Our Implementation Team spends a good deal of time coaching HR professionals on the best way to explain Health Savings Accounts (HSAs) to their employee audiences. HSAs are still relatively new for both HR teams and employees, so learning and practicing how to explain it is a good idea.

The easiest way to explain an HSA is that it’s a coupon for 25-35% off all qualifying health expenses, such as medical, dental, vision, and more. You can take that tax break before the expense occurs (by being a saver), at the time it occurs (by using your debit card) or after it occurs (by funding your account retroactively for expenses you’ve already had). And the best part is that contributions to HSAs are free of income taxes and, if contributed through an employer cafeteria plan, free of payroll taxes too.

Explaining the Four Ways Employees Can Put Money into an HSA

1. Employee pre-tax payroll contributions: You can set the amount you want contributed into your HSA every month from their paycheck. You are allowed to change your payroll deduction at least once a month and the amount you contribute is tax-free which can save you between 25-35% on your healthcare!
2. Employee post-tax contributions:  You can also fund your account directly instead of through their payroll. However, since these contributions are made post-tax, you will be delaying up to $1,500 of tax savings until you file your taxes next April 15. Also, you only save payroll taxes (also called FICA) when the contributions go through a payroll deduction. That’s another 4-5%.
3. Employer contributions: Your employer is helping you build up an account balance by making HSA contributions on your behalf. These contributions count toward your contribution limit ($3,100 for single-only and $6,250 for family) so you don’t have to contribute as much yourself.
4. Rollovers: If you have an existing HSA account elsewhere, you have the option to rollover balances to your new HSA with no tax implications. While you are allowed to have multiple HSAs, you may prefer to keep all your funds in one place.

How Employees Can Manage Their Health Spending

Once funds have been put into an HSA, there are many different ways employees can manage their HSA based on their unique financial goals and lifestyle.  Unlike Flexible Spending Arrangements (FSAs), any unused funds in these accounts at the end of the year can be rolled over to the following year and can be used for future medical expenses.

What Are Eligible Expenses?

The IRS has a full list of items that are eligible and non-eligible expenses for HSAs. Items such as prescriptions, contact solution, dental care, glasses, bandages and acupuncture are eligible expenses. We’ll explain more about these items and how to determine if an expense is eligible in a future post.

Let Us Do the Dirty Work For You

Still unsure about how to best explain them to your workforce? Don’t worry; we’re here to help! We created a 5-minute video (see below) that explains HSAs to employees in a simple and fun way and debunks some of the common myths about HSAs. Feel free to send it to your employees to increase their knowledge of HSAs.

Now that you’re better equipped to explain HSAs to your employees, don’t forget that that it is just the first step of ensuring a successful HSA program. The next step is that you should help them understand the importance of opening their accounts. And if that sounds a little scary, you’re in luck – we made it easy for you to do that too!

1. 2013 HSA and FSA Cheat Sheet - Everything you need to know about the 2013 contribution limits and deductible minimums set by the IRS.
2. 10 Ways to Visualize How Americans Spend Money on Health Care - 10 pretty cool graphics to help visual health spending in the US.  Cardiovascular deaths per capita have declined 80% since 1950 and 7% of nearly $2.3 trillion healthcare dollars is spent on investments.
3. HHS Issues Final Regulation on Exchanges and Qualified Health Plans - Towers Watson created a very thorough overview of healthcare reform.

We would love to hear what articles you have read recently as well! Leave a comment with a link to ones you would like to share.

In an effort to use state funds in the most efficient way and to strategically align themselves with healthcare trends, Utah-based Logan City School District moved their healthcare benefit offering to a consumer-driven High Deductible Health Plan (HDHP) with an HSA option.

The infographic below tells their story about how they planned for the transition, educated employees, and interesting statistics on when and how staff reached out for help.

• 5 Technologies Changing Healthcare – Innovative technology is a major component of Tango, so technologies that could have a real impact on health care fascinate us.  This article talks about five interesting technologies that are changing health care (none having to do with HSAs though).
• Health Savings Account Contribution Caps to Rise Slightly in 2013 – We keep up with news and trends related to HSAs and this one talks about what 2013 contribution limits will be.
• Small Cues Change Savings Choices – Health Savings Accounts are a lot like 401(k)s.  We expect a lot of the lessons learned from using 401(ks) are applicable to HSAs.  Here’s some research about increasing 401(k) contributions that is we think is useful.  A few interesting observations:

• Small communication cues called “anchoring” (changing the example numbers used in communication) affect what people contribute.
• Higher “anchors” increase contributions.

• HSAs Trending Up – Lastly, another reason HSAs are like 401(k)s, they’re growing quickly.  HSA assets have increased 70% since 2010.

If you have read anything noteworthy lately, feel free to leave a link in the comments. We would love to hear what you’re reading as well.

Domestic partners are considered independent individuals when it comes to HSAs.  IRS guidelines should be followed with this in mind. Employer-sponsored insurance plans are allowed to cover individuals, such as domestic partners or financially independent children, who are not tax-dependents. This is possible because the insurance company defines insurance plans whereas the IRS defines the rules governing contribution limits and disbursements from the HSA. Confused yet? We promise, it gets clearer from here.

Contribution Limits to an HSA

Since domestic partners are not considered spouses by the IRS, rules governing spousal HSA contributions do not apply.  Domestic partners are considered two unattached individuals who can open separate HSAs and each have their own contribution limit if they each meet the requirements for opening and contributing to the HSA. For example, if two domestic partners were both covered under family insurance, they would each have a contribution limit of $6,250 in 2012 (assuming they were under 55 and met the other HSA eligibility tests).

Additionally, the HSA contribution limitations placed on spouses, such as not having a general purpose Flexible Spending Account (FSA) or Health Reimbursement Account (HRA), do not apply to domestic partners. These rules often make people think there is a loophole for domestic partners. In fact, the same treatment is received by adult children who are no longer dependents, a category many people expect will grow under recent healthcare reform laws.

Spending HSA Funds

Although the rules regarding contribution limits are advantageous to domestic partners as compared to spouses, the rules around disbursements are not. Unlike spouses, domestic partners do not automatically qualify for tax-free and penalty-free disbursements from their partner’s HSA, whether reimbursements for incurred expenses or withdrawals using a debit card. To qualify for disbursements from the HSA, they must qualify as either a federally-recognized spouse or a tax dependent.

Questions:

My HDHP covers my domestic partner.  Are they eligible to open an HSA?

The same rules apply to your domestic partner as anyone else.  If they meet the eligibility requirements, for example they are only covered by a High Deductible Health Plan (HDHP), yes they are eligible to open an HSA.  See IRS Publication 969 for more details on qualifications.

How do my domestic partner and I determine our contribution limit?

Each domestic partner’s contribution limit is determined just like everyone else.  You each will need to take into consideration your age, your insurance coverage (“self only” or “family” as defined by your insurance company) and your HSA establishment date. Check out IRS Publication 969 for more details.

For instance, even if your family HDHP insurance type covers a non-tax dependent, like adult children, the IRS still considers you as having family HDHP coverage. If that non-tax dependent opens an HSA, their insurance coverage would be considered family when calculating their contribution limit.

Can my domestic partner open an HSA through Tango Health?

Yes, although it is not sponsored by an employer and they would be responsible for all fees. Additionally, contributions are generally only with post-tax funds with the tax benefit taken when taxes are filed. See more information about Tango Health’s individual HSAs.

Phew. Tax time is over. Though you may want to simply wipe the past few weeks from memory, we recommend taking a look at some helpful HSA tax lessons learned based on your calls, e-mails, and support tickets to Tango:

1. Find a better way to keep receipts. Not only are receipts required by the IRS for all HSA expenses in case you are audited (and they are auditing), but they have the vital info needed to claim tax breaks on eligible medical expenses if, for example, you forgot your HSA card when you picked up a prescription.
2. Keep track of all your expenses, no matter how you paid. People often neglect eligible expenses that were mixed in with ineligible ones, and paid with a non-HSA card.  For example, the 2-pack contact lens solution you bought at Costco is an HSA eligible expense, and the prescription you paid for with your credit card because you also had deodorant and a toothbrush at the pharmacy counter is also an HSA eligible medical expense.
3. Multiple HSAs still mean one Form 8889. Mid-year open enrollment seasons are becoming more common. As are changes in HSA custodians. If you contributed to one HSA during one part of the year, then another during the second part, you still only fill out a single IRS Form 8889. And guess what? You only have one HSA contribution limit ($3,100 for self-only or $6,250 family insurance).
4. Two spouses on HSAs could mean multiple Form 8889s but only one contribution limit. Spouses must share an HSA contribution limit, but need to file separate 8889s.
5. Make sure you’re eligible before you open the HSA. If you’re enrolled in Medicare, don’t contribute to a Health Savings Account. Find out if your spouse has a full medical FSA and if so, don’t contribute to an HSA. If you are on an individual-only plan, don’t contribute the family max contribution limit to your HSA. It’s all fixable when you file your taxes, but you take penalties and have to pay taxes on the money you may have already spent.
6. If you are eligible, always open your HSA even if you don’t plan to use it. Every once in a while, we talk to employees who were eligible to open an HSA, but didn’t open it because they weren’t planning to go to the doctor. We’ve heard of a $3,000 emergency hospital visit and unexpected $1,500 crowns and root canals.  If those expenses had been made after an HSA was established, the employee could have recovered income and payroll tax retroactively, saving 25-35% of the amount paid.  Medical expenses are often unplanned, and two minutes opening an HSA can save you hundreds of dollars on a big medical bill.
7. Understand the Last Month Rule if you start your HSA mid-year. Sure, you can contribute the full limit even if you were only on the plan a part of the year, but you need to stay on the plan the entire following year to contribute the max for both years. If not, there is a 10% penalty for the months you were not eligible. We’ll explore the advantages and disadvantages of the Last Month Rule in a future post.
8. Your W-2 will show your contributions through your employer’s cafeteria plan. Using the W-2, along with your Form 1099-SA which shows distributions from your HSA, you have everything you need to file taxes if you only made contributions through your employer. The Form 1099-SA is mailed by your custodian bank in early February, showing all distributions from your account. If you didn’t have any distributions out of your HSA, you will not be sent this form. 
9. Don’t look for your Form 5498-SA (showing contributions for the tax year). You likely won’t see it until May. Your custodian bank doesn’t mail this until May (although you may receive a preliminary one in January). Why? You have until tax day to contribute to your HSA for the previous year.
10. You can review your HSA contributions and distributions anytime on Tango!  Click on the HSA tab, then Activity, and review a specific date range of your HSA activity. Use the radio buttons show just contributions or just debits.

See you next tax year!

Thus, a common question in Open Enrollment sessions or on our toll-free servicing line is: “Should I open a new HSA with my new employer, even if I have one from my previous employer?”

There are several reasons why you should open another HSA if it is sponsored by your current employer:

1. Tax savings. In order to add contributions pre-tax you have to make contributions through payroll deduction from your existing employer. By making contributions to an HSA post-tax, you would be delaying up to $1,500 of tax savings from your next pay date to the following April 15. Plus, payroll taxes (also called FICA) are only saved through a payroll deduction. That’s an additional 4% – up to $250 – that you can only save through payroll deduction with a current employer!
2. No additional fees. If your current employer is covering the account fees on a new HSA, there is no cost or downside to opening it.  In fact, you may now be paying account administration fees on an HSA from a prior employer.  Those fees can add up over the lifetime of the account and quickly dwindle down the account balance, so you definitely should consider closing the costly old HSA and opening a free new one instead.
3. Easy rollover of funds. Just like with 401(k)s, if you don’t want to have multiple HSAs, you can rollover balances to your new HSA with no tax implications. While it’s completely fine to have multiple HSAs, some people prefer to keep all of the HSA money in one place.
4. Out of sight, out of mind. Everyone has a busy schedule so unless you are using your old HSA frequently you may forget about it all together and miss out on money you have already set aside for health spending.
5. Improved services and user-friendliness. Interest rates, investment options, customer service and software tools may all be better with the HSA sponsored by your current employer. Plus it is easier to work with the company-sponsored account because co-workers and managers within the company are familiar with it, making it easier to get your HSA questions answered at your workplace.

Our HSA experts often talk to people that decide not to open a new HSA. This is often painful for us to hear because it is not in their best interest. We can’t make decisions for you but we do offer this advice, don’t let the imagined burden of closing accounts and rolling over money stop you from having the best HSA. The total effort required is usually less than one hour.  4-8% in tax savings plus all the fees that are avoided can mean a benefit of hundreds of dollars. Isn’t that worth an hour?

Photo Credit: www.taxcredits.net

In fact, The Economist wrote an article about how consumers have been picking up more of their healthcare costs over the past decade and pointed to this trend as one big factor in slowing the growth of healthcare inflation:

“The past decade has seen a shift in how people pay for medicine. Americans’ health spending is growing at a slower pace. This is partly because of the downturn, but not entirely. The rate of growth fell every year between 2002 and 2009…spending habits seem to be changing.”

We may be a little biased about how HSAs combined with High Deductible Health Plans (HDHPs) are the best benefit plan structure to drive healthcare consumerism. But if you really want your employees to be good consumers, it’s critical to give them the tools to make good spending decisions.

A mistake many employers make is only providing calculators or tools that calculate costs on a yearly or twelve-month basis. That’s because it’s easy to add up number of visits and prescriptions per month and then multiply it by twelve. These static tools are useful to set spending baselines during open enrollment, but most people are not able to accurately plan the majority of their health care expenses 12 months into the future.

Instead, employees need dynamic financial tools that help them make good healthcare money decisions throughout the year as their situation changes. The best data points for employees to understand how medical needs will impact their finances are:

• Current HSA balance
• Historical medical spending, which should include:
  • HSA transactions
  • Expenses incurred on personal credit cards
  • Personal loans (from providers like CareCredit)
• Categories of medical spending habits
• Current payroll deduction amounts
• Upcoming employer contributions, if applicable
• Remaining tax-free contributions allowed for the year

You might be surprised to know that only about 1/3 of HSA users solely use their HSA debit card for their medical spending. The other 2/3 of HSA users want the option to make eligible health care purchases using their personal credit card or account, then easily reimburse themselves when convenient.

The bad news is that most employees need to go to 4 or 5 different websites, company portals, or other sources in order to piece together this information. Since it is extremely time consuming and cumbersome, employees simply don’t do it and are therefore less equipped to make informed healthcare decisions.

So employers and employees can save money and limit future insurance premium increases by enrolling in consumer directed health plans like those with HSAs, but that’s just the first step. To really promote healthcare consumerism and maximize the value of these plans, employers need to ensure that employees have the right tools to make solid healthcare financial decisions every day.

Photo Credit: www.401kcalculator.org

In previous posts of this series we covered the documents associated with filing taxes with a Health Savings Account (HSA), the difference between pre-tax and post-tax contributions, common questions about Part 1 and common questions about Part 2 of the IRS Form 8889.

This is the last post in this series, we’ll answer some common questions people have about Part 3 of the IRS Form 8889 and a couple of general questions.

Part three of Form 8889 determines if any taxes and penalties apply to amounts contributed when an accountholder is not eligible to contribute.  Keep in mind that HSA eligibility only affects when contributions can be made to an HSA, rather than when money in the HSA can be spent.  The money in the HSA is useable for the lifetime of the account, regardless of insurance status.

Part III Common Questions

Part three is for people that made contributions to their HSA when they were not eligible to make contributions.  This is different than making contributions that exceed the IRS limit and the penalties are different.  In part three, you should only report contributions made when you were ineligible.

I wasn’t eligible the entire year.  How do I check to see if I made contributions when I was eligible?

You can make contributions as soon as your HSA is established and you are HSA eligible.  You can read more about eligibility here.  If you made contributions before this date, they should be included here in part three.  As soon as you cease to be covered by a High Deductible Health Plan (HDHP), you can no longer make HSA contributions.  Any contributions made after this date should also be included.

How does the Last Month Rule affect my eligibility to make contributions?

First, you should check if you fall under the Last Month Rule.  If you qualified for the Last Month Rule and you did not maintain coverage for the entire following year, you may face penalties you need to report on line 19.

What is the penalty for contributing to my HSA when I wasn’t eligible?

If you contribute when you were not allowed, you will pay a penalty of 10% on the amount you contributed.  The 10% penalty will be carried over to line 60 of your 1040 and the total ineligible contributions should then be included as income.

General HSA Tax Questions

What do I do if my spouse and I both have HSAs and we file jointly?

You must fill out a form 8889 for each HSA and then combine the amounts for line 13 and enter it on each person’s IRS Form 8889 on line 13.  For specifics see: http://www.irs.gov/instructions/i8889/ch02.html#d0e362.

How do I determine state tax laws regarding HSAs?

Most state tax laws align with federal laws in regards to HSAs, with some exceptions.  At the end of the 2011 tax year, the following states had HSA tax laws that differed with the federal HSA tax laws: Alabama, California, New Jersey, New Hampshire and Tennessee.

Often times your state’s tax laws regarding HSAs will be explicit in the form you file when you file your state taxes.  We strongly recommend consulting your tax advisor on whether interest, investment gains/losses have special provisions in your state.

This concludes our series on filing taxes with an HSA.  If your questions weren’t answered, feel free to leave them in the comments section and we will try to address them.  Happy Refunds!

In previous posts of this series we covered the documents associated with filing taxes with a Health Savings Account (HSA), the difference between pre-tax and post-tax contributions and common questions about part 1 of the IRS Form 8889.

This post will continue where we left off by answering common questions people have about Part 2 of the IRS Form 8889.

Part two of Form 8889 determines if any taxes and penalties apply to amounts spent or distributed from your HSA.  The penalties calculated in this part will only apply to non-eligible spending from your HSA. Note that you are excluded from these penalties the year you turn 65 but not from paying income tax when using HSA money on non-qualified expenses. (Ahh, the benefits of aging.)

Do I enter amounts in my Tango Flex Reserve™ on my taxes?

If you are a Tango accountholder, any amount currently in your Flex Reserve is only for your record keeping.  The Flex Reserve is the amount of money you can reimburse yourself tax-free based on medical spending paid by a source other than your HSA.  This amount is not reported on your tax return at all since you only report actual dollars that have already been spent or distributed out of your HSA. Flex Reserve is a future tax-free reimbursement opportunity, so you do not need to report it.

What is line 15 asking for?  What does it mean by ‘unreimbursed qualified medical expenses?’

The IRS is trying to determine how much of the money distributed from your HSA was to reimburse you for qualifying medical expenses.  In line 14c you should have entered the amount of money that was taken out of your HSA and not rolled over.  On line 15, you should enter the total HSA money you spent legally on qualified medical expenses.  The IRS calls this amount unreimbursed qualified medical expenses because you should not be reimbursed by your insurance for expenses you paid for with HSA money.  If you used your HSA as it is meant to be used, line 16 should be zero. If you distributed money for reasons other than qualified expenses (such as to buy birthday balloons) or you were reimbursed through insurance for expenses you paid for with HSA money, then you owe tax and a penalty (if you are under 65) on the amount.

This section is especially helpful for people that are 65 or older.  These people can start taking money out of an HSA for non-medical expenses and this calculates how much should be taxed.

Example (follow along by referring to the image above): Eli took money out of his HSA three times in 2011.  The first time, he spent $215 on prescription glasses with his HSA debit card.  The second time he spent $12 dollars on over-the-counter cold medicine using  a check.  Then in October he opened a new HSA at a different custodian.  He took all $658 left in his old HSA and rolled it over to his new HSA.

When he is filling out line 14a he puts $885, the sum of the money that came out of is HSA.  On line 14b he puts $658, the amount he rolled over.  On line 14c he puts $227, the amount he paid for expenses.  On line 15 he puts $215, the amount of HSA money used for eligible expenses.  After subtracting line 15 from line 14c, Eli records $12 on line 16.  This is his ‘taxable HSA distributions’ because he spent HSA money on non-qualified expenses.  Finally on line 17b, Eli writes in $2.40, the penalty for using an HSA on non-qualified expenses because he is not older than 65.

Note: Eli also spent $400 dollars using his American Express card on qualified expenses and those were automatically recorded in his Flex Reserve because he uses Tango.  The amount is not reported anywhere on his taxes though because the money did not come out of his HSA yet.

I don’t know if the expenses I had were eligible.  How do I check if my expenses were eligible?

You should check publication 502 in order to make sure all the disbursements from your HSA were for eligible expenses.  If you have questions about expenses feel free to contact Tango Health or your tax advisor. While we can’t give you tax advice, we can help you find the category of expenses it may fall under.

Note: Keep your IRS Form 1099-sa when you receive it as evidence of correctly completing your tax return.  If you are audited you may have to produce this form. Also, if the IRS has questions regarding spending or disbursements from your HSA, this form will likely be required and will definitely be helpful.

Later this week we’ll cover the final section of the IRS Form 8889 by going over common questions about Part 3 and more general questions.