Health Savings Accounts (HSA)

What are Health Savings Accounts?
Health Savings Accounts (HSAs) are accounts to which individuals, family members, and employers can make tax-deductible cash contributions. These funds can then be used to reimburse the individual (tax-free) for qualifying medical expenses. They are exclusively for the purpose of paying qualified medical expenses of the account beneficiary. These new tax favored accounts were created by the Medicare Prescription Drug Improvement and Modernization Act of 2003.

Who can set up a Health Savings Account?
Any individual covered under a qualified "high deductible" health plan (and not covered by certain other health plans, such as that of a spouse's employer) may establish an HSA. Also, only individuals who are not yet eligible for Medicare can qualify to contribute to a Health Savings Account.

What is a qualified high deductible health plan?
A health plan will qualify as a high deductible health plan (HDHP) if it has an annual deductible of at least $1,000 for an individual's (self) coverage and at least $2,000 for family coverage. Low-deductible coverage for accidents, disability, dental care, vision care, or long-term care is permissible in a HDHP. A HDHP may also include a preventive care benefit. A HDHP must have a maximum annual out-of-pocket expense limit of $5,000 for self-only coverage and $10,000 for family coverage. Different states may have variances on these requirements. Check with your State Department of Insurance for more details.

How do HSAs work?
Funds contributed to a Health Savings Account belong to the account beneficiary and are completely portable. Money can accumulate in the account with tax-free earnings every year. Unused amounts remain available in later years. Tax-advantaged contributions can be made by the individual and family members. An individual's employer can make contributions, and neither the employer nor the employee will be taxed. Employers with "cafeteria plans" can allow employees to contribute untaxed salary through a salary reduction plan. Qualified medical expenses include payments for the diagnosis, cure, mitigation, treatment or prevention of disease, including prescription and over-the-counter drugs. (Qualified medical expenses are defined in Internal Revenue Code Section 214.) HSAs are usually administered by a financial institution of a life insurance company. Because HSAs were established under federal law, the Office of the Insurance Commissioner does not have authority over laws pertaining to HSA administrators. The rules that apply to Health Savings Accounts are similar to those that apply to Individual Retirement Accounts and Medical Savings Accounts.

For more information on Health Savings Accounts, contact your financial consultant or visit the US Department of Treasury's web site at: http://www.treas.gov/press/releases/reports/1061hsafactsheet.pdf

Detailed questions and answers also may be found on the IRS web site at: http://www.irs.gov/pub/irs-drop/n-04-2.pdf