An high deductible health plan (HDHP) has a higher annual deductible than typical health plans and a maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. Out-of-pocket expenses include copayments and other amounts, but do not includes insurance premiums (see exception below). It may provide preventive medical care benefits without a deductible or with a deductible less than the minimum annual deductible.
The plan must have a annual deduction and a annual out-of pocket maximum. For family coverage, the terms of the HDHP must deny payments to all family members until the family as a unit incurs annual covered expenses in excess of the minimum annual deductible ($2,600 for 2015). Thus, a plan would not be a qualified HDHP for 2015 if it allowed payments of an individual family member’s medical expenses exceeding $1,300 (the minimum deductible for self-coverage) but the family as a whole did not have expenses over $2,600. The minimum annual deductible does not apply to preventive care benefits. The plan can qualify as a HDHP even if it pays for preventive care without a deductible or after a small deductible below the regular HDHP minimum [J.K. Lasser’s 2015 Your Income Tax] .
Preventive care includes, but is not limited to, the following [IRS Publication 969].
• Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals.
• Routine prenatal and well-child care.
• Child and adult immunizations.
• Tobacco cessation programs.
• Obesity weight-loss programs.
• Screening services. This includes:
• Heart and vascular diseases.
• Infectious diseases.
• Mental health conditions.
• Substance abuse.
• Metabolic, nutritional, and endocrine conditions.
• Musculoskeletal disorders.
• Obstetric and gynecological conditions.
• Pediatric conditions.
• Vision and hearing disorders.
• Prescription drugs if taken by asymptomatic patients with risk factors for a disease, or by recovering patients to prevent the incurrence of a disease.
Note: by law, prescription drug coverage, other than coverage meeting the preventive care safe-harbor is not a permitted exception to the high-deductible requirement. An HSA contribution cannot be made for individuals with an HDHP and a prescription drug plan because the prescription drug benefits are not subject to the HDHP minimum deductible [J.K. Lasser’s 2015 Your Income Tax] .
You cannot treat insurance premiums as qualified medical expenses unless the premiums are for:
• Long-term care insurance (subject to limits based on age which are adjusted annually).
• Health care continuation coverage (such as coverage under COBRA).
• Health care coverage while receiving unemployment compensation under federal or state law.
• Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental or Medicare Advantage policy.
Family plans that do not meet the high deductible rules.
There are some family plans that have deductibles for both the family as a whole and for individual family members. Under these plans, if you meet the individual deductible for one family member, you do not have to meet the higher annual deductible amount for the family. If either the deductible for the family as a whole or the deductible for an individual family member is less than the minimum annual deductible for family coverage, the plan does not qualify as an HDHP [IRS Publication 969].
Example. You have family health insurance coverage in 2015. The annual deductible for the family plan is $3,500. This plan also has an individual deductible of $1,500 for each family member. The plan does not qualify as an HDHP because the deductible for an individual family member is less than the minimum annual $3,500 deductible for family coverage.
Other health coverage.
If you and your spouse have family coverage, generally you cannot have any other health coverage that is not an HDHP. However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan. You can have additional insurance that provides benefits only for the following items:
• Liabilities incurred under workers’ compensation laws, torts, or those related to ownership or use of property.
• A specific disease or illness.
• A fixed amount per day (or other period) of hospitalization.
You can also have coverage (whether provided through insurance or otherwise) for the following items.
• Dental care.
• Vision care.
• Long-term care.
[IRS Publication 969].
## Self-only HDHP coverage is an HDHP covering only an eligible individual.
** Family HDHP coverage is an HDHP covering an eligible individual and at least one other individual whether or not that individual is an eligible individual.
Example. An eligible individual and his dependent child are covered under an “employee plus one” HDHP offered by the individual’s employer.
You must reduce the amount you, or any other person can contribute to your HSA by the amount of any contributions made by your employer that are excludable from your income. This includes amounts
contributed to your account by your employer through a cafeteria plan. Beginning with the first month you are enrolled in Medicare, your contribution limit is zero.
Example: You turned age 65 in July 2015 and enrolled in Medicare. You had an HDHP with self-only cover-age and are eligible for an additional contribution of $1,000. Your contribution limit is $3,225 ($6,450 × 6 ÷ 12).
If you become eligible under an HDHP, contributions are allowed for the months prior to your enrollment, provided you are eligible in December of that year. But contributions for months prior to your enrollment will be included in your income and subject to a 10% penalty if you don’t remain eligible for the 12 months following the end of the first eligibility year, unless you are disabled or die [J.K. Lasser’s 2015 Your Income Tax].
All employer contributions must be reported on Form 8889. Employer contributions up to the limit are tax free and not subject to withholding for income tax or Social Security and Medicare purposes. All employer contributions must be reported on Form W2, box 12 with code “W”. If employer contributions exceed the excludable limit, they are reported on the W2 as taxable wages. Excess contributions not removed by the due date of your tax return, including extensions, are subject to a 6% penalty. If your employer contributes less than the limit, you may contribute to your HSA but the same overall limit applies to the aggregate contributions. Your contributions are reported on Form 8889 and taken as a deduction FOR AGI [J.K. Lasser’s 2015 Your Income Tax] .
Deemed distributions from HSAs. The following situations result in deemed taxable distributions from your HSA [IRS Publication 969]:
(a) You engaged in any transaction prohibited by section 4975 with respect to any of your HSAs, at any time during the tax year. If your account ceases to be an HSA you must include the fair market value of all assets in the account as of January 1, on Form 8889.
(b) If you used any portion of any of your HSAs as security for a loan at any during the tax year, you must include the fair market value of the assets used as security for the loan as other income on Form 1040 or Form 1040NR.
Examples of prohibited transactions include the direct or indirect:
• Sale, exchange, or leasing of property between you and the HSA,
• Lending of money between you and the HSA,
• Furnishing goods, services, or facilities between you and the HSA, and
• Transfer to or use by you, or for your benefit, of any assets of the HSA.
Any deemed distribution will not be treated as used to pay qualified medical expenses. These distributions are included in your income and are subject to the additional 20% tax.
Additional tax. There is an additional 20% tax on the part of your distributions not used for qualified medical expenses. Figure the tax on Form 8889 and file it with your Form 1040 or Form 1040NR. The 20% tax does not apply if the taxpayer becomes disabled or dies.
Balance in an HSA
An HSA is generally exempt from tax. You are permitted to take a distribution from your HSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions, earlier). Earnings on amounts in an HSA are not included in your income while held in the HSA.
Death of HSA Holder
What happens to that HSA when you die depends on whom you designate as the beneficiary. If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse’s HSA after your death. If your spouse is not the designated beneficiary, the account stops being an HSA, and the fair market value of the HSA becomes taxable to the beneficiary in the year in which you die.
If you want your employees to be able to have an HSA, they must have an HDHP. You can provide no additional coverage other than those exceptions listed previously under Other health coverage.
Contributions. You can make contributions to your employees’ HSAs. You deduct the contributions on your business income tax return for the year in which you make the contributions. If the contribution is allocated to the prior year, you still deduct it in the year in which you made the contribution. For more information on employer contributions see Notice 2008-59, 2008-29 I.R.B. 123, questions 23 through 27, available at www.irs.gov/irb/2008-29,IRB/ar11.html.
Comparable contributions. If you decide to make contributions, you must make comparable contributions to all comparable participating employees’ HSAs. Your contributions are comparable if they are either: The same amount, or the same percentage of the annual deductible limit under the HDHP covering the employees. The comparability rules do not apply to contributions made through a cafeteria plan covered by your HDHP and are eligible.
Comparable participating employees.
• Are covered by your HDHP and are eligible to establish an HSA.
• Have the same category of coverage (either self-only or family coverage).
• Have the same category of employment (part-time, full-time, or former employees).
To meet the comparability requirements for eligible employees who have not established an HSA by December 31 or have not notified you that they have an HSA, you must meet a notice requirement and a contribution requirement.
You will meet the notice requirement if by January 15 of the following calendar year you provide a written notice to all such employees. The notice must state that each eligible employee who, by the last day of February, establishes an HSA and notifies you that they have established an HSA will receive a comparable contribution to the HSA for the prior year. For a sample of the notice [see Reg. 54.4980G-4 A-14©]. You will meet the contribution requirement for these employees if by April 15 you contribute comparable amounts plus reasonable interest to the employee’s HSA for the prior year. or purposes of making contributions to HSAs of non-highly compensated employees, highly compensated employees shall not be treated as comparable participating employees.
Excise tax. If you made contributions to your employees’ HSAs that were not comparable, you must pay an excise tax of 35% of the amount you contributed [IRS Publication 969].
Employment taxes. Amounts you contribute to your employees’ HSAs are generally not subject to employment taxes. You must report the contributions in box 12 of the employee’s Form W-2. This includes the amounts the employee elected to contribute through a cafeteria plan. Enter code “W” in box 1 [IRS Publication 969].
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