem? Basically the same procedure as a IRA or MSA problem. See for detailed IRS procedures.

Tax22 Technically, what documents provide proof that a person is eligible to qualify for a tax deduction for a HSA?

The language of an audit letter from the IRS will be: "Send copies of statements from all employers showing the total number of employees and total contributions made to your medical savings account (if a joint return, both spouses). Send a copy of all health insurance plans. Send copies of cancelled checks or other verification of contributions."

The request can be confusing, so the following suggestions may help. There are three documents that may be required to prove eligibility for a Health Savings Account. The policy declaration page of the health plan will contain the wording indicating that the policy is a "Qualifying High Deductible Health Plan" under Section 223 of the Internal Revenue Code and a list of the individuals covered by the plan. A current billing statement shows that the coverage is in force on the date in question. Some insurance companies provide this as a separate document outside of the policy. Health plans also provide a "Certificate of Creditable Coverage" when you terminate or change health plans. A copy of these documents should be all that is needed to prove eligibility to a bank acting as the HSA trustee or the IRS.

Tax23 I am already enrolled in a high deductible health insurance policy that is switching to a HSA plan design soon. Am I eligible to take a deduction for a HSA contribution? Yes, but double-check with the insurer to make sure that the plan is HSA-qualified and get a written confirmation of HSA status from the insurer. Most high-deductible health insurance plans are not HSA-qualified. HSA-qualified health insurance policies will be clearly labeled as such on the cover page or declaration page of the policy.

Tax24 What if I find out that my insurance is not HSA-qualified after the HSA account is opened? Assuming that the IRS follows the same audit procedures as formerly used with Archer MSAs, an adjustment is made to your income tax bill to include the amount of the HSA contribution as taxable income. Interest and penalty will apply to the unpaid tax.

Tax25 How does my enrollment date in my health insurance affect he amount of my HSA deduction? The starting and ending date of your Qualifying High Deductible Health Plan controls the calculation of the HSA deduction because the deduction is pro-rated depending on the number of full months enrolled in the qualifying insurance plan. For example, if you enroll in a HSA-qualified health insurance plan on February 10 and terminate the coverage on July 20, the health insurer would report to the IRS that you were eligible for 4 months of HSA deductions (March through June). Your tax deduction allowed is then calculated as 4/12 of the maximum annual deduction.

Tax26 What if I enroll on a date in the middle of the year? Your maximum tax deduction is calculated as the number of whole months you were enrolled in HSA-qualified health insurance plan divided by 12, multiplied by the full year's maximum deduction. For example, if you enroll in a $1000 deductible single person HSA-qualified health insurance plan on January 2 and keep the coverage for the rest of the year, the maximum deduction is 11/12 X$1000 = $916.67.

Tax27 What qualifying medical expenses may be covered by the HSA? A Health Savings Account may cover expenses you paid that year for medical and dental care for yourself, your spouse, and your dependents covered by the qualified health insurance plan. Only expenses incurred while the HSA-qualified health insurance plan was in force may be included as a tax-free withdrawal.

The HSA plan may include expenses paid for the prevention or alleviation of a physical or mental defect or illness. Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or treatment affecting any structure or function of the body. Drugs are covered. Medical expenses include fees paid to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and Christian Science practitioners. Also included are payments for hospital services, qualified long–term care services, nursing services, and laboratory fees. Payments for acupuncture treatments or inpatient treatment at a center for alcohol or drug addiction are also covered medical expenses. You may include amounts you paid for participating in a smoking–cessation program and for drugs prescribed to alleviate nicotine withdrawal. However, you may not include amounts paid for nicotine gum and nicotine patches, which do not require a prescription. You may deduct the cost of participating in a weight-loss program for a specific disease or diseases, including obesity, diagnosed by a physician. You may not include the cost of purchasing diet food items. In addition, you may include expenses for admission and transportation to a medical conference relating to the chronic disease of either yourself, your spouse, or your dependent (if the costs are primarily for and essential to the medical care). However, you may not include the costs for meals and lodging while attending the medical conference.

The cost of items such as false teeth, prescription eyeglasses or contact lenses, laser eye surgery, hearing aids, crutches, wheelchairs, and guide dogs for the blind or deaf are eligible medical expenses.

You may not include funeral or burial expenses, health club dues, over–the–counter medicines, toothpaste, toiletries, cosmetics, a trip or program for the general improvement of your health, or most cosmetic surgery.

Transportation costs primarily for and essential to medical care qualify as medical expenses. The actual fare for a taxi, bus, train, or ambulance can be included. If you use your car for medical transportation, you can include actual out–of–pocket expenses such as gas and oil, or you can deduct the standard mileage rate of 12 cents a mile. With either method you may include tolls and parking fees.

You may include in medical expenses the incidental cost of meals and lodging charged by the hospital or similar institution if your main reason for being there is to receive medical care.

For more information, see IRS Publication 502.

Tax28 What if I use HSA funds for non-qualified expenses? If you withdraw money for non-qualified expenses the amount is taxable as ordinary income and a 10% tax penalty is charged. Details on tax reporting and treatment of HSA withdrawals are included in the revised instructions for IRS Form 1040.

Tax29 Where can I get more specific information about the taxation and transaction procedures for my HSA account? The HSA account agreement and custodial authorization that is provided by every HSA administrator has more information on many details of HSA transactions.

Tax30 Is there a maximum balance that may be accumulated in an HSA account? No, there is no maximum accumulation value for these accounts.

Tax 31 Are medical expenses incurred and paid by an individual tax deductible if not paid through a health savings account? Technically, medical expenses could be tax-deductible except for the strict limitations imposed by current tax law. Most people do not meet these requirements to make medical expenses tax-deductible so consequently medical expenses are not tax deductible by individuals unless they are paid through a health savings account.

Tax 31 Are medical expenses incurred and paid by a business tax deductible if not paid through a health savings account? Medical expenses paid by a business on behalf of common law employees are normally tax deductible but the term "employee", as used here in this instance, does not include sole proprietors, partners, owners of S corporations or members of an LLC. Spouses are "employees" as long as they receive a paycheck and the business pays FICA and other usual wage taxes.

Tax 32 Are medical expenses paid by a business considered taxable income to the employees? Yes these payments are ordinary taxable income, unless the benefit payments meet one of the various tax-free benefit plan arrangements authorized by the Treasury known as "qualified plans". These tax-free plans include HSAs and other types of business benefit plans. See for more information on tax-free business health plans.

Tax 33 Are medical expenses for dependents eligible to be covered by a HSA if the dependent is not covered by the qualifying health insurance plan? If an account beneficiary’s spouse and/or other dependents are covered under a non-HDHP, distributions from the HSA to pay their qualified medical expenses are eligible expenses and are excluded from the account beneficiary’s gross income. This clarification was part of IRS Notice 2004-50, questions 12 and 36, released July 23, 2004.

Tax 34 How are contributions to a health savings account made through an employer-sponsored benefit plan reported on a form W-2?

Contributions to a health savings account may be made by the employer or the employee, or a combination of both may make . An employer’s contribution to an employee’s health savings account is not subject to income tax withholding or social security, Medicare or FUTA tax if it is reasonable to believe at the time of the payment that the contribution will be excludable from the employee’s income. Tax-qualified employer contributions to a health savings account are reported in box 12 of Form W-2 with code W. An employee’s contribution to a health savings account is reported the same as regular wages and subject to income tax withholding and social security and Medicare taxes. Employee’s contributions are deductible, within the usual limits, on the employee’s Form 1040. For more information, see IRS Publication titled “Instructions for Form W-2 and W-3”

Tax 35 Is it allowable to deduct contributions to my Health Savings Account while at the same time itemizing my medical expenses for deduction as long as I don't itemize expenses for which I've received distributions from the Health Savings Account?

Medical expenses that are covered by a health plan or Health Savings Account cannot be itemized as tax-deductible expenses on a Schedule A. The instructions for Schedule A and IRS Publication 502 are clear on this issue. There is no requirement that you cover out-of-pocket expenses with your health savings account so some smart investors leave the maximum contributions in a health savings account to accumulate on a tax free basis and pay for medical expenses with other funds that may give an additional tax deduction. Keep in mind that most people do not itemize medical expenses on their tax return because the standard deduction allowed is more than most people actually spend on out-of-pocket medical expenses.


Employee Benefit Issues

EB1 Can HSAs be combined with other employer-sponsored health plans like Flexible Spending Accounts (FSA) , Health Reimbursement Arrangements (HRA), or Cafeteria Benefit Plans (Section 125 plans)? Yes. In fact, in many cases this may be the best way to offer HSAs on a group basis because it helps avoid the administrative issues and employee acceptance problems usually associated with HSA plans. Both the HSA-qualified insurance and the HSA account may be incorporated into other types of health plans. Revenue Ruling 2004-45 restricts the types of HRA and FSA plans that may be used with HSAs. Additionally, there are some legislative proposals that will likely affect the interaction of HRA and FSA plans with HSAs. Employers may roll funds from employee HRAs or FSAs into an HSA on a one-time-only basis, provided that:
The employer rolls over the lesser of the HRA or FSA balance on the date of transfer or September 21, 2006 and the transfer occurs before January 1, 2012, and the individual maintains a HDHP for at least 12 months following the transfer.

If employers allow the FSA to extend prior years' benefits used until March 15 of the following year, employees may still contribute to an HSA if their FSA balance is zero or the FSA balance is transferred to an HSA by January 1st. More information on the currently available options is available at .

EB2 May the employer make an HSA contribution directly to employee accounts? Yes. Either the employer or the employee, or a combination of both may make the HSA contribution.

EB3 Are contributions to a health savings account subject to income taxes, wage taxes, and FICA taxes? Employer contributions to a health savings account are exempt from income taxes and wage taxes but employee contributions are subject to income taxes, FICA taxes and other wage taxes.

EB4 Can the contribution be salary-deducted? Yes, this is called an employee contribution.

EB5 Do these HSA provisions override the eligibility and deductibility rules for discriminatory health plan benefits or owner/employees? No, all of the other applicable provisions of uninsured employer provided benefits apply to employer-funded HSA plans. To be tax-free, the employer provided HSA plan should be nondiscriminatory and in most cases (other than in a C corporation) will treat owner/employees of a business as self-employed individuals.

EB6 What are the rules about discrimination in a group HSA plan? HSA comparability rules require that an employer make the same contributions for similarly covered employees. Some disparity is allowed: the contributions for family coverage may be different than the contributions for single type coverage. Higher contributions are allowed for lower-paid employees. compliance. Contributions must not favor highly paid employees. If the health plan is made up of a "mix and match" of insurance plans or funded through a Health Reimbursement Arrangement (HRA) or a Flexible Spending Account (FSA), then a separate third party auditor's statement is required. See for more information on health plan administration.

EB7 What is the tax treatment of the HSA-qualified health insurance? See the separate article titled "Taxation of Health Insurance Benefits" on the "Articles" page at

EB8 How are the HSA contributions reported on Form W-2? Tax-qualified employer contributions to a health savings account are reported in box 12 of Form W-2 with code W. An employee’s contribution to a health savings account is reported the same as regular wages and subject to income tax withholding and social security and Medicare taxes. Employee’s contributions are deductible, within the usual limits, on the employee’s Form 1040.

An employer’s contribution to an employee’s health savings account is not subject to income tax withholding or social security, Medicare or FUTA tax if it is reasonable to believe at the time of the payment that the contribution will be excludable from the employee’s income. If it is not reasonable to assume that an employer's HSA contributions will be excludable from income, then employer paid HSA contributions are reported in block 1 or form W-2 as regular taxable income. For more information, see IRS Publication titled “Instructions for Form W-2 and W-3”.

EB9 Do the overall dollar limitations for employee benefit plans (known as 415 limits) apply to HSAs? No, HSA deductions may be taken without regard to any other limitation.

EB10 What if my state restricts my employer from offering HSA-qualified insurance? It is possible that federal HSA requirements are incompatible with state insurance requirements for employer-provided health plans. The most practical "work-around" uses a Health Reimbursement Arrangement (HRA) plan . Any employer can set up a HRA plan that effectively eliminates the restrictions established by some states in limiting the types of health insurance available to employees. See for more details and setup information on HRA plans.

EB11 Are HSAs subject to ERISA regulations? No, unless an employer oversteps the normal bounds of administering an HSA plan. Since HSAs are already owned by the individual employees and governed by a trust or sustodial acount there is no need to apply most provisions of ERISA. HSA-qualified health insurance is still subject to employer-provided health benefit laws, where applicable. HSA contributions made by employers are subject to anti-discrimination provisions. See FAB 2004-1 and the explanation at for more detail.

EB11 Are HSAs subject to HIPAA regulations? Yes. HIPAA generally covers two significant aspects of HSAs: 1) privacy of medical information and 2) portability of health insurance coverage. All parties are subject to the medical privacy laws contained in HIPAA with regard to every aspect of handling health savings accounts. The portability of insurance coverage laws contained in HIPAA apply to the qualified insurance component but HIPAA does not apply to savings accounts.

EB12 How are employees over age 65 treated in an HSA plan? Employees over age 65 who are not enrolled in Medicare are treated the same as any other employees with regard to HSA eligibility and participation. Employees covered by Medicare are not eligible to participate in a HSA plan under current federal law. Yet an employer who excludes benefits for older employees from an employer-sponsored health benefit plan may be liable for age-discrimination issues. The recommended solution is to provide similar benefits for older employees through a Health Reimbursement Arrangement (HRA). More information on HRAs can be found at . Note that this alternative benefit is required for federal employees but optional for commercial and private businesses.

EB13 What happens to HSA funds when an employee is no longer covered by the qualifying health insurance plan, leaves the company or turns age 65? HSA funds remaining in employees' accounts at age 65 may be used by the employee or former employee in any manner allowable to all HSA participants. See questions FP1 through FP11 below for more information on withdrawal issues for HSA funds.


Account Administration

Acc1 How much does a HSA account cost? Some HSA accounts have no associated costs, others charge fees. Even if an HSA account normally charges fees, the health plan administrator may elect to cover the cost of these fees and waive fees to participants. Some firms that handle only the HSA account separately form the insurance charge a set-up and administrative fee, generally about the same amount as the fees charged for administering IRA accounts. Optional services like VISA debit cards, check printing or investment brokerage may increase the cost. The average account cost among the firms that do charge fees is $25 to $50 per year.

As of mid 2006, most HSA accounts opened today are free to plan participants with the exception of those few account owners who utilize the HSA account to make securities investments. We expect to see a migration of older HSA accounts from fee-based providers to free service providers.

The fee details are listed on the account disclosure that accompanies or is attached to the account application form. Several of the leading HSA providers' forms are available for download on the Enrollment page of this Web site.

Acc2 Why do some HSA companies charge fees for HSA accounts when others do not? In many cases the fees to reflect the level of service provided. The HSA administrator must be a bank, trust company or insurance company that is responsible for providing trust services, calculating your maximum allowable deposit, producing annual statements and reporting HSA deposits to the IRS. The cost of this service is either paid by the account owner or absorbed by another entity like the employer, association or insurance company. It is reasonable to expect that HSA administration fees will be slightly higher than IRA fees at the majority of financial institutions that offer this service.

Acc3 Why do some HSA companies offer free HSA account administration? This is a usually a promotional offer designed to boost market share of HSAs. The firm is temporarily absorbing the cost of running the HSA account. Usually these will be he same companies that offer a large number of HSA-qualified health insurance plans. is one service that offers HSA accounts to businesses at no additional charge. This Web site includes access to at least one HSA that is available without charge to everyone who wishes to open an account.

Acc4 How do I get a HSA account application form? An application form will be sent automatically when you enroll in most types of HSA-qualified insurance plans. If you are opening a HSA account separately from the qualifying insurance, HSA account applications will be available for online enrollment or for download from the "Enroll Online" page.

Acc5 Where do I send my HSA account application form? HSA account applications may be mailed to Freedom Benefits, P. O. Box 102, Narberth PA 19072. Include your e-mail address on the application for a fast confirmation of receipt of your HSA account application. Expect a confirmation by regular mail from the account trustee in about 10 days.

Acc6 Where can HSA accounts be opened? A growing number of banks and financial firms offer HSA account service. See the HSA Enrollment page for a few of the largest national HSA account administrators that have a record of providing strong accountholder service.

Acc7 Are HSA account contribution made as a lump sum or as periodic deposits? Deposits may be either lump-sum for the tax year or random periodic deposits as elected by the account owner.

Acct 8 When can HSA deposits be made? Contributions must be made during the tax year or in the following tax year prior to the tax filing date.

Acc8 What investments are available for HSA accounts? HSAs may use any of the same types of investments as an IRA account. The most common investment for small HSA accounts is a simple savings account or money market. Each bank that administers HSA accounts has a relationship with a securities firm, known as a broker/dealer, to offer investments within a HSA account. Most commonly this consists of a family of no-load mutual funds. In accordance with securities laws, this information must be obtained directly from the broker/dealer after and may not be used as an "up front" advertisement by the HSA sponsors to entice customers to open HSA accounts. Some HSA accounts require a minimum balance or a minimum length of time for a new account before securities investments are available.

Acc9 What is the interest rate on HSA deposits? The rates change frequently as with any other savings account or money market account. Ask the HSA administrator for the current rate. Some HSA accounts require a minimum balance in order to receive interest.

Acc10 What is the rate of return on other HSA investments? The rate varies depending on the investment you choose. Investment securities may lose value. Check with the investment adviser that handles your HSA account administration. Most investment performance results are published on the Internet and in major newspapers.

Acc11 What investments should I choose? For small HSA accounts with balances under $2000 should use a savings account or money market. No-load mutual funds are a good choice for excess funds above $2000. HSA administrators will provide a list of available investments. Not all HSA administrators are equipped to handle all investments. Generally, the more complicated the investments you choose, the higher the fees and the more limited your choice of HSA administrators. It pays to "keep it simple". You may choose your own investments at no charge or request assistance from the Registered Investment Adviser available through the OnlineAdviserTM service at an additional fee.

Acc12 Do HSA accounts pay broker commissions? Generally no, most HSAs use no-load mutual funds or pay no broker commissions, but you should check your account's disclosure notice.

Acc13 How do I deposit funds to my HSA account? The initial deposit is made in any amount over $50 at the time of application after your HSA-qualified insurance plan is approved. Deposit slips and further instructions will be included with the delivery of your HSA-qualified insurance plan.

Acc14 How do I withdrawal funds from my HSA account? You can make a manual withdrawal request (by mail or in person) or use a debit card. The use of debit cards sounds appealing, but frequently leads to problems with withdrawals by health care providers, so these should be avoided. Some HSA accounts may offer withdrawal by check draft.

Acc15 Do HSA accounts offer a VISA debit card? Yes, you may set up your HSA account with a VISA debit card, but we do not recommend using this option. See the article "Debit Card Problems for Small Business Health Plans" at for detail on this issue. HSA accounts invested in mutual funds do not offer the VISA debit card option. OnlineAdviser clients utilizing the "no additional fee" HSA account service have this option available on request.

Acct 16 Why does this Web site offer a choice of only three account administrators? What about the rest? The value, services and options covered by these three combined with their longstanding reputation and dominant market share make them the most likely choices for the majority of account owners. More choices may be added in the future. All HSA administrators are welcome to use this enrollment service but some may choose not to due to their current distribution arrangements.

Acct 17 What is the difference between a trustee and a custodian? Very little, in practical terms and either can be used to administer an HSA. Banks usually act as trustees and investment companies or insurance companies usually act as custodians. The services provided to the account owner are the same.


Financial Planning

FP1 Can HSA funds be used to pay for health insurance? Yes, but only in very limited circumstances. These include: 1) while you are collecting unemployment compensation, 2) while you are covered on COBRA health insurance plan (see for more information on COBRA coverage and alternatives), 3) when the health insurance is "long term care insurance".

FP2 Can HSA really be used to pay for long term care (LTC) insurance on a 100% tax deductible basis regardless of my income or tax status? Yes.

FP3 Is this a windfall for long term care insurance buyers? Not really. A typical candidate for long term care insurance is not a likely candidate for a health savings account. The average HSA owner is less than 50 years old. The average LTC buyers are in their 60s. The age gap means that today's HSA owners will not benefit from the LTC insurance allowance for many years.But this is a smart financial planning strategy for the future.

Additionally, there are big differences in the risk profile and psychological behavior of these two groups of people. HSAs appeal to people without any significant medical history, low current healthcare expenses and an expectation of low health care expenses in the foreseeable future. LTC insurance tends to appeal to people who are so concerned about their future healthcare expenses that they believe that they might not be able to afford to maintain their current lifestyle without the protection of insurance. It would be a relatively rare event for a person to enroll in both a HSA plan and a LTC insurance plan within the next few years.

A far more likely "real life scenario" is that a person opens a health savings account at age 40, builds up an HSA account with an excess balance of $10,000 by age 65 retirement when they purchase a long term care insurance policy at a price of $2,500 per year. So the HSA plan might fund four year's worth of LTC after 25 years of operation. Some smart financial planning will, of course, improve the results but it is not likely that the availability of the HSA will cause a sudden or dramatic change in behavior or the LTC insurance buyers. The ability to use a HSA to pay LTC premiums will be a relatively insignificant issue in the near future.

FP4 Can HSA funds be rolled over tax-free into an IRA? No. This was a provision of the proposed legislation that was cut in the final revision of the law.

FP5 Can an IRA be rolled over into a HSA account? Yes, but only once beginning after January 1, 2007.

Otherwise, you may be able to achieve essentially the same result of tax-free transfer by taking a taxable distribution from an IRA and making a tax-deductible deposit to the HSA of the same amount in the same year. The two transactions offset each other so that no income tax is due. This transaction would be subject to the maximum HSA contribution limits for the year and should be set up as to avoid any possible early distribution penalty from the IRA account.

FP6 What happens when I terminate my HSA insurance? The HSA account remains unaffected until you withdrawal the funds.

FP7 What happens if I withdraw HSA funds for purposes other than health expenses? Non-qualified withdrawals are subject to a 10% tax penalty.

FP8 What happens to my HSA if I get divorced? HSAs are handled as a tax-qualified property distribution in the same manner as an IRA account in accordance with the marital settlement. Normally this is not a taxable event.

FP9 What happens to my HSA account when I die? The HSA account is transferred to the named beneficiary in a manner similar to an IRA account. A transfer to a surviving spouse is tax-free, the same as an inherited IRA. However, unlike IRAs, transfers at death to other account beneficiaries (like children) are immediately taxable.

FP10 Do I need to be enrolled in a qualifying health insurance plan in order to make tax-free withdrawals? No. The qualifying health insurance is required only to make tax deductible deposits but is not required to make tax-free withdrawals.

FP11 Are there any special withdrawal provisions available for those over age 65? No. The same withdrawal provisions apply as are available to all HSA participants.

FP12 Can a Health Savings Account be owned by a Living Trust? No.

FP13 Can a Living Trust be the beneficiary of a Health Savings Account? Yes. The same rules that apply to individual retirement accounts in this regard would be applicable for HSAs.