Health Information
HSA Regulatory Limits
| |
2004 |
2005 |
2006 |
2007 |
2008 |
Individual Minimum Deductible |
$1,000 |
$1,000 |
$1,050 |
$1,100 |
$1,100 |
Individual Maximum Out-of-Pocket |
$5,000 |
$5,100 |
$5,250 |
$5,500 |
$5,600 |
Individual Maximum Contribution |
$2,600 |
$2,650 |
$2,700 |
$2,850 |
$2,900 |
|
|
|
|
|
|
Family Minimum Deductible |
$2,000 |
$2,000 |
$2,100 |
$2,200 |
$2,200 |
Family Maximum Out-of-Pocket |
$10,000 |
$10,200 |
$10,500 |
$11,000 |
$11,200 |
Family Maximum Contribution |
$5,150 |
$5,250 |
$5,450 |
$5,650 |
$5,800 |
|
|
|
|
|
|
Catch-up Contribution (55+ years old) |
$500 |
$600 |
$700 |
$800 |
$900 |
HSA Basics
Health Savings Accounts (HSAs) are a new healthcare program. HSAs pair a high-deductible health insurance plan with a health savings account to cover medical expenses until the deductible is reached.
- HSAs are "the better rainy day fund" approach to healthcare. Save money on health insurance, and medical expenses when they do occur.
- HSA contributions are from pre-tax dollars, and can be made by the company and/or the individual / employee.
- HSAs are controlled and owned by individuals / employees.
- HSAs accumulate from year to year (not use it or lose it), and are portable.
- HSA payouts for qualified medical expenses are tax-free.
- HSAs accumulated capital, interest and dividends are tax-free until retirement.
- HSAs are an inheritable asset.
- HSAs are expected to encourage participants to become better health care consumers.
- HSAs are not for everyone.
Health Savings Accounts are important new tools for employers and employees to improve their healthcare options. For a business owner or individual, Health Savings Accounts are an inexpensive way to insure family and employees – while reaping tax benefits for almost every dollar committed to the plan.
HSAs were created to offer individuals a tax-advantaged way to accumulate savings for medical expenses. Business owners who offer such a plan to their employees can benefit modestly from tax relief, and, most importantly, can realize substantial healthcare cost savings on a day-to-day basis. HSAs are not for everyone. Yet for the self-employed, and for many other small business employers and their employees, HSAs represent a breakthrough strategy that can lower healthcare costs today and increase retirement savings for future health care needs.
To those familiar with IRA, Keogh and 401(K) plans, HSAs operate in much the same manner, with several important differences. The most important difference is that money placed into an HSA can be withdrawn at any time, before as well as after retirement, if the money is used for medical care expenses. What constitutes a medical expense is pretty basic. Treating a broken nose is okay. Getting wrinkles removed is not. Equally as important, money not spent in one year may rollover to the next and even beyond age 65.
HSAs for Families and Individuals
Click here to download an HSA primer (PDF file)
Who Qualifies for an HSA?
You, if you’re:
- under the age of 65,
- not listed as someone else’s dependent for income tax purposes,
- not receiving Medicare or Social Security benefits,
- covered by a high-deductible health plan, and
- not covered by any other type of health insurance plan, except for:
- Separate dental and/or vision care insurance, or flexible spending accounts (FSAs) covering only dental and/or vision care
- Discount cards for health care services or products (for example, prescription drugs)
- Disease management and wellness programs, as long as they do not “provide significant benefits in the nature of medical care”
- Employee assistance plans, again if they do not “provide significant benefits” (short-term counseling is okay)
- FSAs or HRAs that pay or reimburse for medical expenses after a high deductible has been met*
- Separate long-term care insurance
- Worker’s compensation insurance (through employers)
- Disability insurance (individual or through unions or employment)
- Automobile insurance (including coverage for medical care in accidents and emergencies)
- Business liability insurance
- Insurance that pays for fixed amount of hospitalization
- Freestanding health insurance for travel (such as flight insurance or automatic travel coverage when transport is booked on a credit card).
* Employers may offer HSAs or FSAs that pay or reimburse additional fees for coinsurance or out-of-pocket costs, provided that you have already satisfied your in-network deductible. Retirement HRAs funded by employers, accounts that will only pay for or reimburse medical expenses incurred after retirement, are permitted.
If your spouse or dependents are covered by other insurance, they may not be able to participate. However, you may still be able to use your HSA to pay for their qualifying medical expenses tax-free.
Who Will Not Qualify?
HSAs are not available to persons who are both eligible for and enrolled in Medicare. Most Americans qualify for Medicare at age 65; however, if an individual continues to work past that age, remains enrolled in a high-deductible health plan, and does not apply for Medicare benefits, he or she may qualify to contribute to an HSA.
| If you’re claimed as a dependent on someone else’s tax forms — regardless of whether that someone is a spouse, a domestic partner, or a parent — you cannot open your own HSA. |
Children not of working age cannot open their own HSAs with money given by their parents. Children who work but are claimed as dependents on their parents’ tax return cannot open their own HSAs.
Similarly, a non-working spouse or any other relative who is claimed as a dependent on another person’s tax return cannot open his or her own HSA either.
Individuals and families covered under traditional, full-coverage insurance plans (including Health Maintenance Organizations, Preferred Provider Options, Point-of-Service plans, Medicare and Medicaid) that do not meet the deductible minimum are not eligible for HSAs.
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HSAs: Catch-Up Contribution - Special Rules for Those Over 55
To allow older taxpayers to “catch up,” the current law allows HSA participants to stretch their contribution limit by an additional $700 in 2006. This means that if you are over 55 and have a $1,050 deductible, your legal contribution may be $1,750 for the tax year. Under current law, the “catch-up” amount will increase $100 per year (the catch-up amount will be $800 in 2006) until it reaches an additional $1,000 per tax year by 2009 and there after.
These additional amounts must also be pro-rated, in the same way any other contribution would be, if you participate in the HSA program for only part of the year.
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HSAs: Excess Contributions & Rollovers - Penalties on Excess Contributions
Current law mandates a penalty if you, or your employer, contribute in excess of your limit for the tax year. You will be penalized with a 6% excise tax on the entire amount that is over the limit.
The IRS will also treat amounts in excess as income. The tax responsibility will be yours, even if your employer made that excess contribution.
The 6% penalty tax will be waived if a distribution of the excess (including its earnings) is made to the account holder in a timely manner. The easiest way to do this is to write an HSA check to yourself, in the amount of the excess, before December 31 of the relevant tax year. The earnings on the excess will be taxable on distribution.
If you can prove the check to yourself is a reimbursement for out-of-pocket qualified medical expenses in the second year, you may not have to pay any tax on that amount. You’ll need receipts to back this up, naturally.
Avoid a Tax Penalty
It’s up to you to monitor your HSA contributions and make sure they don’t exceed your legal limit. Use the Contribution Calculator and make sure you know what your limit is. Then pay attention. A monthly number-check, at the same time you balance your checkbook, ought to be enough — it will take only an additional minute or two. |
What About Rollovers from Other Accounts?
If you had an MSA (the ancestor of the HSA, which was available only to the self-employed), you can roll over accumulated funds from that account into your HSA, without paying a tax or penalty. Rollovers do not count towards your contribution limit, but you do not get an additional deduction for them in the current tax year.
An HSA may accept only one rollover per year.
Under current law, rollovers from an IRA, HRA, or other health reimbursement plan from an employer or flexible spending arrangement are permitted on a one time only basis and only to the maximum amount allowed by the HSA regulations.
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Using Your Account
How do you spend HSA Funds?
HSA money must be used for qualified medical expenses to remain tax-free. You can make tax-free withdrawals from your HSA to pay for these expenses as soon as
- your account is activated, and
- you have an opening balance.
There are two reasons why you would pay for qualifying medical expenses with funds outside the HSA account. The first is because you do not have enough money in the account to pay for the procedure. In that case, you may use other funds and take the deduction later as long as you have supporting documents to show the tax authorities. The second reason is that you prefer to leave the funds in the HSA and continue to earn dividends and profits that are not taxable until you retire or use later for qualifying expenses.
What Can You Use Your HSA For?
You can spend your HSA dollars on medical expenses for yourself, or anyone you claim as a spouse or dependent on your personal income tax — even if that person is not covered by your HDHP. In general, HSA withdrawals for qualifying medical expenses are excluded from your gross income — that is, they are not taxed — even if you’re not currently eligible to contribute to the HSA.
Only distributions provable as qualifying medical expenses will be tax-free. If you pay for procedures that do not qualify, the monies used are considered to be “income” for your tax year and will be subject to both federal and state income taxes, as well as an additional penalty tax of 10% of the amount that was spent.
What’s a Qualifying Medical Expense?
The IRS definition of “qualifying medical expenses” is broad, and you can use your HSA to pay for many things your health insurance won’t cover. However, regulations do change. You can always find the most up-to-date list of qualifying expenses online, in Publication 502 on the IRS website or on this website, below.
Here’s just a sampling:
- Professional care
- Medical doctors
- Dentists
- Optometrists
- Nursing services
- Emergency care
- Christian Science practitioners
- Chiropractors
- Psychiatrists
- Psychologists
- Acupuncturists (but not herbalists)
- Therapists (certain certifications may be required)
- Treatments not often covered by health insurance:
- Alcoholism or drug addiction treatment
- Fertility enhancement
- Laser eye surgery
- Prescribed weight-loss or stop-smoking programs
- Special schools and homes for the mentally retarded
- Medical equipment, appliances and other personal items:
- Artificial limbs and prosthetics
- Dentures and other artificial teeth
- Contact lenses and eyeglasses
- Braille books and magazines
- Crutches and wheelchairs
- Hearing aids
- Guide dogs and other helper animals
- Birth control pills
- Costs that may be incurred when seeking treatment
- Trips and travel exclusively for the purpose of a treatment
- Meals and lodging associated with such trips
- Qualifying treatment-related expenses:
- Telephone or television modifications for disability
- Legal fees related to treatments
- Medical conferences (must be related to a condition)
Over-the-Counter Items
The law provides that these small items, such as aspirin, sunscreen, vitamins, “aromatherapy” candles, acne creams, Epsom salts and Ace bandages, qualify only if they have been prescribed. |
What Does NOT Qualify?
These expenses are just a sampling of expenses you can’t pay for with your HSA. (If you do pay for these with a withdrawal from your HSA, you’ll either have to reimburse the account by April 15th of the year following the tax year or pay income tax — plus a 10% penalty tax — on the withdrawal amount.)
- Cosmetic surgery (unless the surgery is related to a medical condition, as in the case of a birth defect or a mastectomy)
- Teeth whitening
- Maternity clothes
- Diaper services
- Health club dues
- Electrolysis for hair removal
- Hair transplants
- Household help or babysitting
- Marijuana for glaucoma (or other controlled substances)
- Nonprescription drugs and medicines (over-the-counter drugs can be qualifying expenses, but you must have a doctor’s written recommendation)
- Food supplements not prescribed by a doctor (e.g., Ensure TM.)
- Over-the-counter vitamins or diet drinks (e.g., Slimfast)
- Swimming lessons
- Weight-loss programs not prescribed
- Funeral expenses
Some borderline expenses must wait for further guidance in the form of future IRS notices.
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IRS Qualifying Medical Expenses
- Abortion
- Acupuncture
- Alcoholism Treatment
- Ambulance
- Artificial Limb
- Artificial Teeth
- Bandages
- Birth Control Pills
- Braille Books and Magazines
- Breast Reconstruction Surgery (post-mastectomy only)
- Capital Expenses (see note)
- Car Modifications (for disabilities)
- Chiropractor
- Christian Science Practioner
- COBRA Payments
- Contact Lenses & Solutions
- Crutches
- Dental Treatment
- Diagnostic Devices (i.e. blood sugar test kits for diabetics)
- Drug Addiction Treatment
- Eyeglasses
- Eye Examinations
- Eye Surgery
- Fertility Enhancement (some
- treatments excluded)
- Guide Dog or Guide Animal
- Hearing Aids
- Hospital Service
- Laboratory Fees
- Laser Eye Surgery
- Lead Paint Removal In Home
- Learning Disability
Legal Fees (with restrictions)
- Lodging (treatment-related only,
- and with restrictions, up to $50 per person)
- Long Term Care Insurance
- Long Term Care (Some)
- Meals (treatment related, with restrictions)
- Medical Conference Fees (relating to chronic illness; no lodging or meals)
- Medical Information Plan
- Medicare Parts A and B
- Medicines (prescribed)
- Mileage (12 cents per mile)
- Nursing Home
- Nursing Services
- Operations
- Optometrist
- Organ Donors
- Osteopath
- Oxygen
- Prosthesis
- Psychiatric Care (including costs for residential care)
- Psychoanalysis
- Psychologist
- Special Education
- Sterilization
- Stop-Smoking Programs
- Surgery
- Telephone modifications (for disability)
- Television modifications (for disability)
- Therapy
- Transplants
- Transportation (treatment related)
- Trips (for treatment)
- Tuition (special education only)
- Vasectomy
- Vision Correction
- Weight-loss programs (only if prescribed)
- Weight-loss foods (only if prescribed)
- Wheelchair
- Wheelchair maintenance
- Wigs
- X-Rays
Note: Deductions for capital improvements that relate to modifications of a home to make it more accessible to handicapped family members are calculated by taking into account the resale value of your home before and after the modifications.
For more details on what's qualified and how to calculate deductions, see IRS Publication 502 (http://www.irs.gov/pub/irs-pdf/p502.pdf) or contact a qualified tax advisor.
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Payments & Tracking
How Do You Pay?
Using an HSA is pretty much like using any checking account. Typically, you’ll have a checkbook with about 25 checks, plus a debit card. Some account custodians charge you for the checks (anywhere from $10 to $25) and will charge you for additional check orders as well.
Besides debit cards and checks, other ways to pay include certain types of credit cards issued by the account custodian and stored-value cards in specific dollar amounts. Stored-value cards for HSAs are similar to store gift cards or phone cards. The starting balance is debited every time the card is used, until the amount is used up.
As a practical matter, the amount of money you spend depends on the balance in your account. Although your deposits in the first few years may be small, your accumulated savings can provide a cushion of tax-free dollars over time.
What If You Need Your HSA Money for Something Else?
In the event of severe financial difficulties, money saved in an HSA account may be immediately withdrawn to meet a crisis. All you have to do is write yourself a check. You will have to report this distribution as potentially taxable income, as you would if you “cashed out” your IRA or Keogh. But you don’t have to withdraw the entire amount, just what’s really needed for this important, non-medical need.
Remember, though, that the amount you withdraw for non-medical expenses loses value as soon as you withdraw it — you could forfeit over 30% of the amount in taxes. Plus, whatever’s left in the account will accumulate less interest for the future. Unless you’re facing a true financial crisis, such as a foreclosure or eviction, you’re probably better off leaving the money in your account.
How Do You Keep Track of HSA Spending?
Your HSA custodian is required to report all distributions from your HSA account to the IRS. You get a copy of the report from your custodian vendor at the end of the year. It’s up to you to tell the IRS how much of the distribution total was for qualifying medical expenses, and what part of the total does not qualify.
You must include any unqualified amount in your taxable income for the year (when you file your income taxes). The qualified amount is noted on a special form. You don’t have to file your medical receipts with the IRS, though you should save them, along with copies of your tax forms, in case of an audit.
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What Do You Do At Tax Time?
You don’t have to itemize your HSA contributions to get the tax write-off for medical expenses. It comes right off the top — above the line — and gets deducted from your gross income.
On your personal income tax return, the amount of your HSA should ideally equal the limit of your allowable deduction under your insurance plan. To make up any difference, the law allows you to contribute to your HSA as late as April 15 of the year after the current tax year. Use the Contribution Calculator to determine the maximum amount you can contribute and still get the tax advantage. Amounts over this maximum may incur tax penalties.
All eligible contributions into an individual or family HSA are exempted from personal income tax. It doesn’t matter whether or not you spend all the money in the HSA in that tax year.
Rules for Reporting Premium Costs and HSA Contributions
Contributions into an HSA can be made either by an individual or by an employer. If you make the contribution, the amount is DEDUCTIBLE from your TOTAL INCOME. In 2006 this deduction is on line 28 of Form 1040. The line may change for 2005, but it will be in the section for “Adjustments to Gross Income.” Similar deductions are reported in this “AGI” section — Lines 23 to 34 on your 2004 tax form. A rundown of your contributions and disbursements may be noted on a separate schedule (Form 8889) to be attached to the 1040.
If your employer contributes to your HSA, the amount is EXCLUDABLE from your WAGES (Line 7 on the 2004 Form 1040). The excluded amount is supposed to be noted on your W-2 paperwork, but you should check to make sure your wage figure, which is minus your employer’s contribution, is correct on your W-2, so you can enter a correct amount on Line 7 on the Form 1040.
If your employer paid for all of your health insurance premiums , only that employer is entitled to deduct this sum as a business expense. You can’t deduct the premium costs.
If you paid part of the premium out of your salary, your costs for the premium will be noted on the W-2, but this sum is not excludable from your wages.
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Your Retirement & Beyond
Can I Retire on Funds from My HSA?
To retire comfortably, you’ll probably need more income than an HSA alone can provide. For most Americans, that income will probably come from a combination of sources: Social Security, employer-sponsored pension plans, and personal savings in accounts like 401(k)s and IRAs. Your HSA can be a part of that — even a big part. But HSAs aren’t designed to be your primary retirement savings vehicle. Use a 401(k), SEP, IRA, or Keogh plan to provide for your retirement income. Use an HSA to give that income a hefty supplement.
After you reach age 65, you can use your accumulated HSA funds (which can include interest or dividends from stock funds, bonds, or other high-yield instruments) for other things besides health care. After retirement, money you withdraw and use for non-qualifying expenses is taxed at the normal rate for investment income. However, money you use for qualifying expenses later in life — such as nursing home costs — can still be withdrawn with no tax paid. It is entirely tax-free.
Death Benefits
The money saved in an HSA is considered an “inheritable asset” subject to estate tax. Taxes may be paid by your heirs or assigns in the year the funds are released from your estate, at the same rate as other inherited, previously untaxed income. Under the current law, the entire amount may pass to a surviving spouse without estate tax.
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Annual Medical Expenses
Medical Expenses are low for most of us. This chart shows Annual Medical Expenses for the United States population by percentage:
Money Spent on Medical Care Annually |
Percentage of U.S. Population |
No Medical Expenses $0 |
33% |
$1 - $500 |
40% |
$501 - $1,000 |
9% |
$1,001 - $2,000 |
7% |
$2,001 - $5,000 |
6% |
$5,001 - $10,000 |
3% |
$10,001 - $25,000 |
3% |
$25,001 - $50,000 |
.5% |
$50,001 - $100,000 |
.2% |
$100,001 - And Up |
.05% |
|
Seventy-three percent of the population spend $500 or less on Medical Expenses per year. Most people will not spend all of their HSA funds in a year. What is not spent is yours to keep and earn interest.
This chart was provided by American Health Value.
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HSAs for Employers
Click here to download an HSA primer (PDF file)
Tips for Selecting an HSA Health Plan for Your Business
Steps to identifying and choosing a high-deductible health plan include:
- Know the qualification rules for a high-deductible health plan.
- Ask others (insurance agent, colleagues, associations, etc.) for recommendations and referrals to brokers and health insurance providers.
- Be aware that health insurance regulations vary by state; find out your state’s regulations.
- Checkout the insurance provider and broker for service quality and licensing.
- Consider using a smaller firm, where your business will make a difference to their business.
- Have insurance data of current health plan available (total cost, employee data such as health, age, gender, residency).
- Consider the cost of a plan as an individual or group (a “pool” of individuals/businesses).
- Call vendors and ask if they offer any HSA-qualified high-deductible coverage plans; mention you are reviewing health insurance providers, and would like to see what they can present. Also, explore and use online insurance brokers.
- Fill out the insurance application form completely and accurately, noting pre-existing conditions, age, gender, and residency.
- Use at least three vendors and get at least three competitive bids for high-deductible policies. It is important to get each bid broken down into inclusions and exclusions, for comparison.
Note: HSAs cannot be initiated unless a high-deductible health plan is already is place.
Additional Considerations
Know qualification rules for a high-deductible health plan:
Deductible minimums of $1,050 for an individual, or $2,100 for a family plan.
Out-of-pocket maximums not to exceed $5,250 for individuals, or $10,500 for families.
No co-pays allowed (no "first dollar" coverage) until after the minimum deductible amount has been met (no “first dollar” coverage at all after Jan.1, 2006).
Checkout agents for licensing and certification, they should have a professional designation, such as Registered Health Underwriter (RHU) or Registered Employee Benefits Consultant (REBC), or hold membership in the National Association of Health Insurance Agents (AHIA) or National Association of Insurance and Financial Advisors (NAIFA).
To know with whom you are dealing, use rating services, such as A.M. Best (www.ambest.com) and NCQA (www.ncqa.org) that monitor customer satisfaction with insurance providers. Check with state licensing agencies for proof of a broker’s/agent’s current license.
Cost of health insurance is often higher for smaller businesses. Consider joining a “pool’ with others to lower costs. Trade associations, local business groups, state and local governments may offer you the chance to join a "pool” with others. Check to insure this is advantageous for your business.
Fill out the insurance application form completely and accurately, if any applications are incomplete or inaccurate, the company may either refuse to pay your claims or cancel your policy.
Get the details, ask insurance providers to provide you with:
- Premium schedule (dates premium payments are due)
- Benefits schedule (detailed list of what is or is not covered)
- Premium rates and ALL applicable administrative fees (monthly and setup fees)
- Copy of a sample agreement and application form (to review before you sign up)
- Checkable references from other clients with similar needs
Be aware of the most overlooked aspect when selecting a company health plan Guarantee of Renewal. This means that the insurer will not be able to, at a whim, cancel your policy, as long as you continue to pay the premiums on time. If possible, also get a cap on percentage increases over the first three years. Get this in writing.
Other considerations:
Before you sign on the dotted line…READ the policy. Have someone else look at it. Make sure you're getting what you asked for.
Key Financial Considerations for Any Policy Plan
- Cost of premium(s) on monthly basis for the year.
- Amount of deductible for year.
- Maximum Lifetime Benefit amount for life of the policyholder.
- Exclusion of preventative care from deductible amounts.
- Discounts for use of in-network services or doctors.
- Additional costs for desirable options (i.e. maternity, prescription drug benefits).
- Guaranteed of renewal.
- Reasonable assurance of insurer's financial stability and ability to pay claims.
- Insurer's reputation for good customer service and rapid response to questions when they arise.
Good rules of thumb to keep in mind when choosing a vendor:
- Companies with good reputations generally earn them and try to keep that reputation.
- Capping expenses for the next three years is more important than the cheapest rate this year.
- Providing quality health care is still the main objective and should be kept in mind at all times.
- Keeping on top of your health care program can make a difference in your employee morale.
Health Insurance Checklist
Good plans should cover:
- Inpatient hospital services
- Outpatient surgery
- Emergency services
- Physician visits (in the hospital)
- Office visits
- Care by specialists
- Skilled nursing care
- Medical tests and X-rays
- Preventive care and checkups
Good plans may or may not cover these options:
- Prescription drugs
- Mental health care
- Drug and alcohol abuse treatment
- Home health-care visits
- Rehabilitation facility care
- Physical therapy
- Hospice care
- Maternity care
- Chiropractic care
- Alternative health care
- Well-baby care
The best plans may waive the deductible for preventative care, and effectively pay 100 percent of all costs for routine procedures, such as annual physicals, age-appropriate cancer screenings, pre-natal care, and required immunization for children covered by the policy.
When you buy a policy, the first premium is usually due at the time you sign the purchase agreement. Your check for will also include monthly administrative fees, and perhaps an initial setup fee as well.
Remember that direct agents, independent agents, and brokers all get a commission on the policies they sell.
Selecting An HSA Custodian for Your Employees
You can set-up HSA accounts for you and your employees with an Account Custodian, such as a bank. A good HSA provider will have the following features:
- Easy deposits — in person, by mail, by electronic transfer, or through an automatic payroll deposit mechanism.
- Easy withdrawals with a checkbook or debit card.
- An attractive daily compound interest rate on your deposits (2% APR is the current norm).
- Reasonable charges for administering the account (annual fees of $3 per month are reported as the norm, although some vendors offer “no fee” accounts).
- Ability to check balances and recent account action at any time, by phone, by web and by monthly printed account summaries.
- A yearly printed statement of all deposits and detailed data on all debits or expenses, to satisfy the IRS requirements for reporting.
- FDIC insurance.
Tips for Smaller Businesses
Trade associations, local business groups, state and local governments may offer you the chance to join a "pool" of businesses in a group plan; often these groups, because they are larger, get better rates. If the group plan offers a qualifying high-deductible policy, this may be a good route for your small business. If your small business has three or more employees, you can be your own "group," and usually get a better rate than an individual would.
Be aware that if you are self-employed and a sole proprietor, a major insurance company may not actively seek your business. You may be small commission to them – or you may be, in their estimation, uninsurable. This is particularly true if you have not had a health insurance policy in force within the last year.
Big insurance companies generally charge smaller business more, even for high-deductible policies. They may advertise what seem to be comparatively low rates, but their application forms usually state that, upon reviewing your application, they will reserve the right to offer you a slightly different plan at a higher premium cost.
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IRS Qualifying Medical Expenses
- Abortion
- Acupuncture
- Alcoholism Treatment
- Ambulance
- Artificial Limb
- Artificial Teeth
- Bandages
- Birth Control Pills
- Braille Books and Magazines
- Breast Reconstruction Surgery (post-mastectomy only)
- Capital Expenses (see note)
- Car Modifications (for disabilities)
- Chiropractor
- Christian Science Practioner
- COBRA Payments
- Contact Lenses & Solutions
- Crutches
- Dental Treatment
- Diagnostic Devices (i.e. blood sugar test kits for diabetics)
- Drug Addiction Treatment
- Eyeglasses
- Eye Examinations
- Eye Surgery
- Fertility Enhancement (some
- treatments excluded)
- Guide Dog or Guide Animal
- Hearing Aids
- Hospital Service
- Laboratory Fees
- Laser Eye Surgery
- Lead Paint Removal In Home
- Learning Disability
Legal Fees (with restrictions)
- Lodging (treatment-related only,
- and with restrictions, up to $50 per person)
- Long Term Care Insurance
- Long Term Care (Some)
- Meals (treatment related, with restrictions)
- Medical Conference Fees (relating to chronic illness; no lodging or meals)
- Medical Information Plan
- Medicare Parts A and B
- Medicines (prescribed)
- Mileage (12 cents per mile)
- Nursing Home
- Nursing Services
- Operations
- Optometrist
- Organ Donors
- Osteopath
- Oxygen
- Prosthesis
- Psychiatric Care (including costs for residential care)
- Psychoanalysis
- Psychologist
- Special Education
- Sterilization
- Stop-Smoking Programs
- Surgery
- Telephone modifications (for disability)
- Television modifications (for disability)
- Therapy
- Transplants
- Transportation (treatment related)
- Trips (for treatment)
- Tuition (special education only)
- Vasectomy
- Vision Correction
- Weight-loss programs (only if prescribed)
- Weight-loss foods (only if prescribed)
- Wheelchair
- Wheelchair maintenance
- Wigs
- X-Rays
Note: Deductions for capital improvements that relate to modifications of a home to make it more accessible to handicapped family members are calculated by taking into account the resale value of your home before and after the modifications.
For more details on what's qualified and how to calculate deductions, see IRS Publication 502 (http://www.irs.gov/pub/irs-pdf/p502.pdf) or contact a qualified tax advisor.
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Accounting & Payroll
Rules For Reporting Premium Costs and HSA Contributions
Contributions into an HSA can be made either by an individual or by an employer. If the individual makes the contribution, the amount is DEDUCTIBLE from the individual’s TOTAL INCOME (Line 22 on the current version (2006) of Form 1040).
If the employer makes the contribution, the amount is EXCLUDABLE from the employee’s WAGES (Line 7 on the current version (2006) of Form 1040). The excluded amount is supposed to be noted on the employee’s W-2 paperwork.
If the employer pays for all of the employees’ high-deductible insurance premiums, only the employer is entitled to deduct this sum as a business expense.
LLC (Limited Liability Companies) and LLP (Limited Liability Partnerships)
Small organizations often operate as an LLC. Under the current tax laws, single-owner LLCs are taxed as if they were sole proprietorships. LLCs with multiple owners get the same tax treatment as a partnership unless they elect to be treated as a corporation. LLPs get the same tax treatment as a partnership. Thus, there are no special tax advantages between LLCs or LLPs under the HSA program.
C and S Corporations
With a “regular” or C Corporation, your business must pay its own income tax on the taxable profits of your corporation. The tax rate for corporations varies by a few percentage points from what is due from married or single taxpayers. Personal service corporations (doctors, lawyers, engineers, architects, etc) are taxed at a flat rate of 35 percent of their net profit for the year. If you and others pay yourselves a salary from a C corporation, your health insurance premium costs are a business deduction for the corporation. If you and others are drawing a salary from the income that derives from your corporate business, each of you have to pay a personal income tax on that income. After-salary profits are taxed to the corporation. Upon eventual distribution of the profits you and others pay tax again – the dreaded “double tax” on the distributed profits on your personal tax return.
Tax rules for a “special” or S Corporation are similar to those for a partnership, i.e., you pay tax on your salary and your share of after-salary profits. If an individual’s shareholding in an “S” Corporation is more than 2 percent, that person is eligible to deduct the cost of company-paid health insurance premiums as a gross income “adjustment” on the Form 1040. Other shareholders are treated as employees in the manner of C Corporations.
Corporations reporting taxable income (profits) of less than $100,000 qualify for a significantly lower corporate tax rate. Many small corporations therefore strive to find as many business deductions as possible, to get under the $100,000 limit.
HSAs are a new way to get there. Because owner salaries and compensation are deductible as a corporate business expense, contributions into an HSA can cut both the corporate tax and income tax at the same time.
Because of the non-discrimination rules for HSA contributions, a corporation with many employees will set a practical limit on contributions to all its employees, large and small.
Excluding Contributions From An Employee's Taxable Income
On a payroll you must calculate withholding in accordance with government tables to cover the employee’s income tax. Federal Income Tax requires this withholding, as do the majority of states that have State and/or Local Income Tax. Contributions to HSAs on behalf of employees are exempt from these taxes, and join the list of other forms of worker compensation that are not taxed:
- Generally all health coverage policy premiums
- Generally all employer contributions to employee retirement plans
- All worker’s compensation premiums or benefits
- Extra sick pay or disability (after the first six months)
- Reimbursements for moving expenses, parking garages, public transit (subject to certain limits)
- Reimbursements for business expenses by employees (T & E) when these are accounted for to the employer
More Tax Relief for Employers
In addition to withholding for income tax, you must withhold a percentage of each employee’s pay for Social Security and Medicare under The Federal Insurance Contributions Act (otherwise known as FICA) towards the benefits they will one day receive from Social Security and Medicare.
In tax year 2006, the tax rate of a paycheck is 7.65%:
- 6.20 percent for Social Security
- 1.45 percent for Medicare
But wait, there’s more: an employer must also pay an equal amount of taxes to the government on behalf of the employee. And, pay the employer's share of FICA on behalf of each worker.
For highly paid employees, there is a FICA ceiling. For tax year 2006, the company does not have to pay FICA once it has paid the first $94,200 in wages per person. There is no Medicare ceiling; no matter what the company pays its highest-paid worker, the company still has to take out the Medicare tax.
Under the HSA program, employer contributions to worker HSAs are not subject to any of these taxes, nor are they considered to be gross wages when calculating a variety of other taxes, such as Withholding Unemployment Tax (FUTA). Unemployment tax benefits are regulated by a combined state and federal program. Just like income tax, the company has to withhold both a federal tax (FUTA) and a state unemployment tax. The current percentage for federal withholding for FUTA is 6.2%. It is a single flat rate, paid up to a ceiling on the first $7,000 of a worker’s pay.
The company’s state unemployment tax rate will vary from state to state. The company may also have to pay Disability Insurance Tax. In certain states (notably New York and California) this is a tax that pays for a mandated state disability insurance program must be paid and/or withheld by the employer. Under current federal rules, employer contributions to worker HSAs are exempted from these taxes as well.
| Setting Up Your Payroll For HSAs
Basic First Steps (Checklist)
___ Obtain Employer Identification Number (EIN) for your business. You must do this if you plan to pay wages to at least one other person beside yourself. To apply for a number, use IRS form SS-4. You can do this online.
___ Decide how frequently you’ll issue paychecks (Weekly? Biweekly? Monthly?).
___ Decide which of your workers are full time employees. Some of your help may wish to be paid as independent contractors, if eligible.
___ Obtain a completed withholding application (W-4 form), Social Security Number, for each employee.
___ Make a note to file 1099s for each independent contractor you expect to pay more than $600 in this tax year. |
Working With the W-2
Each employee gets a W-2 by January 31st for the previous tax year. Copies of each employee’s form are also sent to the IRS in early February, along with a summary sheet, the Transmittal of Wage And Tax Statements, also known as IRS Form W-3. Employees who leave your company before the tax year is over may also request a copy of their W-2 earlier, so they can see what the total taxes were relating to their employment.
Wages (plus tips and compensation) for each employee are totaled for the year in Box 1. The amount of wages subject to Social Security (the first $94,200 of wages) goes into Box 3. The amount of wages subject to Medicare tax (everything after the first $400) goes into Box 5.
The amount of withholding for each tax (Box 2, 4, 6) should equal the amount you’ve already paid in monthly and quarterly installments. For how to calculate withholding, see IRS publication #15-T.
Not everyone will use Boxes 7-11. These report Social Security paid on tips and gratuities, hardship advances for those who will qualify for the Earned Income Tax Credit (EIC).
“Non-Qualified Plans” are other payouts made by the employer on behalf of the employee that may not be tax-exempt from FICA or other payroll taxes. These include distributions from pension plans, IRAs, and profit-sharing plans. For example, if an employee leaves and “cashes out” vested pension funds, the sum is noted on the W-2, and the employee will be responsible for the taxes.
Where then, are the deductions for a company’s contributions to an employee’s HSA? They are tucked away in Box 12, and identified with a special code “W.”
Under Code “W”
Box 12 is the section reserved for payments that generally will be tax-exempt from gross income, and hence from gross income taxes. These include income deferred via a 401(k) plan (Code “D”), Moving Expenses (Code “P”) and salary reductions to a SIMPLE (Code “S”).
Employer contributions to a Health Savings Account are Code “W.” So, in Box 12, if you made a $200 contribution to a worker’s HSA, you’ll indicate this by “200.00 W”.
If you do a W-2 for yourself or a spouse, this is where you will indicate your contribution to your own HSAs. If you contributed $4,500 to your HSA, write down “4500.00 W”.
On the employee’s tax return, any figure that appears in Box 12 must be matched up as a pre-tax adjustment on the 1040. This is how the IRS will track HSA deductions. This is how they make sure that when the employer makes the contribution, only the employer gets the tax benefits.
Box 13 requires you to check off squares if the worker was exempt from any withholding (part time worker or agent paid only by commissions), or “actively participated” in any qualified pension, profit-sharing, or stock-bonus plan, including 401(k) SEP or SIMPLE plans. (Again, this is an IRS match point.)
Box 14 is reserved for other adjustments, which are non-elective, such as required employer-employee matching contributions to pension plans. Another match point. Boxes 15-20 are where you report wages and withholding payments for state and local tax.
This should get your company’s accounting and payroll up to speed on HSAs.
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