Wisconsin Health Savings Accounts
What is a Health Savings Account?
New Tax Law Effective January 1, 2004 Health Savings Accounts, often referred to as an HSA, is a tax exempt account with a financial institution in which you accumulate savings to pay for medical expenses. They work together with a high deductible health insurance plan.
Starting in 2004, eligible individuals can slash their federal income tax bills by making deductible HSA contributions. This will be like making deductible IRA contributions. Even better, you can qualify for the HSA break regardless of your income since there are no nasty phase-out rules for high earners like the ones that apply to deductible IRA.
Similar plans were previously referred to as MSA or Medical Savings Accounts. The new HSA tax law made several significant changes to the MSA. The plans are now available to many more people than ever before.
You deposit money into your Health Savings Account as often as you need. Amounts that have accumulated are intended to be withdrawn and used to pay for actual medical expenses, such as doctor visits, prescriptions, etc. that your health insurance plan doesn't cover until you reach your deductible.
You get a tax deduction for money contributed to the account each year. Then you pay your medical expenses by withdrawing funds from the account. If expenses exceed your health insurance policy deductible, the policy pays the additional costs. If you spend less than the amount contributed, the difference stays in the account and earns interest. No use it or lose it provision!
The HSA account can have features of both a savings and a checking account, where you can have checks and debit cards, but is not a savings or checking account in the strict sense due to tax and legal regulations.
Who is eligible to have a Health Savings Account?
Now nearly everyone maintaining an individual or family high deductible health plan will be eligible to get an HSA. Partners and 2% Subchapter S shareholders as well as Sole Proprietorships are eligible. Also, an employee of a small business (50 or less employees) that maintains an individual or family high deductible health plan.
An individual is ineligible for an HSA if the individual is covered under a health plan that is not a high deductible health plan.
What is a High Deductible Health Plan?
A high deductible health plan is a plan that has either (a) An annual deductible of at least $1,000.00 and not more than $2,600.00 for individual coverage for tax year 2004; or (b) An annual deductible of at least $2,000.00 and not more than $5,150.00 for family coverage for tax year 2004.
A high deductible health plan has a higher annual deductible than typical health plans, and a maximum limit on the annual out of pocket expenses. Monthly, quarterly, or annual premiums are generally much lower with a high deductible health plan.
What are the Benefits of a Health Savings Account?
- Tax Savings Ð HSA contributions can be deducted from your gross income on your tax return, even if you do not itemize deductions
- Individuals and families can write off 100% of their deductible, up to a maximum of $2,600 for an individual and $5,150 for a family
- Funds left to accumulate in your HSA can grow with tax deferred interest earnings
- Your insurance premiums are usually lowered when you change from a low to a high deductible plan
- Even if you change jobs, your HSA goes with you
- After age 65, you may make withdrawals from your HSA for any reason without a penalty
The tax deduction cannot exceed the individual's earned income.
How Much Can Be Contributed to an HSA?
The maximum annual amount permitted to be contributed in order to qualify for a tax deduction to an HSA for a year is 100% of the deductible for individual and/or family coverage (a family is more than one person).
Example 1: Individual
Individual has coverage with a high deductible health plan with an annual deductible of $2,000.00. The annual contribution limit this individual can make is 100% or $2,000.00, up to a maximum of $2,600.00.
Example 2: Family
Family has coverage with a high deductible health plan with an annual deductible of $4,000.00. The annual contribution limit is 100% or $4,000.00, up to a maximum of $5,150.00.
The contribution cannot exceed annual earnings.
Generally, HSA holders must pay 6% excise tax on contributions to an HSA that are greater than the limit. The owner may withdraw the excess without paying the excise tax if they withdraw by the due date of the tax return and withdraw any income earned on the excess.
No minimum contributions are required except to cover an annual custodian fee.
Why Establish an HSA?
In short, the advantage to an HSA is that the individual gets to keep the amount that is unspent in the account. If one puts $3000 in their account for the year and only uses $1000 of medical services, they get to keep the additional $2000 (in their account). This amount is not lost and rolls over to the next year. The funds in the HSA can continue to grow until one needs them for medical expenses or reaches age 65.
How Much Can I Save?
Below are two examples of how much can be saved by having an HSA. There is also a worksheet that you can use to help you determine how much you can save.
Example 1 - Average Scenario: Family of four - Husband is 47, self employed; wife is 44; two children. This example compares out of pocket expenses with and without an HSA. Estimated annual medical expenses are $1500. $900 for husband, $300 for wife, $100 for child one, $200 for child two.
| Traditional Plan | HSA Plan | |||
| Expenses Without HSA |
Savings Without HSA |
Expenses With HSA |
Savings With HSA |
|
|
Plan Specifications |
Deductible: $500 Coinsurance: 80/20 |
Deductible: $5000 Coinsurance: 0 |
||
|
Estimated Annual Medical Expenses |
$1500 |
$1500 |
||
|
Annual Premiums (A) |
$7400 |
$3175 |
||
|
HSA Contribution (B) |
+ $0 |
+ $3000 |
||
|
Tax Savings on Premium: Premium: Tax Rate: Allowable Deduction (C) |
$7400 x .33 |
- $2442 |
$3175 x .33 |
- $1047 |
|
Tax Savings on HSA: HSA Contribution: Tax Rate: HSA Tax Deduction (D) |
0 x .33 |
- $0 |
$3000 x .33 |
- $990 |
| Out of Pocket to Cover Deductible: (E) |
+ $1100 |
|
+ $0 |
|
| Out of Pocket to Cover Coinsurance (F) |
+ $ 80 |
|
+ $0 |
|
|
Total Out of Pocket Costs =(A+B) - (C+D) + (E+F) |
$6138 |
|
$4138 |
|
| Amount of Current Year HSA Contribution Not Spent (You keep) |
|
|
$1500 |
|
*Note: The $1500 of medical expenses will be taken out of the HSA contribution already accounted for in (B).
Synopsis Example 1: The total out of pocket expenses without the HSA is $6,138. The net cost for the HSA plan is $2638 ($4138 - $1500). This is a savings of $3500! Go to blank worksheet to estimate your savings.
Example 2 - Worst Case Scenario: Family of four - Husband is 47, self employed; wife is 44; two children. This example compares out of pocket expenses with and without an HSA. Estimated annual medical expenses are $75,000. $400 for husband, $74,400 for wife, $200 for child one, $0 for child two.
| Traditional Plan | HSA Plan | |||
| Expenses Without HSA |
Savings Without HSA |
Expenses With HSA |
Savings With HSA |
|
|
Plan Specifications |
Deductible: $500 Coinsurance: 80/20 |
Deductible: $5000 Coinsurance: 0 |
||
|
Estimated Annual Medical Expenses |
$75,000 |
$75,000 |
||
|
Annual Premiums |
$7400 |
$3175 |
||
|
HSA Contribution |
+ $0 |
+ $3000 |
||
|
Tax Savings on Premium: Premium: Tax Rate: Allowable Deduction: |
$7400 x .33 |
- $1700 |
$3175 x .33 |
- $1047 |
|
Tax Savings on HSA: HSA Contribution: Tax Rate: |
0 x .33 |
- $0 |
$3000 x .33 |
- $990 |
| Out of Pocket to Cover Deductible: |
+ $1100 |
|
+ $2000 |
|
| Out of Pocket to Cover Coinsurance |
+ $900 |
|
+ $0 |
|
| Total Out of Pocket Costs |
$6958 |
|
$6138 |
|
| Amount of Current Year HSA Contribution Not Spent |
|
|
$0 |
|
Synopsis Example 1: The total out of pocket expense without the HSA is $6958. The net cost for the HSA plan in $6138. This is a savings of $820. This shows that the worst case scenario still produces a savings.
How Do Distributions Work?
HSA owners can make a withdrawal (also called a distribution) at any time when used for qualified medical expenses.
Depending on the custodian, you may need to fill out a form requesting a withdrawal, request an electronic funds transfer to another account, such as a personal checking or debit card account.
HSA custodians are not required to determine whether HSA distributions are used for medical expenses. The owner is responsible for this. Federal Tax Form 8853, Part III is filled out to prove withdrawals for qualified medical expenses.
HSA owners can also pay for health care service provided or prescription from their personal resources (savings or checking account), and can then reimburse themselves by removing funds from the HSA.
The tax penalty for non-qualified withdrawals under age 65 from an HSA is 10% plus the normal tax rate.
Any contribution that exceeds the limits stated above are not tax deductible.
How Can an HSA Be Established?
Any eligible person can establish an HSA with a qualified trustee or custodian. You do not need permission from your insurance carrier or from the IRS before establishing an HSA.
Who is a qualified HSA trustee or custodian? Any insurance company or bank can be a trustee or custodian if they offer that service. Also, individuals who are approved to create and maintain IRAs, such as a financial advisor, are automatically approved to be a custodian or trustee.
Contact an HSA administrator to sign up for an HSA. In most cases an application is filled out and submitted, possibly along with other eligibility forms. We recommend HSA Bank and will assist you in setting up your account, once your High Deductible Health Plan is set up.
Some custodians will send reports to the HSA owner. These may include quarterly or monthly statements and account summaries, which show a detail of all the activity in the account.
How do I get started?
To initiate the process of finding health insurance that fits your individual needs, click on the planfinder at the top of the page.
