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Health Saving Accounts
Section 1202 of the recently enacted Medicare, Prescription Drug, Improvement and Modernization Act provides for the establishment of Health Savings Accounts. These accounts are designed to help individuals pay for qualified medical expenses and retiree health costs on a tax free basis.
A Health Savings Account (HSA) can be established by an individual who has a High Deductible Health Plan (HDHP). An HDHP is defined as a plan with an individual deductible of $1000 and a family deduction of $2000. Out-of-pocket expenses must be no more than $5,000 for an individual and $10,000 for a family, with these amounts being adjusted annually for inflation. Preventative services can be provided as first dollar coverage. An individual can not be covered by a non-HDHP medical plan except in limited circumstances (e.g. a non-HDHP offering dental or vision coverage).
An individual can contribute up to 100% of the deductible to a maximum of $2,600 for an individual and $5,150 for a family. Those individuals between the ages of 55 and 65 are permitted additional catch up contributions which total $500 for 2004 increasing to $1,000 in 2009. Employer can contribute to such accounts within the guidelines established and employer contributions are not included in the employee income.
These contributions can be used to pay for qualified medical expenses (Section 213(d) expenses with the exception of health insurance premiums), long term care insurance, COBRA coverage, health insurance for those on unemployment compensation and retiree health insurance other than a Medicare Supplemental policy. Moneys not spent are carried from year to year and the coverage is portable.
Moneys withdrawn for non-medical reasons will be included in an individual's gross income and a 10% penalty will apply except in case of death, disability or attainment of age 65. The account can be transferred tax free in case of a divorce. In case of the death of the individual, where the spouse is the beneficiary, there is no taxable event. If however the beneficiary is not the spouse taxes would apply.
This coverage can be offered under a cafeteria plan, though questions remain as to what additional rules if any will apply in such a situation. The IRS has indicated it will come out with additional guidance regarding HSA's in the summer of 2004.