Health Savings Account FAQs

What is a Health Savings Account?

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 added section 223 to the Internal Revenue Code to permit eligible individuals to establish health savings accounts (HSAs) for taxable years beginning after December 31, 2003. An HSA allows individuals to pay for qualified health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.

An HSA is similar to an Individual Retirement Account (“IRA”). Like an IRA, an HSA is established for the benefit of an individual, is owned by that individual, and is “portable.” Thus, if the individual is an employee who changes employers or leaves employment, the HSA stays with the individual. However, an IRA cannot be used as an HSA nor can you combine an IRA and an HSA in a single account.

Who is eligible for an HSA?

To be eligible for an HSA, you must be covered by a high deductible health plan and you must not be covered by other health insurance. (This restriction does not apply to insurance for specified illness or disease or accident, disability, dental care, vision care, long-term care or hospitalization insurance) In addition, you cannot be enrolled in Medicare nor can you be claimed as a dependent on someone else’s tax return.

You are also ineligible for an HSA if, while covered under a high deductible health plan, you are also covered (whether as an individual, spouse, or dependent) under a health plan that is not a high deductible health plan.

May an individual establish more than one HSA?

An eligible individual may establish and contribute to more than one HSA. However, the rules governing HSAs, such as those setting maximum annual contribution limits, apply no matter how many HSAs are established by an eligible individual. Thus, for example, the account balances of all HSAs established by an individual are aggregated for purposes of applying the maximum annual contribution limit described below.

What is a “high deductible health plan”?

A high deductible health plan is a health insurance plan that has an annual deductible (determined yearly by the Treasury Department). In 2021, the deductible must be at least: (1) $1,400 for individual (self-only) coverage or (2) $2,800, for family coverage (coverage of more than one individual). In 2021 the annual out-of-pocket expenses required to be paid under the health plan cannot exceed $7,000 for individual coverage or $14,000 for family coverage.

Out-of-pocket expenses include deductibles, co-payments, and other amounts the participant must pay for covered benefits, but do not include premiums. High deductible health plans can have first dollar coverage (no deductible) for preventive care and higher out-of-pocket expenses (copays & coinsurance) for non-network services. (The dollar amounts described above are subject to annual cost of living adjustments.)

Who can offer a high-deductible health plan?

A high-deductible health plan may be offered by a variety of entities, including insurance companies and health maintenance organizations (HMOs).

Are HSAs allowed under a cafeteria plan?

If a high deductible plan is offered as part of a cafeteria plan, it can be used to establish your eligibility for an HSA. (A cafeteria plan or flexible benefit plan is an employee benefit plan that permits employees to choose from a variety of benefits, including health and accident insurance cash, tax advantages and retirement plan contributions.)

May HSA contributions made under a cafeteria plan be changed?

If you elect to make HSA contributions under a cafeteria plan, you may start or stop the election or increase or decrease the amount of your HSA contribution at any time, as long as the change is effective prospectively.

May an individual who uses a discount card for health care services or products contribute to an HSA?

A discount cardholder may be eligible to establish an HSA if the individual is covered by a high-deductible health plan and is required to pay health care costs, taking into account the discount, until the HDHP deductible is satisfied.

May an individual covered by an Employee Assistance Program (EAP), disease management program, or wellness program establish an HSA?

An individual who is covered by such programs may still be eligible to establish an HSA if the programs do not provide significant medical care or medical treatment benefits. Certain screening and preventive care services are disregarded when determining whether a program provides significant medical care or treatment benefits.

S Corporations and Partnerships

I have a client who is an S Corporation. Can the company contribute for the owner(s)?

A company cannot contribute to the HSA account of individuals owning 2% or more of the company, pay administrative fees on their behalf and write it off as a business expense (as they could do for contributions to other employees). The 2% + owners or Partners themselves can have HSA compatible coverage and establish HSAs.

They would need to contribute with their own after-tax dollars. Because the 2%+ owners or Partners are not receiving an employer contribution, they can choose to fund their HSA in any way they see fit and are not limited to the comparability requirements. At the end of the year, the owners/Partners would deduct their HSA contributions from their individual tax return.

Healthcare FSA Limited Purpose Provision

How does an HSA work if my client has a healthcare FSA?

A group can offer health savings accounts (HSAs) alongside a healthcare flexible spending account (FSA) as long as the group has a "limited purpose provision" added to their healthcare FSA plan document. This can be done by most healthcare FSA administrators.

The "limited purpose provision" allows employees with a healthcare FSA to use their FSA funds "first dollar" for dental and vision – anything non-medical, but the employee must use their HSA funds up to their annual deductible for medical before they can use their healthcare FSA funds for medical. This rule also applies to employees whose spouses have an FSA with their employer even if the HSA account holder’s employer does not offer a healthcare FSA.

The limited purpose provision does not apply to those employees who do not have an HSA. Without the limited purpose provision added to the healthcare FSA plan document, an employee with a healthcare FSA cannot have an HSA. A dependent care FSA is not affected by the addition of an HSA.

IRS Publication 969 covers the Healthcare FSA/HSA stacking rules and "limited purpose provisions" on a high level. Please see "Other Coverage" under the HSA subhead by clicking here.

Establishing an HSA

How do you establish an HSA?

If you are an eligible individual, you can establish an HSA with a qualified HSA trustee or custodian, in much the same way that individuals establish IRAs with qualified IRA trustees or custodians. No permission or authorization from the Internal Revenue Service (“IRS”) is necessary. Community West Bank requires you to complete an application form available on our website (www.cvcb.com).

Can you revoke your HSA custodial agreement?

You may revoke a Community West Bank HSA Custodial Agreement within a period of seven (7) days after the date upon which you enter into the Agreement. To revoke the Agreement, please write to Community West Bank HSA at 7100 N. Financial Drive, Suite 101 Fresno, CA 93720. If you mail your notice of revocation, the postmark date (or date of certification or registration, if sent by certified or registered mail) will be deemed the date of delivery and the date of revocation.

If you revoke your account in accordance with these time limits, you are entitled to a return of the entire amount deposited to your account without adjustments for any fees, expenses, commissions, or investment gains or losses.

For more information, see IRS Publication 502: Medical and Dental Expenses (Section 213(d)).

Domestic Partnerships

Can HSA funds be used for a domestic partner?

HSAs are a Federal program and as such covered by Family Protection Act which does not recognize domestic partnerships even if the state of residency does. In the state of California for example, an employee’s domestic partner could be covered under the employee’s health plan however, the employee can only make a single HSA contribution (assuming there were no children).

In such a case, the employee cannot use his/her HSA funds for the domestic partner's expenses (even if qualified) without being taxed and penalized.