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5.1.A. ERMUSR 10-11-2011
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5.1.A. ERMUSR 10-11-2011
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City Government
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ERMUSR
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10/11/2011
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MARTIN AGENCY, INC. <br />Q: How is an HSA funded? <br />A: Several ways: <br />An HSA can be funded by the employer, the employee, or both. Funds are held by an eligible <br />financial institution (a third-party administrator). The HSA does not require employer <br />sponsorship. If an employer offers a QHDHP, the employee may establish an HSA on their own <br />at a financial institution of their choice. <br />Funding of the HSA can be done at any time and at any amount subject to the maximum limit <br />of $3,050 for those with single coverage and $6,150 for family coverage in 2011. The limits for <br />2012 will be $3,100 for single coverage and $(1,250 for family coverage. The funding can be <br />periodic, such as monthly or quarterly, or a lump sum. Contributions for each calendar year <br />must be made by April 15 of the following year. <br />Health plan claims are eligible for reimbursement if incurred after the HSA (the actual <br />account) has been established. Funding of the HSA may occur retroactively to the medical <br />expense. However, in order to be reimbursed from the HSA as a qualified medical expense, <br />the funds must be first deposited into the HSA. <br />Funding by payroll deduction: <br />• An employer can allow funding of an HSA through a cafeteria plan allowing the employee to <br />avoid payroll taxes. Employers also save on payroll taxes for any payroll deducted <br />contributions. <br />• Any payroll HSA deduction can be adjusted during the year subject to employer procedures. <br />This funding flexibility makes funding an HSA more flexible than an FSA which allows no <br />changes once a payroll deduction is elected except in the case of a "life event". <br />• All payroll HSA deductions from the employer/employees are subject to cafeteria plan <br />nondiscrimination rules and other restrictions on participation in cafeteria plan; such as more- <br />than-2% shareholders in a Subchapter S corporation and other self-employed individuals are <br />not eligible to participate in a cafeteria plan. <br />Funding outside of payroll deduction: <br />• If an employee funds an HSA on their own, the funding is tax deductible for federal taxes on <br />an "above the line" basis (thereby reducing adjusted gross income). <br />• If an employer funds an HSA, it is tax deductible by the employer and is not subject to payroll <br />taxes. Note: special rules determine the tax treatment of HSA contributions made by <br />Subchapter S corporations on behalf of their more-than-2% shareholders. <br />• As an exception to HSA comparability rules, employers making HSA contributions outside of a <br />cafeteria plan may contribute more to non-highly compensated employees than to highly <br />compensated employees. However, all non-HCES must receive the same contribution based <br />on coverage. <br />• HSA funding may also be made by a one-time rolloverfrom the employee's Individual <br />Retirement Account (IRA). However, the employee must remain HSA eligible for 12 months <br />after the rollover date. The rollover amount counts toward the HSA annual maximum <br />contribution. <br />CONFIDENTIAL. <br />PAGE 2 <br />
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