Is this the answer to the health care dilemma?
Health Savings Accounts (HSAs) are a new mechanism available to consumers for planning and paying for medical and other health-related expenses. On December 8, 2003, President Bush approved Medicare legislation, which also contained provisions to establish HSAs. They were modeled after Medical Savings Accounts (MSAs), which were created in 1996 and sold only to self-employed individuals. With the introduction of HSAs at the beginning of this year, sales of the MSAs ceased, and existing plans are being converted to the newer HSAs.
The features of the HSAs are very similar to the original MSAs, but there are some enhancements that will benefit many more people – not just businesses and self-employed workers.
- Anyone enrolled in a qualified high-deductible health plan is eligible for an HSA; only self-employed persons or employees of a small business, coupled with a high-deductible plan, were eligible for the MSA.
- Both employers and employees can contribute to an HSA; only the employer or employee (not both) could contribute to an MSA.
- The full amount of the deductible can be contributed annually to the HSA; only 65% of the individual deductible or 75% of the family deductible could be contributed to an MSA.
What is a Health Savings Account?
It's an account into which money is deposited by an individual to pay for future qualified medical expenses. An HSA has to be used in conjunction with a high deductible health plan. The tax advantages are "twice as nice" because
(1) the account accumulates money and earns tax-deferred interest, and money taken out of the account to pay for eligible medical expenses is never taxed; and
(2) contributions to the HSA are deductible from taxable income.
What is a high deductible health plan?
A high deductible health plan is typically a major medical plan that does not cover first dollar medical expenses. Here are some rules:
- An individual must have an annual deductible of at least $1,000 and an annual out-of-pocket expense limit of no more than $5,000.
- A family plan must have an annual deductible of at least $2,000 and an annual out-of-pocket expense limit of no more than $10,000.
- These amounts are expected to change nearly every year because they are indexed for inflation.
insured, as well as any other family member on the same policy, is responsible for paying all medical expenses each year up to the amount of the deductible before their insurance plan begins to pay for any medical services. The purpose of the Health Savings Account is to provide the funds to cover these expenses that are paid by the individual.
What is a qualified medical expense?
Qualified medical expenses are typically those that are covered by more traditional health plans, but also include most nonprescription drugs, dental and vision expenses. Qualified medical expenses are described in detail in section 213(d) of the legislation. Premiums for qualified long-term care insurance are considered qualified medical expenses, but premiums for Medicare Supplement policiesdo not constitute qualified medical expenses.
Will the high deductible health plans associated with HSAs be underwritten in the same manner as low deductible health plans? Will they be underwritten in the same manner as high deductible health plans not associated with HSAs?
Yes. The same underwriting rules and guidelines will apply to high deductible health plans associated with HSAs as apply to low deductible health plans. And the rules and guidelines for underwriting high deductible health plans not associated with HSAs will apply to high deductible health plans that are associated with HSAs.
Who is eligible for a Health Savings Account?
Anyone who is covered by a high-deductible plan, is not also covered by a health plan that is not a qualified high-deductible plan, is not entitled to Medicare benefits, and is not claimed as a dependent on someone's tax return.
Employers can establish HSAs for eligible employees, and there is no employer size limit.
What are the contribution rules?
Any person for whom the account is established can contribute annually to the HSA up to the total amount of the policy's deductible. In an employer group HSA, both the employer and employee can contribute - but the combination of both annual contributions cannot exceed the deductible amount.
It's important to note that if no money is used from the account by the insured in a given year, the next year's contribution amount is not reduced. Furthermore, unused money in the account remains in the account from year to year and continues to earn tax-deferred interest. The interest is tax-free as long as withdrawals from the account are used to pay for qualified medical expenses.
Annual contributions can be made in one lump sum, semi-annually, monthly, or on any schedule approved by the HSA custodian. The deadline for contributions is generally April 15, a date familiar to us all. Contributions made between January 1 and April 15 can be designated as being made in for the previous tax year as long as those contributions don't exceed the previous year's deducible.
If excess contributions are made, this can cause problems. The excess amount is not deductible, employer contributions above the maximum are included in the employee's gross income, and an excise tax of 6% of the excess contribution is imposed on the account owner.
What are the rules for taking money out of a Health Savings Account?
Money typically will be withdrawn from the account with a checkbook, debit card or credit card made available to the account holder by the account custodian (usually a bank designated by the health insurance carrier).
Money withdrawn to pay for qualified medical expenses is not taxed. This rule extends to individuals who are no longer eligible to have an HSA but have accumulated money in an HSA when they were eligible. Examples of this scenario include an individual who owned an HSA but turned age 65 and became eligible for Medicare parts A and B - at which time the individual ceases to be eligible for a high deductible health plan. The accumulated funds can still be used tax-free if spent on eligible medical expenses.
Any money withdrawn that is not used for eligible medical expenses will be considered income of the account owner and will be subject to a 10% excise penalty in addition to income tax owed. The 10% penalty is not imposed if the account owner is disabled or has reached age 65.
If the account owner dies, any balance in the HSA is the property of the designated beneficiary. If the beneficiary is the spouse of the account holder, the money can be used tax-free if spent on eligible medical expenses.
What are the advantages of a Health Savings Account?
Key advantages of a Health Savings Account:
- You make many more health care decisions. In most cases, there is no network of doctors or hospitals that you must use, and there is no need for pre-certification or pre-authorization of health care services.
- The plan makes you independent of an employer - you can take the plan with you wherever your career takes you. Even with an employer-sponsored plan, the HSA belongs to you, and you take it with you upon termination.
- The tax savings are very attractive. The contributions are deductible from your gross income, and interest earned on the account is tax-free if withdrawals are used to pay for eligible medical expenses.
- Unlike flex-pay Section 125 plans, any account balance at the end of the year is not lost - it stays in the account until you decide to use it.
To learn more about opting for a Health Savings Account, ask your local Indiana Farm Bureau Insurance agent for details.