Health Savings Accounts (HSAs) were created by Public Law 108-173, the
"Medicare Prescription Drug, Improvement and Modernization Act of 2003," signed
into law by President Bush on December 8, 2003. Health Savings Accounts will
change the way millions meet their health care needs because they are designed
to help individuals save for qualified medical and retiree health expenses on a
tax-advantaged basis.
Any adult who is covered by a high-deductible health plan (and has no other first-dollar coverage) may establish an HSA. Tax-advantaged contributions can be made in three ways:
- the individual or family can make tax deductible contributions to the HSA even if they do not itemize deductions;
- the individual's employer can make contributions that are not taxed to either the employer or the employee; and,
- employers sponsoring cafeteria plans can allow employees to contribute untaxed salary through salary reduction.
To encourage saving for health expenses after retirement, individuals age 55 and older are allowed to make additional catch-up contributions to their HSAs. Once an individual enrolls in Medicare they are no longer eligible to contribute to their HSA.
Amounts contributed to an HSA belong to the account holder and are completely portable. Funds in the account can grow tax-free through investment earnings, just like an IRA.
Funds distributed from the HSA are not taxed if they are used to pay qualified medical expenses. Unlike amounts in Flexible Spending Arrangements that are forfeited if not used by the end of the year, unused funds remain available for use in later years.
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Features of an HSA include:
- Your own HSA contributions are tax-deductible
- Interest earned on your account is tax-free
- Withdrawals for qualified medical expenses are tax free (consult your tax advisor)
- Unused funds and interest are carried over, without limit, from year to year
- You own the HSA and it is yours to keep - even when you change plans or retire
- Your HSA is administered by a trustee/custodian
Who is Eligible for an HSA?
- Anyone who is not entitled to Medicare can accumulate tax-favored savings for health care needs.
- You must have a qualified high deductible health insurance plan and, no other similar health insurance.
- You obtain coverage under a qualified health insurance plan with a minimum deductible of $1,000 for singles and $2,000 for families. Each year you're allowed to save 100 percent of the health plan's annual deductible, up to $2,650 for singles and $5,250 for families in 2005. Older Americans can save even more! You use the savings account to pay for your lower-dollar medical expenses, or those that aren't covered by the health plan.
For more information, contact us, go to the
U.S. Dept of Treasury web site, or
download the press release issued by the White House.
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