Friday, December 24th, 2010

Good Neighbor Insurance (www.gnazhealth.com and www.gninsurance.com) is continuing to update our clients on the new health insurance laws.   There are six major coverage options for those in the US and even though some of the rules and regulations are similar for all many differences are there and it all depends on how old you are and for whom you work.  Many critical details of this new insurance law will be clarified in the months and years to come. 

These six major coverage options are:

(1) Individual or family coverage (private health care plans)

(2) Employee/employer group option for small businesses (typically under 50 employees)

(3) Employee/employer group option for large businesses (typically larger than 50 employees)

(4) Exchange options through the state you are residing in (fully integrated 1-1-2014 and are quasi-government and private insurance coverage combined)

(5) Medicare (which include Parts A, B, C, and D) for those 65 years onwards

(6) Full government health plans like Medicaid, CHIP, TRICARE, VA and other coverage plans as may be designated by the Department of Health and Human Services based mostly on financial criteria and/or military service.

Health Savings Accounts (HSAs) were created by the Medicare bill signed by President Bush on December 8, 2003 and are designed to help individuals save for future qualified medical expenses on a tax-free basis.

What is an HSA?

A health savings account (HSA) is a tax-favored savings account created for the purpose of paying medical expenses.

• Tax-deductible
  Contributions to the HSA are 100% deductible (up to the legal limit) — just like an IRA.
• Tax-free
  Withdrawals to pay qualified medical expenses are never taxed.
• Tax-deferred
  Interest earnings accumulate tax-deferred, and if used to pay qualified medical expenses, are tax-free.
• HSA money is yours to keep
  Unused money in your HSA is not forfeited at the end of the year; it continues to grow, tax-deferred.

What are the limits for a 2010 and 2011 health plan?

	Minimum Deductible	Maximum Out-of-Pocket		Annual Contribution Limit/Money into your Bank Account	55+  Contribution
Single	$1,200	$5,950		$3,050	$1,000
Family	$2,400	$11,900		$6,150	$1,000

 

Starting in 2013 the maximum amount to place in your health saving bank account or also called annual contribution limit cannot exceed $2,500 per individual or $5,000 per family.

Why high deductible health insurance?

• High deductible coverage often costs less than low deductible and copay plans.
• Typically you can save half on premiums.

How does an HSA plan work?

An HSA works in conjunction with high deductible health insurance. Your HSA dollars can be used to help pay the health insurance deductible and any qualified medical expenses, including those not covered by the health insurance, like dental and vision care. Any funds you withdraw for non-qualified medical expenses will be taxed at your income tax rate, plus 10% tax penalty.

Once you meet your calendar-year deductible, the health insurance pays remaining covered expenses in accordance with the terms and conditions of your particular plan. Some plans pay 100% of covered expenses after the calendar-year deductible is met.

Who can have an HSA?

You must be a qualified:
1) Covered by high deductible health insurance plan;
2) Not covered under other health insurance;
3) Not enrolled in Medicare; and
4) Not another person’s dependent.

Exceptions:
Other health insurance does not include coverage for the following: accidents, dental care, disability, long-term care, and vision care. Workers’ compensation, specified disease, and fixed indemnity coverage is permitted.

What are the tax deductible contribution limits?

Federal law states that annual contribution limits are $3,000 for singles/$5,950 for families for 2009 and $3,050 for singles/$6,150 for families for 2010 and 2011. Individuals aged 55+ may contribute an additional $1,000 for each tax year.

Are there HSA management fees?

As you shop for an HSA, don’t forget to check the fine print on the savings account. Management fees are common in the financial industry, and they may include:

• One time set up fee.
• Monthly maintenance fee.
• Debit card fee.
• Printed check fee.
• Overdraft fee.

Do HSAs work with physician and provider networks?

Yes. These networks are very often part of the health insurance plan, and they provide discounts on health care. The discounts apply to all care — even prior to meeting the health insurance deductible. So, your HSAs savings go further.

Can my HSA be used for dependents not covered by the health insurance?

Generally, yes. Qualified medical expenses include unreimbursed medical expenses of the accountholder, his or her spouse, or dependents.

What about nonmedical withdrawals?

Nonmedical withdrawals from your health savings account are taxable income and subject to a 10% tax penalty in 2010 and 20% in 2011.

Exception.
This tax penalty does not apply if the withdrawal is made after the date you:
1) Attain age 65;
2) Become totally and permanently disabled; or
3) Die.

Can my HSA be used to pay premiums?

No, this would be a nonmedical withdrawal, subject to taxes and penalty.  You can only use your HSA to pay health insurance premiums if you are collecting Federal or State unemployment benefits, or you have COBRA continuation coverage through a former employer.

Exceptions:
No penalty or taxes will apply if the money is withdrawn to pay premiums for:
1) Qualified long-term care insurance; or
2) Health insurance while you are receiving federal or state unemployment compensation; or
3) Continuation of coverage plans, like COBRA, required under any federal law; or
4) Medicare premiums.

Can I purchase long-term care insurance with money from my HSA?
Yes, if you have tax-qualified long-term care insurance.  However, the amount considered a qualified medical expense depends on your age.  See IRS Publication 502 for the amounts deductable by age.

What happens to the money in my HSA if I lose my HDHP coverage?
Funds deposited into your HSA remain in your account and automatically roll over from one year to the next.  You may continue to use the HSA funds for qualified medical expenses.  You are no longer eligible to contribute to an HSA for months that you are not an eligible individual because you are not covered by an HDHP.  If you have coverage by an HDHP for less than a year, the annual maximum contribution is reduced; if you made a contribution to your HSA for the year based on a full year’s coverage by the HDHP, you will need to withdraw some of the contribution to avoid the tax on excess HSA contributions.   If you regain HDHP coverage at a later date, you can begin making contributions to your HSA again.

How do I use my HSA to pay my physician when I’m at the physician’s office?
If you are still covered by your HDHP and have not met your policy deductible, you will be responsible for 100% of the amount agreed to be paid by your insurance policy to the physician.  Your physician may ask you to pay for the services provided before you leave the office.  If your HSA custodian has provided you with a checkbook or debit card, you can pay your physician directly from the account.  If the custodian does not offer these features, you can pay the physician with your own money and reimburse yourself for the expense from the account after your visit. 

If your physician does not ask for payment at the time of service, the physician will probably submit a claim to your insurance company, and the insurance company will apply any discounts based on their contract with the physician.  You should then receive an “Explanation of Benefits” from your insurance plan stating how much the negotiated payment amount is, and that you are responsible for 100% of this negotiated amount.  If you have not already made any payment to the physician for the services provided, the physician may then send you a bill for payment.

How do I know what is included as “qualified medical expenses”?
Unfortunately, we cannot provide a definitive list of “qualified medical expenses”.  A partial list is provided in IRS Pub 502 (available at www.irs.gov). There have been thousands of cases involving the many nuances of what constitutes “medical care” for purposes of section 213(d) of the Internal Revenue Code. A determination of whether an expense is for “medical care” is based on all the relevant facts and circumstances. To be an expense for medical care, the expense has to be primarily for the prevention or alleviation of a physical or mental defect or illness. The determination often hangs on the word “primarily.”

What are the tax benefits?

There are three major tax advantages to your HSA.
1) Cash contributions to an HSA are 100% deductible from your federal gross income (within legal limits).
2) Interest earnings accumulate tax-deferred.
3) Withdrawals from an HSA for “qualified medical expenses” are free from federal income tax.

What is a qualified medical expense?

A qualified medical expense is one for medical care as defined by Internal Revenue Code Section 213(d). The expenses must be primarily to alleviate or prevent a physical or mental defect or illness, including dental and vision. Most expenses for medical care will fall under IRC Section 213(d).

However, some expenses do not qualify.
A few examples are:

• Surgery for purely cosmetic reasons
• Health club dues
• Illegal operations or treatment
• Maternity clothes
• Toothpaste, toiletries, and cosmetics

HSA money cannot generally be used to pay your insurance premiums.

*See IRS Publications 502 (“Medical and Dental Expenses”) and 969 (“Health Savings Accounts and Other Tax-Favored Health Plans”) for more information.

Are lump-sum deposits permitted?

Under the law, yes, but make sure your financial institution accepts lump-sum deposits. You may also be required to continue minimum monthly deposits. Lump-sum deposits may not exceed the maximum annual contribution limit.

Are there adjustments for inflation?

Yes, the tax law requires an annual Cost of Living Adjustment (COLA) based on changes in the Consumer Price Index. This calculation, rounded to the nearest $50 increment, affects deductible limits, maximum out-of-pocket amounts, and the maximum annual HSA contribution limits.

Can I have an HSA and an IRA?

Yes, having an HSA in no way restricts your ability to have an IRA.

Can HSA money be rolled into an IRA?

No, it can only be rolled over into another qualified HSA without incurring tax consequences.

Must distributions begin at age 70 1/2?

The law is silent on this point at the present time.

What happens to my HSA when I die?

Your HSA will be treated as your surviving spouse’s HSA, but only if your spouse is the named beneficiary. If there is no surviving spouse or your spouse is not the beneficiary, then the savings account will cease to be an HSA and will be included in the federal gross income of your estate or named beneficiary.

When can I start to use the funds in my HSA?

Once your account is open, a deposit has been made to your account and funds are available, you can start using your HSA. You are 100 percent vested as soon as the funds are deposited and you have total control over the funds.

What expenses are qualified for reimbursement from my HSA?

You are eligible to receive tax-free reimbursement for qualified health expenses not covered by your insurance as defined by Section 213(d) of the Tax Code. A list of these expenses is available on the IRS Web Site, www.irs.gov. HSA distributions used for any purpose other than the qualified medical expenses listed will be taxable, and the appropriate tax rules will apply.

What about “catch up” contributions for those 55 and older?

Individuals aged 55 and over may contribute an additional $1,000 above the maximum for each tax year.

Is it true that individuals 65 or older can take out funds from their HSAs for any reason without a penalty?

If an individual is age 65 or older, regardless of whether the individual has been enrolled in Medicare, there is no penalty to withdraw funds from the HSA. As always, normal income taxes will apply if the distribution is not used for unreimbursed medical expenses (expenses not covered by the medical plan).

How does the new health care reform law affect HSAs?

The near-term impact on HSAs is limited to (1) an increased penalty on HSA distributions that are not used for qualified medical expenses for those under the age of 65 from 10 to 20 percent and (2) the exclusion of most over-the-counter medications as a qualified medical expense unless they are prescribed by a physician.

How does the new health care reform law affect non-medical withdrawals?

Nonmedical withdrawals from your health savings account are taxable income and subject to a 10% tax penalty in 2010 and a 20% tax penalty as of January 1, 2011.

Exception:
This tax penalty does not apply if the withdrawal is made after the date you:

1. 1) Attain age 65;
2. 2) Become totally and permanently disabled; or
3. 3) Die.

Additional information from the US Department of Treasury:

 Fact Sheet:

Growth of health savings accounts (HSAS)

Then (2004):

• 438,000 — Individuals were covered in November 2004 by HSA-type insurance plans — according to the America Health Insurance Providers (AHIP).

• 113,000 (roughly 240,000 individuals) — IRS data on individual tax returns reporting HSA deductions in tax year 2004¹.

Now:

• 3.2 million — Seven fold increase to individuals covered by HSA type insurance plans (November 2004 to December 2005) — according to AHIP.

o 31% — Previously uninsured individuals buying health insurance on their own.

o 33% — Small businesses not previously offering coverage.

o Nearly 50% — Age 40 or over.

• $1 billion — Dollars invested in HSAs by Americans, according to data gathered by Inside Consumer-Directed Care (ICDC) newsletter Feb. 24 issue — based on financial data provided by more than 60 financial firms including JPMorgan Chase, Wells Fargo and The Principal Financial Group.

• 42% — Number of Individuals or families with incomes below $50,000 buying HSA type insurance on their own, according to “Health Savings Accounts: The First Six Months of 2005”

The future:

• 14 million by 2010 — Treasury Department projection of HSA policies (covering 25 to 30 million people) — based on current law.

• 21 million by 2010 — Treasury Department HSA policies estimates rise by 50 percent (covering 40 to 45 million people) — based on the President’s health care initiative.

Doug Gulleson loves to scuba dive overseas and makes sure he has his US health care and overseas health care, www.gninsurance.com , information with him at all times when he travels   Keep our blog close by you, www.gntravelinsurance.com, for continual updates on the changes with the US health care system.