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Congress recently enacted a new tax-exempt Health Savings
Account (HSA) for individuals and families who purchase high
deductible medical insurance plans. HSAs do not require participants
to be employees or self-employed, so they have broader application
than current law Medical Savings Accounts (MSAs), flexible
spending accounts under cafeteria plans (FSAs) or health reimbursement
accounts that don't permit employee salary deferral (HRAs).
Contributions to HSAs are not permitted once an individual
is eligible for Medicare.
A high deductible medical insurance plan has a $1,000 deductible
for individuals with an out-of pocket expense limit that is
not more than $5,000 or a $2,000 deductible for family coverage
with an out-of-pocket expense limit that is not more than
$10,000. The maximum amount that an individual may defer tax-free
is the greater of the high deductible amount or the maximum
deductible under a MSA. For 2004 the "greater" amount
is the MSA maximum deductible amount of $2,600 for self-only
coverage or $5,150 for family coverage.
Employers may make excludable HSA contributions for their
employees, the IRS is considering whether the rules governing
employer-sponsored HSAs will follow the cafeteria plan rules
or 401(k) rules.
Not only are contributions to HSAs deductible, distributions
are excluded from taxable income if they are used to pay for
"qualified medical expenses". Qualified medical
expenses include: medical expenses deductible under Code Sec.
213; long-term care insurance premiums; COBRA insurance premiums;
and insurance premiums for recipients of federal or state
unemployment compensation insurance; Medicare Part A or B
insurance premiums; Medicare HMO insurance premiums; and retired
worker insurance for the "employee" share of the
premium.
Non-qualified distributions are subject to a 10% penalty
tax. Individuals who attain the age of 55 during the year
are entitled to make $500 annual catch up contributions increasing
to $1,000 in 2009.
HSAs do not have the "use it, or lose it" feature
that makes FSA medical reimbursement accounts frustrating.
Any unused amounts from the prior year HSA are rolled over
to the current year account to determine the maximum current
year contribution.
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