Healthcare Savings Account (HSA):

Established in 2003 with the passage of the Medicare Prescription & Drug Act, an HSA allows consumers to pay for qualified medical expenses tax free. To qualify for an HSA, an individual or family must be:

• covered by a qualified high deductible health insurance plan (HDHP)
• not covered by other health insurance, with some minor exceptions
• not enrolled in Medicare, and
• not able to be claimed as a dependent on someone else’s tax return.
  • Children cannot establish their own HSAs
  • Spouses can establish their own HSAs, if eligible

Once enrolled in a qualified HDHP, an HSA can be established at a financial institution of choice. An HSA qualified HDHP is a health insurance policy that meets certain deductible and out-of-pocket expense requirements. An individual HDHP must have at least a $1,000 deductible and the maximum out-of-pocket including the deductible and co-insurance cannot exceed $5,100. A family HDHP must have at least a $2,000 deductible and the maximum out-of-pocket including deductible and co-insurance cannot exceed $10,200.

Benefits

Some of the most attractive features of an HSA are the multiple tax benefits and savings:

• Contributions are tax deductible.
• Money in your account grows tax deferred.
• Pay for qualified medical expenses tax free.
• The money you put into an HSA…is YOUR money! HSAs are portable if you change employers.
• Consider the retirement supplement you can create – at age 65, the money in your HSA can be withdrawn for any purpose... not just medical expenses! Note: While you may spend your HSA funds for non-medical expenses at age 65 and older, you will have to pay income taxes on those amounts.

How do I contribute to my HSA?

This depends on your particular situation. If you are an individual with a qualified HDHP, you can establish an HSA account with the financial institution of choice or with one recommended by your Gilsbar representative. You will receive a checkbook and/or debit card and deposit slips for your HSA. The HSA is your personal account -- you can make deposits and withdrawals at your convenience for qualified medical expenses. When the contributions are based upon amounts you contribute throughout the year, the tax benefits are reaped when an above-the-line deduction is made from your taxable income.

If you are an employee whose employer has established an HSA plan and bank account, your HSA contributions will most likely be made via payroll withdrawal. You will designate an amount to contribute each pay period, but the management of HSA funds is ultimately your responsibility. You will receive a checkbook and/or debit card and deposit slips for your HSA. The HSA is your personal account -- you can make deposits and withdrawals at your convenience for qualified medical expenses. When the contributions are based upon payroll withdrawals, the tax benefits are reaped each time a payroll withdrawal is made.

Who can contribute to an HSA?

Depending upon the specific arrangement with your employer, your HSA can be funded by you, your employer or both, and any other person on your behalf. Contributions from all sources cannot exceed the limits set by law.

What are my contribution limits?

You can contribute 100% of your HDHP deductible into an HSA (subject to annual maximums). Currently the federal maximum contributions into an HSA are $2,650 individual or $5,250 family deductible (indexed annually). Whatever amount you choose to contribute into your HSA, you can then take as an above the line deduction before adjusted income is calculated. Maximum account contributions may yield greater income tax savings. For individuals age 55 and older, additional "catch-up"* contributions to HSAs are allowed, but they must stop once an individual is enrolled in Medicare.

Additionally, you may choose to fund an HSA account by a salary reduction arrangement through a cafeteria plan. Contributions to the HSA through a cafeteria plan are “pre-tax” and not subject to individual or employment taxes. Talk to your employer to find out if this option is available.

*In 2005, the catch-up contribution is $600; 2006 - $700; 2007 - $800; 2008 - $900; 2009 and after - $1,000.

What happens if I contribute over the limits?

Excess contributions are subject to a 6% excise tax unless they are withdrawn on a timely basis.

What are HSA qualified expenses?

Eligible expenses for HSA reimbursement are those identified in the IRC section 213 (d). To save you time, we’ve provided a list of qualified expenses. Click here to download and print the list of HSA qualified expenses.

How do I pay for a doctor’s visit or prescriptions with an HSA?

Use your HSA debit card, HSA checks or pay with cash. If paying cash, be sure to keep your receipts and track expenses so you can reimburse yourself from your HSA. Its good practice to keep your HSA bank statements and medical receipts together. This will help you manage your funds and maximize your benefits.

What happens if I don’t use all of the money in my HSA by the end of the plan year?

At the end of the year any remaining funds in your HSA can be rolled over to the next. There is no penalty for unused funds. There are penalties if you use the funds for unqualified medical expenses. Any withdrawal made for unqualified medical expenses will be subject to both income tax and a 10% penalty.

Flexible Spending Account (FSA)

Commonly referred to as a Flex Plan or a Cafeteria Plan, Section 125 is an IRS regulated, employer-sponsored benefit plan that allows employees to voluntarily convert part of their compensation into tax-free benefits. Contributions made through Section 125 are entirely free of federal, state and FICA taxes.

Important definitions to help you understand Section 125:

• Flexible Spending Account - Employees contribute pre-tax earnings for unreimbursed medical/dental expense and dependent day care expenses.
• Premium Only Plan (POP) - Employees contribute to group health/dental insurance premiums with pre-tax earnings.
• Cafeteria Plan - Includes both Premium Only Plans (POP) and Flexible Spending Account (FSA) plans, giving employees a variety of options to achieve tax savings.

Check with your employer to find out which Section 125 arrangement has been established for your company.

Benefits

Provided by your employer, an FSA is a reimbursement account that allows you to set aside a certain amount of each paycheck, pre-tax to pay for qualified medical expenses and dependent care expenses. FSA were designed to help employees pay for medical and dependent care expenses that are not typically covered by health insurance. By using your FSA to pay for qualified medical expenses, you pay for expenses tax-free and you save on income tax...which means your take-home pay might actually improve!

How do I contribute to my FSA?

With an FSA, you must decide on your withdrawal amount at the beginning of the plan year and the amount cannot be changed throughout the year. The amount you designate will be equally divided between pay periods. To estimate the out-of-pocket expenses that you, your spouse and your dependents may incur, consider any standard copays, prescriptions, office-visits and planned medical expenses, i.e. braces or lasik eye surgery. The same method applies for estimating FSA contributions for dependent care expenses, i.e. children’s day care or elder care expenses.

Who can contribute to an FSA?

Depending upon the specific arrangement with your employer, your FSA can be funded by you, your employer or both.

What are my contribution limits?

Medical expense contribution limits are set by your employer. Limits per year for dependent daycare are $5,000.

What are FSA qualified expenses?

Eligible expenses for FSA reimbursement are those identified in the IRC section 213 (d). To save you time, we provided a qualified expense list to help you estimate your FSA contribution. Click here to download and print the list of qualified expenses.

How do I pay for a doctor’s visit or prescriptions with my FSA?

Depending on your employer’s plan design there are two methods for paying medical expenses and receiving FSA reimbursements:

• Pay your normal copay, doctor’s charge or prescription expense. Keep your receipt from the visit. You will send Gilsbar a copy of your receipt with your FSA claim form. The same method applies if you need to fill a prescription. Keep your receipt then file with your FSA claim to Gilsbar. Gilsbar will send you a reimbursement check from your FSA.
• Pay your normal copay, doctor’s charge or prescription expense. The claim will automatically be filed with Gilsbar and any out-of-pocket expenses are submitted to your FSA for reimbursement.

Health Reimbursement Arrangement (HRA)

In 2002, the Treasury Department and the IRS issued guidance that clarifies the tax treatment of Health Reimbursement Arrangements (HRAs). An HRA is a benefit arrangement that provides for reimbursement of qualified medical costs. HRAs may be offered in conjunction with an HDHP or other type of health plan, or may stand alone. HRAs allow room for employer flexibility. HRAs must be funded solely by your employer and cannot be funded by salary reduction.

Benefits

Medical benefits paid for with HRA funds that meet certain requirements are not taxable. The guidance also clarifies that HRAs generally are not subject to the complex design requirements for health Flexible Spending Arrangements funded through salary reduction under a cafeteria plan. Money in your HRA can roll-over to the next year (the maximum roll-over amount is determined by your employer).

How do I contribute to an HRA?

Only your employer can contribute to the account.

Who can contribute to an HRA?

An HRA can only be funded by your employer.

What are the contribution limits?

There are currently no federal limits on contribution, but your employer most likely will set their own. The money your employer contributes to the account is not considered income; therefore, you will not pay taxes on this benefit.

What are HRA qualified expenses?

Eligible expenses for HRA reimbursement are those identified in the IRC section 213 (d). Click here to download and print the list of qualified expenses.

If I have an HRA, how do I pay for a doctor’s visit?

Depending on your employer’s plan design there are two methods for paying medical expenses and receiving HRA reimbursements:

• Pay your normal copay, doctor’s charge or prescription expense. Keep your receipt from the visit. You will send Gilsbar a copy of your receipt with your HRA claim form. The same method applies if you need to fill a prescription. Keep your receipt then file with your HRA claim to Gilsbar. Gilsbar will send you a reimbursement check from your HRA.
• Pay your normal copay, doctor’s charge or prescription expense. The claim will automatically be filed with Gilsbar and any out-of-pocket expenses are submitted to your HRA for reimbursement.

What happens if I don’t use all of the money in my HRA by the end of the plan year?

Funds in an HRA may roll over from year to year, if the employer designs the plan to allow for "rollovers". However, most employers put a cap on the number of years rollovers are allowed. Employers may also design the plan with a "spend-down" feature, to allow an HRA to continue to reimburse former or retired employees, after termination of employment or retirement until the funds in the HRA are spent down. This too may have a cap.

These recommendations are for informational purposes only and shall not constitute medical advice or tax advice nor shall it substitute professional medical consultation or professional financial consultation.