Beyond Benefits - Health Savings Accounts 101

3. What are the "qualified medical expenses" that are eligible for tax-free distributions?

Qualified medical expenses are expenses paid by the accountholder for diagnosis, cure, mitigation, treatment, or prevention of disease. Examples of these expenses are certain over-the-counter and prescription drugs, transportation to care providers, qualified long-term care expenses, and certain health insurance premiums. (referenced in Part One - question 9). Such expenses are "qualified medical expenses" only if they are ineligible for insurance or any other type of coverage. For more information, visit www.irs.gov/pub/irs-pdf/p502.pdf.

4. How do I pay for medical services?

Typically the plan administrator or the custodian of a health savings account will provide the account holder debit cards or convenience checks to pay for medical services. If payments are made out-of- pocket, you may reimburse yourself from the health savings account. The plan administrator or custodian of the health savings account will be able to provide these administrative details.

5. What happens if the HSA has insufficient funds for payment?

The plan administrator or custodian of the health savings account may assess overdraft fees for returned checks or debit card transactions.

6. Is tax reporting required for an HSA?

Yes. IRS Form 8889 must be completed with your tax return each year to report total deposits and withdrawals from your account.

You do not have to itemize to complete this form.

7. What are the tax rules of an HSA?

An HSA provides you triple tax savings by allowing:

tax deductions from gross income when you contribute to your HSA;
tax-free earnings through interest and investments; and
tax-free withdrawals for qualified medical expenses.

8. How are distributions taxed after the accountholder is no longer an eligible individual?

Distributions used exclusively to pay for qualified medical expenses are not taxed, whether or not the accountholder is eligible to contribute to an HSA at the time of distribution.

9. What happens to the HSA if I die?

Upon death, ownership of the HSA is transferred to your designated beneficiary.

10. What are the income tax consequences for the beneficiary after the HSA accountholder's death?

Upon death, any balance remaining in the accountholder's HSA becomes the property of the individual named in the HSA as the beneficiary of the account. If the accountholder's surviving spouse is the named beneficiary of the HSA, the HSA is treated as though the surviving spouse were the accountholder, and distributions used for qualified medical expenses are not subject to income tax.

If, by reason of the death of the accountholder, the HSA passes to a person other than the accountholder's surviving spouse, the HSA ceases to be an HSA as of the date of the accountholder's death, and the person is required to include in gross income the fair market value of the HSA assets as of the date of death.

11. Who is responsible for determining whether HSA distributions are used exclusively for qualified medical expenses?

As the HSA accountholder, you must ensure that distributions are used for qualified medical expenses. Records of medical expenses should be maintained as evidence that distributions have been made for these purposes. You are responsible for ensuring contributions to the HSA do not exceed IRS limits.

12. If I change employers, what happens to my HSA?

Since you are the owner of the HSA, you may continue to maintain the account if you change employers.

13. Can I reimburse myself with HSA funds for qualified medical expenses incurred prior to my enrollment in an HSA?

No. Qualified medical expenses may only be reimbursed, tax-free, if the expenses are incurred after the date your HSA was established.