Health Savings Accounts 101

1. Health Savings Accounts 101 Brandi McGlothin Payroll & Employee Benefits

2. Presentation Disclaimer • The intent of this presentation is only for educational/informational purposes and should not be construed as offering legal or tax advice • Individuals that consider enrolling in a qualified High Deductible Health Plan, or opening a Health Savings Account (HSA), should familiarize themselves with the rules of the insurance and the account • Management of an HSA is the sole responsibility of the accountholder with regard to eligibility, contributions, distributions, and tax reporting

3. What is a Health Savings Account (HSA)? • Special account owned by you to pay and save for current and future qualified medical expenses on a tax-free basis • Used in conjunction with a qualified “High Deductible Health Plan” (HDHP) • Qualified HDHP’s do not cover 1st dollar medical expenses except for preventive care • All covered benefits, including Rx drugs, must apply to the HDHP deductible • Goal is to reduce money spent on health care by placing more responsibility on you (consumer-driven)

4. Who is Eligible for an HSA? • Any individual that: • Is covered by a qualified HDHP • Is not covered by any other non-qualified HDHP • Specific disease or illness insurance, accident, disability, dental, vision and LTC is allowable • Is not enrolled in Medicare and/or drawing Social Security benefits • Is not claimed as a dependent on another person’s tax return • Spouses can establish their own HSAs, if eligible

5. Who is Eligible for an HSA? • Is not covered by TRICARE (until TRICARE offers an HSA qualified HDHP) • Has not received any VA health benefits in the last 3 months • Does not have an FSA that is not specified as “limited-purpose” or “post-deductible” • Does not have an HRA (Health Reimbursement Arrangement) that is not suspended or used solely for retiree health expenses

6. HSA Contribution Rules • Contributions can be made by you or by others on your behalf • Your contributions can be made on an after-tax basis and taken as an “above-the-line” deduction on your tax return, or • You can make pre-tax contributions through payroll deductions • You can deposit your funds with the trustee/custodian of your choice

7. HSA Contribution rules • Ball State offers two trustee/custodian choices for pre-tax payroll direct deposit: • ASB/Mellon – New Jersey • HSABank – Sheboygan, WI • New! – Effective July 1, 2011

8. HSA Contribution Rules • You own the contributions within the HSA as soon as the funds are deposited • Your employer has no more control over your HSA than they do over your personal checking account • You can make a once-in-a-lifetime transfer from a traditional or ROTH IRA to your HSA • The distribution must be made directly by the IRA trustee to the HSA trustee • The distribution is not included in your income and not deductible • The distribution amount is subject to the contribution limits applicable for the year of the transfer

9. HSA Contribution Rules • For 2011, the maximum amount that can be contributed to an HSA is: • $3,050 (self-only coverage) • $6,150 (family coverage) • Individuals who are age 55 or older can make “catch-up” contributions of $1,000 each year • A full year’s contribution (plus the “catch-up” if applicable) may be made to your HSA when you first become eligible • However, if you make the full contribution and do not remain eligible during the “testing period”, you will be subject to taxes and penalties

10. New this year!!! employer hsa contributions • Effective January 1, 2012, Ball State will begin “seeding,” or contributing to employee HSAs • Seeding will done on a calendar year basis due to tax concerns • Employees must open an account with HSABank in order to begin receiving the seed • Ball State will pay the monthly maintenance fee for the HSABank accounts • Ball State is currently looking at an alternative contribution “vehicle” for employees in the HDHP who do not meet HSA eligibility requirements

11. Employer hsa contributions

12. HSA Distribution Rules • Distribution is tax-free if taken for “qualified medical expenses” (QMEs) • There is no definitive list of expenses; a partial list is provided in IRS Publication 502 (available at www.irs.gov) • Expenses must be incurred on or after your HSA is established • If your HDHP coverage is effective on the 1st day of the month, you can establish your HSA as early as the 1st day of the same month • If your HDHP coverage is effective any day other than the 1st day of the month, you cannot establish your HSA until the 1st day of the following month

13. HSA Distribution Rules • Funds may be used for medical expenses of your spouse or any of your IRS dependents, even if these individuals are not covered by the HDHP* • You can still use the funds for QMEs, even if you no longer have HDHP coverage • Funds roll over each year; there is no “use it or lose it” like with FSAs • There is no time limit on using the funds *Funds cannot be used for same-sex domestic partners

14. HSA Distribution Rules • You may reimburse prior years’ expenses as long as they were incurred on or after the HSA was established • If you enroll in Medicare you can use your account to pay Medicare* premiums, deductibles and co-pays • If you are not 65, you cannot use your HSA funds to cover Medicare premiums for your spouse • If you use your account to pay for non QMEs, the amount is included in your income (taxed) and is subject to a 20% penalty *You cannot use your HSA to purchase Medigap

15. HSA Distribution Rules • Once you turn 65, you can use your account to pay for items other than QMEs…like a cruise or new car! It will be taxed, but the 20% penalty will not apply* • Mistaken HSA distributions can be returned • Mistaken distributions must be repaid by April 15th of the year following the year in which the mistake was or should have been discovered – the mistake has to be clearly a mistake, not just an emergency *This also applies if you become disabled

16. Hsa paperwork: how to handle it • The key to success is ORGANIZATION! • An HSA is a tax benefit, so if faced with an IRS audit, you’ll have to prove that you used the funds for QMEs • Keeping good records will also help make sure you’re always paying the right amount • We recommend that you keep everything in one location • Shoe box, file folder, desk drawer, under your mattress, etc. • Receipts, medical bills and EOBs (Explanation of Benefits) should be kept along with your tax records for the year (don’t send them in with your tax return!)

17. What Should I Do Next? • Research, research, and research…make an informed decision

18. Questions? Please contact the Payroll and Employee Benefits Office (PEB) at 285-8461 www.bsu.edu/payroll Email: peb@bsu.edu