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In a time of rising health care costs for employers and employees, an individual covered by a high deductible health insurance plan can set up and contribute to a tax-free Health Savings Account to pay for medical expenses incurred by the individual and his or her spouse and dependents. The HSA offers advantages over other savings vehicles — it is not limited to employees of small businesses and the self-employed, the unspent balance rolls over at year-end, and the account is portable.
This comprehensive, easy-to-understand course for CPAs focuses on establishing the account, eligibility, contributions, operation and administration, taxation of distributions and IRS and DOL reporting, as well as coordination with Flexible Spending Accounts (FSAs), Archer Medical Savings Accounts (Archer MSAs) and Health Reimbursement Arrangements (HRAs).
This edition reflects changes made by the Tax Relief and Health Care Act of 2006, which, among other things, expands HSA funding sources and HSA annual contribution limits. Its appendices include the annual HSA limitations; a comparison of HSAs, FSAs and HRAs; state conformity to federal tax treatment of HSAs; relevant notices, announcements, revenue rulings and releases; administrative forms; and IRS forms.
Objectives:Prerequisite: None
Accepted for PFS and CFP® credit.
Videocourse Details
View a sample video clip!
| Windows Media Format |
| Broadband |
| 56k (dial-up) |
VIDEO MODERATOR: Susan D. Diehl
In the video, Susan D. Diehl, president of PenServ, Inc., interviews Thomas D. Cotter, Manager of corporate tax at Aetna; Jerri LS Langer, Member at COKALA Tax Information Reporting Solutions, LLC; and Avery E. Neumark, CPA, J.D., Partner at Rosen Seymour Shapss Martin & Company LLP and member of the AICPA Employee Benefits Technical Resource Panel.
*(123-min. video) The DVD disk contains the video presentation and viewable copy of the Manual.
** The Additional Manual is for group study training only. Unlike other formats, it has no exam answer sheet and cannot be used to earn self-study credit
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CHAPTER 1
Introduction
The steadily rising cost of health care and premiums for health coverage in this country presents an economic challenge for many individuals, some of whom struggle to maintain coverage, and others who opt to remain uninsured. Also, employers of all sizes who traditionally have provided health benefits for their workforces have become concerned about their ability to continue to offer such coverage on an affordable basis. This was the climate when, as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) enacted on December 8, 2003, a new type of taxfavored savings vehicle for health expenses known as a Health Savings Account (HSA) was created. Three years later, after HSAs had gained some popularity, Congress made significant improvements. On December 20, 2006, President Bush signed into law the Tax Relief and Health Care Act of 2006 (P.L. 109-432) (TRHCA) which included several significant HSA provisions, such as increases to the contribution limits and administrative simplifications. This chapter provides the history of HSAs (including their establishment, improvement, and regulation), and explores the pros and cons of both participating in an HSA arrangement as an individual and offering an HSA arrangement as an employer.
Health Savings Account (HSA)
An HSA, described in Code Section 223, is a funded account, similar to an Individual Retirement Arrangement (IRA). Contributions may be made within specified limits by individuals who meet certain eligibility requirements and/or by employers or others on behalf of such individuals. Amounts in an HSA grow on a tax-deferred basis and, if used for qualified medical expenses, may be distributed on a tax-free basis. In order to contribute to an HSA, an individual must be covered under a High Deductible Health Plan (HDHP) and may not participate in any other non-HDHP, subject to certain exceptions.
HSA/HDHP Providers
A few companies offered HSAs with individual HDHPs effective January 1, 2004, many of whom previously had offered Archer Medical Savings Accounts (Archer MSAs). HSAs with group HDHPs were not available widely on January 1, 2004, primarily because most existing HDHPs offered on the group market had to be modified to comply with the requirements under the MMA. For example, many HDHPs offered on the group market were structured to provide prescription drug coverage before the deductible was satisfied. These products were modified and many group health insurers offered HSAs and HDHPs that satisfied the requirements under the MMA effective January 1, 2005.
There are companies that offer services as HSA trustees or custodians only. The number of HSA trustees/custodians has been growing steadily since the MMA was enacted. In order to qualify as an HSA trustee, a company must be a bank, an insurance company, or a nonbank trustee (see Chapter 2). Each year, the IRS publishes a list of companies approved as nonbank trustees.1
HSAs are expected to continue to attract banks and financial institutions to sponsor the accounts and manage the assets in them, particularly because of the increased contribution limits under the TRHCA. The aggregate amount held and invested in HSAs is expected to grow steadily each year. Also, HSA sponsors can charge set-up fees, maintenance charges, and service fees. These factors may make HSAs become as lucrative to these institutions as IRAs, which gained popularity in the mid-1970s.2
Predecessor to the HSA: The Archer Medical Savings Account (Archer MSA)
The HSA is based upon and similar to the Archer MSA (discussed more fully later), which became available in 1996 for use by self-employed individuals and employees of small employers (those with 50 or fewer employees). Archer MSAs, however, have not enjoyed widespread use in large part due to a restriction that prohibits employers with more than 50 employees from making the account available to employees. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) placed a cap on the number of individuals (generally 750,000 taxpayers) who could have an Archer MSA. That number was never reached.3 Also, although Archer MSAs were set up as a temporary program originally due to expire in 2000, Congress extended that deadline four times.
Two substantive differences between Archer MSAs and HSAs relate to the deductible under the HDHP and the funding of the account.
HSA - A Consumer-Driven Health Plan
The years immediately preceding the enactment of the MMA were a period during which "consumer-driven" or "defined contribution" health plans emerged, through which employers offered employees a defined amount of health care dollars to be spent or saved for future use, at the employees' discretion. Proponents tout these alternative arrangements as a way to make costs more predictable and provide incentives to employees to make wiser health care spending decisions. HSAs are consistent with the consumer-driven philosophy. Also, many view HSAs with favor because they provide the ability to use amounts in the account for medical purposes on a tax-advantaged basis as well as for nonmedical purposes (subject to income tax and 10% additional tax). With the exception of Archer MSAs, existing vehicles for providing such coverage on a taxadvantaged basis do not allow that flexibility. Finally, because HSAs are based on Archer MSAs, which had been enacted earlier, there was precedent for the approach.
A Method to Reduce Health Care Spending
To participate in an HSA, an individual must be covered by an HDHP. HSA proponents take the position that participants can save money by participating in an HDHP that generally has lower premiums than a non-HDHP. Also, proponents contend that, if participants are given a choice either to save money in an HSA account (which can earn interest tax-free) or to spend it on medical goods and services, they will confine their spending to only necessary purchases and will demand lower prices, more value for their dollar, or both. In contrast, under traditional health plans, the full cost of a service is not as obvious or important to a participant because he or she typically is responsible only for the copayment. Thus, HSA proponents argue that HSAs will reintroduce market forces to the health care system as well as allow savings to accumulate on a tax-free basis to pay for future health care expenses.
Other Defined Contribution or Consumer-Driven Health Accounts
Health Reimbursement Arrangements (HRAs),Health Care Flexible Spending Arrangements (health FSAs), and Archer MSAs are considered defined contribution or consumer-driven health accounts because they all allow employees to decide how the dollars credited or deposited to their accounts are spent.
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