Sunday, October 7, 2012

With the increasing implementation of High Deductible Health Plans by employers of all types and sizes the rules and regulations around Healthcare Savings Accounts also called H.S.A.'s become very important to employees and employers. There are significant penalties if monies in these tax favored accounts are used inappropriately.

Healthcare Savings Accounts are a critical component of an employer's benefit package when offering a qualifying High Deductible Health Plan. Because High Deductible Health Plans do not have co-pays for services like doctor visits and prescription drugs, which employees are accustomed, saving for these expenses is critical.

To open a H.S.A. account an employee must be covered by a qualified high deductible health plan as defined by the I.R.S. code. In general this means the plan has been approved as meeting the deductible criteria and benefit design guidelines. The deductible has to be a minimum of $1,200 for singles and $2,400 for families. There can be no co-pays for routine medical care such as physician visits. The plans can offer no cost wellness benefits.

Here are some advantages and dis-advantages of Healthcare Savings Accounts.

Advantages:

1. Anyone can contribute to an employee's H.S.A. The employer, employee or third parties can contribute as long as the total contributions do not exceed the maximum allowed in the calendar year as set by the I.R.S. In 2012 those limits are $3,100 for singles and $6,250 for families.

2. The contributions can be made in any increments. The contributions can be made in a lump sum or in smaller, such as monthly, amounts.

3. The contributions can vary in amounts, so an employee can make larger contributions in months where more money is available and no contributions in months when monies are not available.

4. The H.S.A. belongs to the employee. If the employee leaves the employer the monies in the H.S.A. follow the employee.

5. Monies in an H.S.A. are deductible from an employee's gross taxable wages. If the contributions are made through payroll deduction by the employer prior to tax then the employee will not need to report the contributions on their personal tax return. The contributions will be listed on their W-2.

6. Any interest or earnings applied to monies in a H.S.A. account is tax exempt.

7. Monies withdrawn from an H.S.A. for "qualified medical expenses" are tax exempt. Qualified medical expenses include vision, dental and medical.

8. Monies in an H.S.A. account can also be used to pay premiums for long term care insurance, COBRA premiums and healthcare coverage while drawing un-employment.

9. If the employee changes to a non-qualified medical plan the monies in a H.S.A. plan can continue to be utilized to pay for co-pays and deductibles. No additional contributions can be made if not covered by a qualified plan.

10. Any monies not used continue to roll over from year to year.

Dis-Advantages:

1. Employees must be covered by a qualified plan the first day of the last month of the employee's tax year to make a contribution.

2. There are annual limits on contributions regardless of the health insurance deductible.

3. Withdrawals for expenses other than qualified medical expenses are subject to a 20% penalty plus subject to income tax.

4. If an employee changes to a non-qualified medical plan during the plan year then contributions can be limited based on the number of months the employee was enrolled in the qualified plan.

5. Employer contributions to an employee H.S.A. account are the immediate property of the employee.  If an employee leaves the employer they cannot try to recoup any deposits made into an employee account.

Healthcare Savings Accounts can function as important component of an employee and employers benefit strategy. Properly utilized they can provide financial resources to pay for medical expenses and allow for reduced premiums due to higher deductible insurance policies. Education is the key, both for employees and employers.  The I.R.S. regulations around Healthcare Savings Accounts are found in Publication 969 which you can find at www.irs.gov.

If you have questions regarding Healthcare Savings Accounts, payroll law or employee benefits contact Gary Garner at Gary@IlluminareGroupInc.com.