Health Savings Accounts (HSAs)

The Frequently-asked Questions below were taken from the October 2004 State and School Employees' Life and Health Plan newsletter, Know Your Benefits. The information provided on HSA accounts is general information and does not constitute the provision of legal and/or financial advice. You are encouraged to consult with a tax advisor and/or other expert for more information regarding HSAs.

Why Implement a High Deductible Health Plan?

A recently enacted federal law allows an eligible individual who is covered by a HDHP to establish a Health Savings Account (HSA).

Effective January 1, 2005, the Plan (Mississippi State and Public Employee's Health Insurance Plan) will offer a High Deductible Health Plan (HDHP) option. The following is a summary of the benefits for the HDHP.

What is a Health Savings Account?

Health Savings Accounts (HSA) are portable, interest-bearing, funded accounts to provide for tax-free savings for medical expenses. HSAs allow individuals to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax free basis. HSAs are a new fax-favored IRA-type account that is intended to be used to pay qualified medical expenses. HSAs are similar to 401(k) type rules and penalties.

Who is eligible for a HSA?

To be eligible, an individual:

• must be covered by a High Deductible Health Plan (HDHP),

• must not be covered by other health insurance (does not apply to specific injury insurance and accident, disability, dental care, vision care, long-term care),

• must not be enrolled in Medicare, and

• can't be claimed as a dependent on someone else's tax return.

What are qualified medical expenses?

Qualified medical expenses include, but are not limited to:

• Health Insurance Deductible

• Co-payments for medical services, prescriptions, or products

• Over-the-counter drugs

• Long-term care insurance

• Health insurance premiums during any period of unemployment

Distributions for qualified medical expenses are not taxable. However, distributions for non-qualified medical expenses are subject to a 10% excise tax in most cases.

How can I apply for the High Deductible Health Plan?

You can apply for the HDHP during the Open Enrollment Period (October 1-24 at MSU) by completing an Application for Coverage form.

 

If you are a retiree and apply for the HDHP and you will become eligible for Medicare during 2005, your coverage will be automatically changed to the Standard Plan on the first day of the month that you become eligible for Medicare.

How can I get a HSA?

HSAs must be funded through a trust or custodial account. Permissible trustees and custodians include banks, insurers, and any entity that has been approved by the IRS to be a trustee of an individual retirement account or Archer MSA.

How do I know if a HSA is right for me?

To determine if the HDHP with an HSA is right for you and your family, you will need to do a little homework and perform a few simple calculations.

• Review past year(s) health spending

• Determine what you have spent in out-of-pocket health care costs

• Estimate what your out-of-pocket costs would be if you had had HSA in previous years

• Estimate your use of prescription drugs and how they will impact the dollars in your HSA

Review all of the above to determine if you would have had any excess HSA funds in prior years and remember that any unused funds "roll over" for use in future years.

 

Any amount (up to the established limits) that you deposit into your HSA while covered by a qualified high deductible plan is a tax-deductible expense, so be sure to calculate your tax savings.

 

When you look at all of the above calculations and they indicate an overall positive financial impact, and you like the idea of having significant control on how you spend your health benefit dollars, then an HSA may be right for your and your family.

What benefits are different from the Standard Plan?

The differences for 2005 will be the medical deductible, co-insurance, out-of-pocket amounts, and benefits that apply toward the out-of-pocket amounts.

Will benefits under the HDHP change from year to year?

Yes. The law requires that the deductible and out-of-pocket amounts are subject to cost of living adjustments. This means that the deductible and out-of-pocket amounts will change annually wit the federal cost of living index.

 

Beginning January 1, 2006, the law mandates that the same deductions must be applied to medical services and prescription drugs. In other words, the minimum annual deductible must be satisfied before benefits can be provided for medical services and/or prescription drugs.

 

In addition, co-payments and other benefits are subject to change.