Merritt Personal Lines Manual: Health Savings Accounts Introduction
As part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, Health Savings Accounts (HSAs) were created as the next generation of Archer Medical Savings Accounts (MSAs). Some of the important differences include:
- More Americans are eligible for HSAs than were eligible for MSAs.
- MSAs were set up as a pilot program HSAs are permanent.
- HSAs provide more tax deductions and have fewer restrictions than MSAs.
An HSA works like an IRA, except that money is used to pay health care costs. Participants enroll in a relatively inexpensive, HSA-qualified High Deductible Health Plan (HDHP).
A high deductible insurance plan is a health plan with a minimum deductible of $1000 for self-only coverage and $2,000 for family coverage. The maximum out-of-pocket expenses for allowed costs must be no more than $5,000 for self-only coverage and no more than $10,000 for family.
Then, a tax-deductible savings account may be opened to cover current and future medical expenses. The money deposited, as well as the earnings, is tax-deferred. The money can then be withdrawn to cover qualified medical expenses tax-free. Unused balances roll over from year to year.
HSAs are an innovative way to save healthcare dollars, realize tax savings and increase financial security; they can empower individuals to have greater control over their health care decisions. However, they do require the insured to understand more about the mechanics of health care coverage than traditional indemnity plans or managed-care systems did.
HSA plans offer the ability to build up savings to pay for future medical expenses as a tax exempt savings account that is owned by the insured and managed by a financial institution. Like an IRA, contributions to an HSA are tax deductible and continue to grow tax deferred. Also, an insured who is self-employed can deduct 100% of the monthly premium.
The contributions to an HSA can be used to pay for health care that is not covered under a traditional or PPO individual health plan. Examples of some of these forms of treatment are vision, acupuncture, chiropractic or dental care. All unused contributions to the HSA will continue to grow. At age 65, the insured can use these accumulated funds as retirement income or to offset future health care costs such as long term care. All of the money deposited into a personal HSA is the insured's money. If the insured changes jobs or moves, the HSA account still belongs to him or her.
Contributions are allowed up to 100% of the health plan deductible. The maximum annual contribution is $2,850 for self-only policies and $5,650 for family policies (indexed annually).
A side note: Individuals 55-64 may make additional "catch-up" contributions of up to $800 in 2007, increasing to $1,000 annually in 2009 and thereafter. A married couple can make two catch-up contributions as long as both spouses are at least 55. Catch-up contributions will help individuals accumulate assets for retiree health expenses.
Contributions to HSA accounts may be made by individuals, family members and employers. Contributions made by individuals and family members are tax-deductible (for the account beneficiary) even if the account beneficiary does not itemize. Employer contributions are made on a pre-tax basis and are not taxable to the employee. Employers will be allowed to offer HSA's through cafeteria plans. The investment earnings accrue tax-free.
HSA distributions are tax free if they are used to pay qualified medical expenses. Distributions made for any other purpose are subject to income tax and a 10% penalty. The 10% penalty is waived in the case of death or disability. The 10% penalty is also waived for distributions made by individuals age 65 and older. Upon death, HSA ownership may transfer to the spouse on a tax-free basis.
