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Medicare Legislation includes
new Health Savings Accounts
December 6, 2003


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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