>Any individual who is covered by a high-deductible health plan may establish an HSA. Amounts contributed to an HSA belong to the individual and are completely portable. Every year the money not spent stays in the account and gains interest tax-free, just like an IRA. Unused amounts remain available for later years (unlike Flexible Spending Arrangements where unused balances are forfeited if not used by the end of he year).
“Starting January 1, 2004, new innovative Health Savings Accounts will change the way millions can save to meet their health-care needs,” said Treasury Secretary John Snow, in a statement. “We want Americans to be able to take advantage of HSAs as soon as possible. An HSA is a good deal, and all Americans should consider it. HSAs will help consumers have more choice in meeting their health-care needs, and we are acting today to clear the way.”
>According to the Treasury/IRS guidance, tax-advantaged contributions can be made in three ways:
- the individual and family members can make tax-deductible contributions to the HSA even if the individual does not itemize deductions
- the individual’s employer can make contributions that are not taxed to either the employer or the employee
- employers with cafeteria plans can allow employees to contribute untaxed salary through a salary reduction plan.
>Funds distributed from the HSA are not taxed if they are used to pay qualifying medical expenses. To encourage saving for health expenses after retirement, HSA owners between age 55 and 65 are allowed to make additional catch-up contributions ($500 in 2004) to their HSAs.
>According to the latest guidance, HSAs are more flexible and are available to many more individuals than Archer MSAs. The minimum required deductible of the high-deductible plan is lower, both employees and employers can contribute, and the maximum contribution is now the full amount of the deductible. Employees of large companies are now eligible. Individuals with existing MSAs can either retain them or roll the amounts over into a new HSA.
HSA Law Clarifications
>In addition to the basic information about HSAs, the guidance provides the following clarifications:
- Employer contributions to employee HSAs are not subject to FICA taxes.
- An HSA is allowed for employees covered by an employer self-insured medical reimbursement plan with a qualifying high-deductible.
- Like MSAs, trustees or custodians are not required to determine withdrawals are used for medical expenses.
- Special rules are provided for determining the deductible for high-deductible family coverage.
- Like MSAs, in addition to banks and insurance companies, persons may be approved as HSA custodians under the IRA nonbank trustee rules and existing IRA or Archer MSA trustees or custodians are automatically approved.
- While an HSA trustee or custodian that does not sponsor the high-deductible health plan may request proof or certification that someone is eligible to contribute to the HSA, it is not required.
- Otherwise eligible individuals without earnings may contribute to an HSA – including self-employed and unemployed.
>The Treasury Department and the IRS said they will put out more guidance in the summer of 2004. To that end, Monday’s Notice requests comments concerning HSAs, including:
- What kinds of preventive care can be offered without a deductible in a high-deductible health plan?
- What is the relationship of HSAs to Flexible Spending Arrangements and Health Reimbursement Arrangements?
- Are high-deductible plans used in conjunction with an HSA allowed to impose a lifetime limit on benefits?
>HSAs were created by the Medicare bill signed by President Bush on December 8 and are designed to help individuals save for qualified medical and retiree health expenses on a tax-free basis. For more information, go to http://www.treas.gov/press/releases/js1061.htm .
>IRS Notice 2004-2 is online at http://www.irs.gov/pub/irs-drop/n-04-2.pdf