What is a Health Savings Account (HSA)??

In January 2004, Congress authorized Health Savings Accounts (HSAs) as a combination of a high-deductible health insurance plan and a tax-advantaged savings account which can be spent on medical and health expenses. With the high deductible health insurance, people have the security of being insured for medical care in case of serious illness or injury. With an HSA, people have the freedom to choose the medical and healthcare services they want, and use tax-free money to pay for it.

Who is eligible to establish an HSA?

An individual may establish an HSA if he or she is under age 65, covered by a qualified high-deductible health plan, and is not claimed as a dependent on another person’s tax return.

What are the requirements of a HSA-qualified high deductible health plan?

For self-coverage, the annual deductible must be at least $1,000 (and not more than $2,600) with annual out-of-pocket expenses required to be paid (deductibles, co-payments and other amounts, but not premiums) not exceeding $5,000. For family coverage, the annual deductible must be at least $2,000 (and not more than $5,150) with annual out-of-pocket expenses required to be paid not exceeding $10,000.

What other kinds of insurance can an eligible individual have?

• Accident insurance
• Disability insurance
• Dental care insurance
• Vision care insurance
• Long term care insurance
• Automobile insurance
• Property liability insurance
• Workers’ compensation insurance
• Tort liability insurance
• Insurance for a specified disease or illness
• Insurance that pays a fixed amount per day of hospitalization
• Tort liability insurance

How does an eligible individual establish an HSA?

HSAs can be set up with a qualified HSA trustee or custodian. Any insurance company or bank can be an HSA trustee or custodian. An HSA can be established through a qualified trustee or custodian who is not the provider of the high deductible health plan. In this case, proof of qualified insurance coverage for the eligible individual may be required by the trustee or custodian.

Who may contribute to an HSA?

Any eligible individual may contribute to an HSA. For an HSA established by a self-employed or unemployed individual, the individual may contribute to the HSA. Family members may also contribute to an HSA of another family member as long as that other family member is an eligible individual.

How much may be contributed to an HSA?

HSA participants can make pre-tax contributions to HSAs each year up to the amount of the health plan’s annual deductible. In 2004, the contribution limit for eligible individuals with self-only coverage is at least $1,000, but not more than $2,600. For eligible individuals with family coverage, the contribution limit is at least $2,000, but not more than $5,150. Individuals between ages 55 and 65 can contribute an additional $500 annually. Savings remaining in the HSA at year end may roll over into the next year tax-free. And, during the next year, the HSA holder may make another annual contribution of tax-free dollars to their Health Savings Account.

What is the tax treatment of an eligible individual’s HSA contribution?

Contributions made by an eligible individual to an HSA are deductible from adjusted gross income. The contributions are deductible whether or not the individual itemizes deductions. However, the individual cannot also deduct the contributions as medical expense deductions. Contributions made by a family member on behalf of an eligible individual to an HSA are deductible by the eligible individual in computing adjusted gross income.

What is the tax treatment of any distributions from HSAs?

Distributions from an HSA used exclusively to pay for qualified medical expenses of the account beneficiary, his or her spouse, or dependents are excludable from gross income - even if the individual is over age 65. Distributions from HSAs used for any other purpose is includable in the gross income of the account beneficiary and is subject to an additional 10% tax.

What are expenses that are eligible for tax-free distributions from HSAs?

IRS defines eligible medical expenses in IRS Publication 502 as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, and for treatments affecting any part or function of the body. Expenses must be primarily to alleviate or prevent a physical or mental defect or illness. This includes costs for physicians, surgeons, specialist medical practitioners, osteopaths, optometrists, psychologists, psychiatrists, dentists, nurses, chiropractors, acupuncturists, and other therapy received as medical treatment; costs for eyeglasses, contact lenses, and hearing aids; costs for prescription drugs and over-the-counter drugs; and capital expenses to install special equipment in a home for medical purposes.

Eligible expenses include premiums for health insurance, including qualified long-term care insurance, COBRA healthcare continuation coverage, and health care coverage while an individual is receiving unemployment compensation. Eligible medical expenses also include the cost of transportation and lodging necessary to get medical care. For individuals over age 65, HSAs can be used to pay for premiums for Medicare Part A or B, Medicare HMO, and the employee share of premiums for employer-sponsored retiree health insurance. HSA trustees are not required to verify whether HSA distributions are used for eligible expenses. Eligible expenses do not include expenses for cosmetic surgery, household help, health club dues, vitamins, cosmetics, or a vacation.

Are HSAs available in Hawai‘i?

HSAs are available in Hawai‘i for sole proprietors, self-employed individuals, and those working as part-time employees. For Hawai‘i employers, the Hawai‘i Prepaid Health Care Law requires that all health insurance plans offered by Hawai‘i employers must be approved as a qualified plan by the state government’s Prepaid Health Care Council. So, insurers must get state approval of their HSA product before Hawai‘i employers can offer HSAs to their employers. There are a number of options available to Hawaii residents. Merrill Lynch is rolling out a savings plan for HSAs and GSAA Benefits www.econsumersaver.com/ offers high deductible health insurance with a tax-favored savings account. Money in the savings account helps pay the deductible. Once the deductible is met, the insurance starts paying. Money left in the savings account earns interest and is yours to keep.

Where can I find more information on HSAs?

More information is available on the internet from the U.S. Department of Treasury at http://www.ustreas.gov/press/releases/js1061.htm Please follow the links from this page to download specific fact sheets and guidance on Health Savings Accounts.

Health Savings Accounts Can Help Fix Hawai‘i’s Healthcare System by Dr. Earl E. Bakken (President, Five Mountains Hawai‘i)

Improving community health with knowledge, tools and opportunities
To be healthy, people must have access to the knowledge, tools, and opportunities that lead to satisfying lives. Our North Hawai‘i community is gaining the knowledge about healthy lifestyles and ways to prevent disease from a strong network of community nonprofit organizations. Knowledge is coming from the health information resources at Tutu’s House and North Hawaii Community Hospital; from the community health improvement efforts of Five Mountains Hawai‘i and the North Hawai‘i Outcomes Project, and from the community education work of the Kohala Center and the Makali‘i Voyaging program.

Along with that knowledge growing in our community, comes a desire by people to control their healthcare choices to achieve and sustain personal health. People want to work with their own doctors and healthcare practitioners to select their unique blend of medicine, healthcare services and products. These knowledgeable consumers don’t want an insurance company making such personal healthcare choices.

Employees in Hawai‘i are very fortunate to have mandatory health insurance offered by their employers. But, they have limited choices with the number and type of health insurance policies offered by the employer. People who are self-employed, sole proprietors, or who are working part-time have even more limited choices for health insurance. And because of the high costs and limited freedom of choice, some people even choose to be uninsured and pay out of pocket for their medical expenses.

Now, there appears to be a glimmer of hope for our community to have a sensible financing tool to pay for their healthcare.

Health Savings Accounts (HSAs) are a new tool for knowledgeable healthcare consumers
In January 2004, Congress authorized Health Savings Accounts (HSAs) as a combination of a high-deductible health insurance plan and a tax-advantaged savings account which can be spent on medical and health expenses. With the high deductible health insurance, people have the security of being insured for medical care in case of serious illness or injury. With an HSA, people have the freedom to choose the medical and healthcare services they want, and use tax-free money to pay for it.

HSAs can be set up by anyone under age 65 with a high-deductible health insurance policy with annual deductibles of at least $1,000 for individuals and $2,000 for families. Participants can make pre-tax contributions to HSAs each year up to the amount of the plan’s annual deductible with a maximum annual contribution of $2,600 for those with self-coverage and $5,150 for those with family coverage. Any balance remaining in the HSA at year end rolls over tax-free to the next year. And, during the next year, the HSA owner can make another annual contribution of tax-free dollars to the account.

HSAs for Hawai‘i’s self-employed individuals, sole proprietors and those working part-time
Health Savings Accounts will be a new healthcare financing tool for Hawai‘i’s self-employed individuals, sole proprietors, and those working as part-time employees. These workers make up an important part of our islands’ economy. But since they are not covered by the state’s prepaid healthcare law, they need to cover their own insurance, seek state-subsidized coverage like QUEST, or go uninsured. HSAs can offer a new alternative for this large group of Hawai‘i’s workers.

Next steps for HSAs in Hawai‘i
For many Americans, HSAs started to be available in January 2004 when Congress authorized them to be established. However, in Hawai‘i, it appears that HSAs will become a reality only after some important steps are taken by state officials and insurers.

First, the state tax law needs to incorporate all the new changes Congress just made to the federal tax law to establish HSAs. Then insurance companies need to register any qualified high deductible health insurance plans with the state insurance commissioner with details on premiums and coverage.

Once these things are accomplished, then self-employed individuals, sole proprietors, and those working as part-time employees would be able to buy a qualified high deductible health plan and establish HSAs.

For Hawai‘i employers, however, some additional regulatory steps would still need to be taken before they could offer HSAs to their employees. Under the Hawai‘i Prepaid Health Care Law, all health insurance plans offered by Hawai‘i employers must be approved as a qualified plan by the state government’s Hawai‘i Prepaid Health Care Council.

HSAs could be a reality in Hawai‘i this year to help improve community health
If everything goes right, it won’t be too long before Hawai‘i’s self-employed individuals, sole proprietors and those working part-time will have access to HSAs as a new and effective healthcare financing tool for themselves and their families.

Health Savings Accounts will be an important step to improve community health in Hawai‘i by giving consumers control over their own healthcare expenditures, the economic motivation to get healthy and stay healthy, and freedom of choice to blend medical practices and products in the best way to meet their own personal healthcare needs.

Mahalo.