Understanding HDHPs and Health Savings Accounts

In order to have a valid HSA, you must be enrolled in a high deductible health plan (HDHP), have no other health coverage (there are exceptions), not be enrolled in Medicare and cannot be claimed as a dependent upon someone else's tax return. There are many contingencies or possibilities so it is best to seek advice from a licensed insurance agent or an accountant.

An HDHP has many guidelines to follow. With annual deductible limits set by the IRS, a user of the plan can have either of two basic types of coverage - self-only and family. For families, a spouse may still be eligible for HDHP plan provided that they are not covered by their spouse's plan (if it is a non-HDHP plan). A subscriber can still enjoy other types of benefits with their health coverage - prescription, dental, vision, disability, accidental and long term care.

There are limits on the amount of contributions you can make to a health savings account. This depends on the specific type of coverage your HDHP carrier provides. Each plan will have a specific deductible. In order to make qualified contributions, you must maintain your eligibility for coverage within a qualified HDHP plan and have the same type of coverage all year to maximize contributions. In addition, you may have to reduce the amount of contributions if you have made contributions other health spending accounts. You should be aware that if you contribute funds in excess of the deductible limit placed on the account, you will pay a 6% excise tax on the overage amount. You can also avoid the 6% excise tax if you withdraw any income earned on the withdrawn contributions and include them on the "other income" section of your tax return.

Taking and reporting distributions from your health savings account has its own set of guidelines to follow. Should you pay for medical expenses that are not covered by the HDHP, you can request for a distribution from your HSA. The funds used from this account must be used for medical expenses in order to remain tax free. If not, they may be subject to a 10% additional tax on any distribution taken. You will need to maintain records for the amount of contributions made as well as what funds were used for qualified and non-qualified distributions. Keep in mind that if you should use any part of the funds as security for another loan or should your account ceases to be an HSA, the funds will be deemed as fully distributed and you will need to report the fair market value of the assets in the account.

You will also need to understand what can happen to a health savings account in the event that the owner dies. If the owner's spouse is the beneficiary, the account can remain as an HSA. If the beneficiary is not a spouse, then the account ceases being a health savings account and becomes taxable (at fair market value).

HDHPs and HSAs are fairly new products that are attempting manage the growing costs of medical expenses. You should research what HDHP carriers can offer you to see if this route is the best for you and your family.

by Jack Morgan