A Health Savings Account, or HSA, combines the advantages of reduced premiums -- realized through selecting a higher deductible medical plan -- with the ability for Vermont business owners and their employees to accumulate tax-deferred funds (principal, interest, dividends and capital gains) from year-to-year without penalty to pay for current and future "Eligible Medical Expenses".  If HSA funds are withdrawn and used for a non-eligible purpose, the accountholder is assessed a 20% penalty on that amount and must include the amount as taxable income in the tax year it was withdrawn. 

 

Benefit Design & Strategies is the expert on HSA plans and HSA custodial accounts in Vermont with its membership in the National Association of Alternative Benefits Consultants (NAABC) and subscription to a number of resource services alerting us to HSA changes and Treasury Department rulings related to these plans.

Eligible Vermont groups include employers of any size and self-employed individuals. To more likely satisfy the needs of their employees, many Vermont employer-groups offer two medical plans (referred to as a "dual option") with the HSA plan being one selection.

 

Since the HSA legislation was adopted in late 2003, Benefit Design and Strategies, LLC has successfully implemented and continue to service HSA plans with over half of our Vermont group clients, both large and small. 

 

 

Contributions to HSA accounts from all sources (accountholders, employers, spouses and relatives) are restricted to the "statutory limits" established each year by the U. S. Treasury Department. The 2011 limits are $3,050.00 for persons with single coverage and $6,150.00 for accountholder enrolled in two-person and family coverage.

 

In 2012, these statutory limits have increased slightly to $3,100 for single coverage and $6,250 for two-person and family coverage.  There is no limit, however, on the amount that can be accumulated in an HSA account over time.

 

Accountholders age 55 and older can make an additional "catch-up" contribution in excess of the Statutory Limits of up to $1,000 for both 2011 and 2012. There is no longer a pro-ration of contributions to HSA accounts for health plans commencing in the middle of the year, a much criticized shortcoming of these plans prior to 2007. See also the article on 2011 and 2012 HSA Contributions.

 

Upon attaining the age of 65, a participant can use the accumulated savings for any purpose without penalty; however, funds used for non-medical purposes MUST be added to one's taxable income in the year withdrawn.

 

An HSA account is often confused with the Medical Expense Reimbursement Accounts offered through a Section 125 Cafeteria or Flexible Benefit Plan. The major differences are:

1) the ability to carry over unused funds in your HSA account each year without penalty,

2) the ability of owners, partners in a partnership or stockholders of an S corporation to participate and make contributions to their personal HSA accounts, and

3) the ability to use the HSA account as another retirement savings vehicle.

 

 

HSA funds can be used to pay for or reimburse the following eligible expenses:

1. Out-of-pocket health expenses covered by the HSA-qualified medical plan;
2. Certain prescribed over-the-counter drugs, other than those used for cosmetic purposes or to promote good   

     health (i.e. multi-vitamins, toothpaste, etc);
3. Vision exams and corrective eyewear, including contacts and saline solution;
4. Dental fees, dentures and braces so long as the orthodontics is not strictly for cosmetic purposes;
5. Hearing exams and hearing aids, including batteries;
6. Smoking cessation programs, but not nicotine patches;
7. Most naturopathic medical services;
8. Routine physicals, female well-care and related diagnostic screening/lab services (all HSA-qualified plans

     offered in Vermont pay 100% of the cost of preventive care for adults and children if the services are rendered

     by a primary care physician or a physician in the carrier's medical network); and
9. Premiums for tax-qualified long-term care (nursing home/home health) insurance up to a set amount based

     on the policy holder's age, but not Medicare Supplemental or Part D (prescription drug) policies.

Check out a more complete list of eligible medical expenses or go to www.irs.gov. You may download the latest edition of I.R.S. Publication 502 here.  This taxpayers' handbook is intended to identify permitted tax deductible medical expenses to be itemized on Schedule A "Itemized Deductions" of the federal 1040 income tax return.  While detailed in its description of deductible services and products, it is not a complete list of eligible HSA expenses and, in fact, a few items are not allowed as HSA expenses.  Another good source of eligible and ineligible medical expenses can be found in the latest edition (9th edition) of HSA Road Rules prepared by HSA insider, a division of Infinity Insurance