Funds from an HSA may not be used to purchase health insurance, except if used to purchase continuation coverage (i.e., COBRA), qualified long-term care insurance, health insurance while unemployed, or, for individuals eligible for Medicare, any health insurance other than a Medicare supplemental policy. IRC § 223(d)(2)(B). Thus, an HSA can be used to pay premiums on Medicare Part A or Part B, Medicare HMO, and the employee share of premiums for employer-sponsored retiree health insurance, but not to pay premiums on Medigap policies. Notice 2004-2, Q & A 27. Other distributions are permitted, subject to tax and penalties. HEALTH SAVINGS ACCOUNTS HSA’s COORDINATION WITH OTHER ACCOUNTS AND ARRANGEMENTS Funds from an Archer MSA may be rolled over into an HSA. IRC § 220(f)(5). However, rollovers from HRAs or FSAs to HSAs are not permitted. Notice 2004-2, Q & A 23. Maximum contributions allowed to an HSA for any given year are reduced by any contributions made to an Archer MSA in the same year. IRC § 223(b)(4)(A). An HSA may be offered as part of an IRC § 125 cafeteria plan. IRC § 125(d)(2). Comment: It is unclear whether an employer can permissibly maintain an HRA or FSA in conjunction with an HSA/HD health plan. The IRS has asked for comments on the relationship between HSAs and FSAs or HRAs. The IRS has also asked for comments on the relationship between the HSA provisions of IRC § 223 and the rules governing FSAs under IRC § 125. Notice 2004-2. TAX TREATMENT OF DISTRIBUTIONSDistributions for qualified medical expenses incurred after the HSA was established are generally not taxable. IRC § 223(f)(1). Any amount paid or distributed out of an HAS, which is not used exclusively to pay the qualified medical expenses of the account holder is includable in the gross income of such holder. IRC § 223 (f)(2). In addition, such amounts are subject to a 10% penalty. IRC § 223(f)(4). Penalty Exemptions: IRC § 223(f)(4) includes an exception (but only for the penalty) to the above exclusivity requirement for distributions made after an individual dies or becomes disabled, IRC § 223(f)(4)(B), or reaches the Medicare eligibility age (age 65). IRC § 223(f)(4)(C). | |
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