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This week: Health Savings Accounts

This week’s federal benefits “open season” newsletter discusses Health Savings Accounts (HSA) that are available to employees who enroll in high deductible health plans.

In this edition of Federal Daily’s special Open Season newsletter series, federal employee benefits expert Edward A. Zurndorfer discusses Health Savings Accounts (HSA) that are available to employees who enroll in high deductible health plans.  Mr. Zurndorfer is a Certified Financial Planner and a Registered Health Underwriter.

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A Health Savings Account (HSA) is a tax-favored account set up exclusively to pay out-of-pocket medical expenses of an account owner, spouse and dependents. To contribute to an HSA, one must be enrolled in a High Deductible Health Plan (HDHP), not enrolled in Medicare, not covered by another health insurance plan, and not claimed as a dependent on someone else’s federal income tax return.

Contributions to an HSA are deductible from the owner’s gross income and accrue earnings (interest or dividends). Distributions from an HSA—contributions and earnings—are not taxed, provided that they are used to pay for qualified medical expenses. Unlike a Health Care Flexible Spending Account (HCFSA), HSA funds not used during one year can be held over and used to pay for qualified medical expenses in later years, including during retirement.

Similar in nature to a traditional Individual Retirement Account (IRA), an HSA is owned by an individual and is therefore portable. But unlike an IRA, all distributions from an HSA used to pay qualified medical expenses are income tax-free. Federal employees who own HSAs keep their HSAs if they leave or retire from federal service and work for a private employer or a state or local government.

Here is some additional information about HSA requirements, contributions to an HSA, and withdrawals from an HSA:

High deductible health plan (HDHP). An HDHP is a health plan that meets certain requirements (adjusted annually for inflation) regarding minimum deductible and maximum out-of-pocket expenses. For 2013, these amounts are:

Coverage Type

 2013 Minimum Deductible

2013 Maximum Out-of-Pocket Expenses

Self Only

$1,250

$6,250

Self and Family

$2,500 

$12,500


As a rule, the HDHP may not provide benefits except for certain preventative care until the minimum deductible for the year has been met.

Permitted other insurance and FSAs. An individual is permitted to contribute to an HSA even if they have certain “permitted” other insurances such as dental, vision or long-term care insurance. Federal employees who participate in an HCFSA are not permitted to contribute to an HSA. But FSA participation is permitted if the FSA is a “limited expense” FSA (LEXFSA) that reimburses only for out-of-pocket dental and vision expenses.

• A trust or custodial account. An HSA must be in the form of a trust or custodial account established with a qualified trustee or custodian such as a bank or an insurance company.

• Contributions to an HSA. Contributions to an HSA generally must be in cash. FEHB health plans with HSAs automatically credit a portion of the health plan premium to the HSA. The credited amount differs for self only enrollment and for self and family enrollment. HSA owners also have the option to make tax-deductible contributions to their HSAs, with the overall maximum HSA contributions for 2013 as follows:        

 Coverage Type       2013 Maximum HSA Contributions
 Self Only

$3,250

 Self and Family

$6,450

Individuals age 55 and older may also make additional “catch-up” contributions to their HSA of up to $1,000 during 2013. $

• Distributions from an HSA. Distributions from an HSA may be made at any time. Distributions used solely to pay for qualified medical expenses of the account owner, spouse and dependents are excludable for gross income. Qualified medical expenses are expenses incurred after the HSA has been established for “medical care” as defined in Internal Revenue Code Section 213(d). This includes amounts spent for the diagnosis, cure, mitigation, treatment or prevention of disease to the extent not reimbursed by insurance. Qualified medical expenses do not generally include health insurance premiums—medical, dental or vision insurance premiums. But long-term care (LTC) insurance premiums can be paid from an HSA.

Any distributions from an HSA not used to pay qualified medical expenses are taxable to the account owner and are also subject to 20 percent penalty. The penalty does not apply if a distribution is made because of an HSA owner’s death, disability or reaching age 65.

If an HSA owner is no longer eligible to contribute to an HSA, distributions from the HSA are still permitted. For example, the HSA owner who is enrolled in Medicare Part B can request HSA withdrawals to pay Medicare Part B premiums or to pay LTC insurance premiums.

At death, funds in an HSA pass to a named beneficiary. If the beneficiary is a surviving spouse, the account becomes the surviving spouse’s HSA, subject to the normal rules that apply to HSAs. If the funds in an HSA pass to a non-spousal beneficiary, the account ceases to be an HSA as of the date of death, and the non–spousal beneficiary must include in taxable income the value of inherited HSA assets as of the date of death.

The HSA can be a useful savings tool for federal employees who want to pay their current and future out-of-pocket medical expenses in a tax-efficient and least costly way. But participation in a HSA requires participation in an HDHP. For those employees who make frequent visits to a doctor or have dependents who require frequent doctor visits, HSA participation through enrollment in an HDHP may not be a suitable choice.

Those employees who enroll in an HDHP and are not eligible for a HSA will be given Health Reimbursement Accounts (HRA).  FEHB plans allot a portion of the  FEHB premiums to the HRA owner’s account as credits. HRA credits can be withdrawn tax-free to pay deductibles, out-of-pocket qualifying medical expenses, and Medicare Part B premiums.

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