Small Business Health Insurance FAQ
» Who Can Participate in a Section 125 Premium Only Plan?
» How do I set up a Section 125 Plan Premium Only Plan for my company?
» Do I have to file any Section 125 documentation with the IRS?
» What is Consumer-Driven Health Care?
» Who is eligible for a HSA?
» Are there limits on contributions to HSAs?
» What expenses are eligible for reimbursement from a HSA?
» What happens when an employee's HSA funds run out?
» Can my employees use HSA dollars for non-eligible expenses?
» Who is responsible for tracking expenses paid from the HSA?
» Who has control over the money in a HSA?
» What happens to the money in a HSA after an employee turns age 65?
» How are HSAs different from FSAs?
» Do the smaller health costs (paid out of HSAs) apply to the deductible of High Deductible Health Plans?
» If a High Deductible Health Plan is a PPO product, do my employees get discounts from participating health care providers for the costs that they cover out of their HSAs?
» Are there any employer reporting requirements regarding HSAs?
» Is the employer required to contribute to employee owned HSAs?
» Are there any discrimination rules applicable to HSAs?
Q. Who Can Participate in a Section 125 Premium Only Plan?
A. Employees of regular corporations, S-corporations, limited liability companies, partnerships, sole proprietors, professional corporations, and not-for-profits are eligible. The IRS prohibits sole proprietors, partners, LLC members, or individuals owning more than 2% of an S-Corporation from participating.
Q. How do I set up a Section 125 Plan Premium Only Plan for my company?
A. Purchasing a Section 125 Plan provides you with a Plan Adoption Agreement, a Plan Document, a Summary Plan Document that you must provide to each employee, and an election form for each employee.
Q. Do I have to file any Section 125 documentation with the IRS?
A. No, but you must keep file copies of completed and signed election forms for each of your participating employees, as well as, an officer signed Adoption Agreement and Plan Document. You must also conduct a simple non-discrimination test each year to maintain compliance.
Q. What is Consumer-Driven Health Care?
A. It is the combination of a High Deductible Health Plan with a financial tool, most commonly a Health Savings Account. The two vehicles (HDHP and HSA) work together to equip plan participants in controlling medical spending while taking advantage of reduced premium and tax reductions.
Q. Who is eligible for a HSA?
A. To be eligible for a Health Savings Account, an employee must be covered by a qualified High Deductible Health Plan (HDHP), must not be covered by other health insurance, must not be enrolled in Medicare, and must not be claimed as a dependent on someone else's tax return.
Q: Are there limits on contributions to HSAs?
A: The maximum (aggregate) annual contribution for 2009 is $3,000 for employees with single coverage, or $5,950 for employees with family coverage (for 2010 - $3,050 single and $6,150 family). Eligible employees age 55 or older may make additional "catch-up" contributions of up to $1,000 in 2009 and 2010.
Q. What expenses are eligible for reimbursement from a HSA?
A. HSA dollars may be used for qualified medical expenses incurred by a participant and his or her spouse and dependents. Qualified medical expenses are those related to medical care and are outlined within IRS Section 213(d). In summary the IRS states that "the expense has to be primarily for the prevention or alleviation of a physical or mental defect or illness." IRS Publication 502 contains a partial list of qualified medical expenses.
Q. What happens when an employee's HSA funds run out?
A. The employee is fully responsible for any eligible medical expenses until the HDHP's deductible is reached even if their HSA funds are no longer available during the plan year.
Q. Can my employees use HSA dollars for non-eligible expenses?
A. Money withdrawn from an HSA account non-eligible expenses is considered taxable income to the participant and is subject to normal income taxes and a 10% penalty (unless the participant is over age 65, disabled, or deceased). Participants can avoid taxes and potential penalties if the funds are repaid by April 15 of the year following the year in which the distribution took place.
Q. Who is responsible for tracking expenses paid from the HSA?
A. The bank (or other administrator / custodian) tracks the total dollar amount spent from the account and provides that information to plan participants and to the IRS. The form reflecting this amount is called a 1099-SA and is normally sent prior to January 31st. Participants should maintain copies of medical care receipts to verify how funds were utilized in the event of an audit.
Q. Who has control over the money in a HSA?
A. The individual employee who opened the account will have control over the assets. Upon death, HSA ownership will transfer to the account beneficiary.
Q. What happens to the money in a HSA after an employee turns age 65?
A. Once a participant is 65 and enrolled in Medicare, they may no longer contribute to a HSA; however, the funds remaining in the account may be used for health expenses (tax free) and to pay certain premiums like Medicare Part A, B & D, Medicare HMO and the employee's share of retiree medical premiums. Funds cannot be used to purchase a Medigap policy. If funds are used for non-medical expenses, the amount withdrawn will be taxable, but there is no longer a penalty.
Q. How are HSAs different from FSAs?
A. The most significant difference is that at year end, FSA funds are surrendered. HSA fund balances roll over to the next year.
Q. Do the smaller health costs (paid out of HSAs) apply to the deductible of High Deductible Health Plans?
A. Yes, all eligible medical charges apply to the HDHP deductible.
Q. If a High Deductible Health Plan is a PPO product, do my employees get discounts from participating health care providers for the costs that they cover out of their HSAs?
A. Yes, employees should always offer their insurance ID card to medical providers even if paying for services using their HSA. This will ensure that discounts are awarded and that their deductibles are properly tracked by the insurance carrier.
Q. Are there any employer reporting requirements regarding HSAs?
A. Pre-tax HSA contributions made by both the employer and the employee must be reported on the employee's W-2 form in Box 12. Enter "W" for HSA contributions.
Q. Is the employer required to contribute to employee owned HSAs?
A. Neither the employer nor the employee is required to contribute to an HSA.
Q. Are there any discrimination rules applicable to HSAs?
A. An employer who makes HSA contributions must make comparable contributions on behalf of all participating employees (with comparable coverage). Contributions are "comparable" if they are either the same amount or same percentage of the deductible. Part-time employees are considered separately.