About Health Savings Accounts
The federal government passed the Medicare Prescription Drug, Improvement, and Modernization Act in 2005, which included a provision for establishing HSAs. HSAs are tax-free savings accounts that can be used to pay for medical expenses incurred by individuals, spouses, or dependents.
HSAs are open to individuals covered by high deductible health insurance plans. The annual deductible must be at least $1,000 for individual coverage, and at least $2,000 for family coverage. HSAs are a significant improvement over previous savings vehicles, which were limited to employees of small businesses and the self-employed and required health insurance policies with much higher deductibles.
People with existing medical savings accounts (MSAs) can either retain them or roll the amounts over into a new HSA.
Some employers sponsor HSAs as part of their benefit plans. And some employers even match employee contributions to the HSA. There is no requirement that the employer do so, but the government's General Accountability Office estimates that over 50% of employers who offer HSA-eligible plans do contribute. The contribution limits are the same regardless of whether the employer or the employee funds the plan. The Wall St. Journal reports that an industry survey showed employees are much more likely to open HSAs if their employer contributes.
Contributions to HSAs by individuals are deductible, even if the taxpayer does not itemize. Contributions by an employer are not included in the individual's taxable income. Individuals, their employers, or both can contribute tax-deductible funds each year up to the amount of the policy's annual deductible, subject to a cap of $2,600 for individuals and $5,150 for families. In addition, individuals over age 55 can make extra contributions to their accounts and still enjoy the same tax advantages.
The interest and investment earnings generated by the account are also not taxable while in the HSA.
Amounts distributed are not taxable as long as they are used to pay for qualified medical expenses. HSA funds can be used to cover the health insurance deductible and any co-payments for medical services, prescriptions, or products. In addition, HSA funds can be used to purchase over-the-counter drugs and long-term care insurance, and to pay health insurance premiums during any period of unemployment.
Amounts distributed that are not used to pay for qualified medical expenses will be taxable, plus a 10% penalty to be applied to deter the use of the HSA for non-medical purposes.
The Employee Benefit Research Institute found in a 2008 survey that Americans have become more worried about retirement in recent years, espcially with the cost of health care rising.
One of the great things about HSAs is that they are "portable";
people takes their HSAs with them when they leave their jobs. Most people
have health insurance through their jobs, so a change in jobs means a change
in insurance. HSAs are somewhat like individual retirement accounts (IRAs)
in that they are owned by the individual, not the employer.
The New York Times reports that the consulting firm DiamondCluster estimatest that by 2010, more than 15 million Americans will have a health savings account.
Iowa State Extension article on Health Savings Accounts
When the person with the HSA dies, the HSA goes to the surviving spouse if the spouse was named as a beneficiary. If there is no named beneficiary the money goes to the estate and can be considered income for tax reasons in that year.
