Described as "IRAs for health care," the new Health Savings Accounts (HSAs) should be a great option for many. HSAs are made available through the Medicare Modernization Act (MMA) signed into law December 8, 2003. Although this bill appears to be a Medicare bill, those with Medicare aren't eligible to participate in an HSA.
HSAs are tax-advantaged accounts created for the sole purpose of paying for the qualified expenses of the account beneficiary. HSAs may be sponsored by a bank, an insurance company, or another institution deemed appropriate. Funds contributed to an HSA may accrue with interest-tax free-and unused balances may be carried over.
To participate in an HSA, individuals must be covered by a qualified high-deductible health insurance plan. Self-only coverage has deductibles ranging from $1,000 to $5,000; family coverage has deductibles from $2,000 to $10,000. Annual out-of-pocket maximums are $5,000 for self-only coverage and $10,000 for family coverage. The deductibles and out-of-pocket maximums are indexed for inflation beginning in 2004.
Contributions to an HSA may be made by the account beneficiary or the account beneficiary's employer. Contributions made to an HSA may not exceed the lesser of: the annual deductible for the high-deductible insurance plan or $2,250 for self-only and $4,500 for family. Contributions that exceed the annual limit are permitted for individuals age 55 and older. These additional contribution amounts would phase in gradually, reaching $1,000 per year in 2009 and after. Contribution limits are indexed to the consumer price index beginning in 2004.
Employee contributions to an HSA are excluded from gross income, and employer contributions to an employee's HSA are treated as employer-provided coverage and aren't subject to income or employment taxes-subject to maximum contribution limits. Funds from an HSA used to reimburse qualified medical expenses of the account holder aren't included in gross income. Amounts distributed from an HSA to reimburse non-qualified expenses are included in gross income and are subject to an additional 10 percent tax penalty.
HSA funds may be used to pay for health care costs of the individual, their spouse, and/or qualified dependents. Approved health care costs include: qualified medical expenses permitted under section 213 of the Internal Revenue Code, qualified long-term care insurance, COBRA continuation coverage, health insurance if the individual is receiving unemployment compensation, and any health insurance-excluding a Medicare supplement policy-for individuals 65 or older.
Many financial institutions are beginning to advertise HSA availability. The high-deductible health insurance plans you're required to participate in aren't clearly defined yet. Insurance companies are investigating the legislative requirements to be considered a high-deductible health plan, as it applies to HSAs, and are anticipating better direction to apply regulations by this summer. The HSA and high-deductible health plan options should be available to you locally by this fall. IBI