Health and Medical Savings Accounts

Medical Savings Accounts

In 1997, a pilot program was established to allow certain individuals to participate in medical savings accounts (MSAs). MSAs can be used to help pay for qualified medical expenses. The pilot program, which was scheduled to expire in 2002, has been extended until the cumulative number of MSAs filed exceeds 750,000.

Participation

Individuals are eligible to participate in an MSA if they are:

self-employed or employees of small employers (employers who average 50 or fewer employees on any business day during the two preceding years), and
covered under a high-deductible health insurance plan (HDHP). An HDHP is a health plan with an annual deductible of at least $1,200 (in 2012) for individual coverage and at least $2,400 (in 2012) for family coverage.

Contributions

MSAs are like IRAs, but exist specifically to defray unreimbursed health care expenses on a tax-favored basis. Employee contributions to the MSA are deductible on the employee’s personal income tax return. Employer contributions are exempt from federal income and employment taxes. MSAs may not be funded under a section 125 cafeteria plan.

MSAs may be funded by employee contributions or employer contributions, but not by both at the same time. The maximum annual contribution to the MSA is limited to a percentage of the deductible amount on the individual's HDHP (65% of the individual coverage deductible, and 75% of the family coverage deductible).

MSA Contribution Type	Federal Income Tax Withholding	Social Security and Medicare	Federal Unemployment	Form W-2
Employee contributions	taxable	taxable	taxable	boxes 1, 3, and 5
Employer contributions	exempt	exempt	exempt	box 12 with an “R”

Distributions

Distributions from MSAs are similar to distributions from FSAs, except amounts contributed in one year can be used to purchase benefits in a later year. To receive tax-favored status, distributions must be for qualified medical expenses incurred by the employee, his spouse, or his dependents. If distributions are made for anything other than medical expenses, they are subject to a 15% excise tax, unless the distribution is paid after the employee reaches age 65, or upon death or disability of the employee.

State and Local Taxes

The taxability of MSA contributions may vary by state.

Health Savings Accounts

The Medicare Prescription Drug Improvement and Modernization Act of 2003 (the "Medicare Act") introduced the health savings account (HSA), a form of tax-exempt health plan. Eligible individuals began establishing accounts on January 1, 2004.

Considerations for Employers Establishing an HSA

An HSA is an exceptional tool to reduce health insurance premiums by moving from a traditional PPO to a high-deductible health plan.
An HSA is a valuable employee hiring and retention tool.

Employment Taxes on an Employer’s HSA Contributions

Amounts an employer contributes to an employees’ HSA are generally not subject to employment taxes.
Employers must report HSA contributions in box 12 of IRS Form W-2 for each employee during the calendar year.

Participation

Individuals covered under a high-deductible health insurance plan (HDHP) are eligible to participate in an HSA.

Contributions

HSAs are like IRAs, but exist specifically to defray unreimbursed health care expenses on a tax-favored basis.

Employee contributions to the HSA are deductible on the employee’s personal income tax return.
Employee contributions to the HSA are toward either an individual or family plan. These plans are treated the same for taxation and W-2 reporting purposes; however, the contribution limits for these plans are different.
Employer contributions are exempt from federal income and employment taxes. HSAs may be funded under a section 125 cafeteria plan.
Employers deduct HSA contributions on the “Employee benefit program” line on the company’s business income tax return.
Employers must make comparable HSA contributions to all comparable employees’ HSAs, unless the employer offers the HSA through a Cafeteria Plan.
Employer must pay a 35% excise tax on the non-comparable HSA contributions.

All contributions should be reduced by any amounts contributed to a separate medical savings account.

HSAs can be funded by employee contributions, employer contributions, or both. The maximum annual contribution to the HSA is limited to the lesser of 100% of the total annual deductible for the HDHP, or $3,100 (in 2012) for individual plans and $6,250 (in 2012) for family plans. Individuals between 55 and 65 years of age may make an additional "catch-up" contribution of $1000 (in 2012) over and above these limits.

HSA Contribution Type	Federal Income Tax Withholding	Social Security and Medicare	Federal Unemployment	Form W-2
Employee contributions not funded under an IRC section 125 cafeteria plan	taxable	taxable	taxable	boxes 1, 3, and 5
Employee contributions funded under an IRC section 125 cafeteria plan	exempt	exempt	exempt	box 12 with a "W"
Employer contributions (funded or not funded under an IRC section 125 cafeteria plan)	exempt	exempt	exempt	box 12 with a "W"

Distributions

Distributions from HSAs may be requested at any time. If distributions are made for anything other than medical expenses, they are subject to a 20% excise tax, unless the distribution is paid after the employee reaches age 65, or upon death or disability of the employee.

State and Local Taxes

The taxability of HSA contributions may vary by state. Check with your state for additional tax information.