HSA - Health Savings Accounts

Health Savings Accounts (HSAs) are tax-favored IRA-type trust accounts that "eligible individuals" covered by certain high-deductible health plans (HDHP) can establish to pay for certain medical expenses of the eligible individuals and their spouses and/or tax dependents. HSAs first became available on January 1, 2004 after being created by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The statutory rules governing HSAs are found primarily in Code 223. Unlike HRAs and Archer MSAs that came before, HSAs can even be funded on a pre-tax basis through a cafeteria plan.

A health savings account is a good deal, and all American should consider it. Every year, the money not spent would stay in the account and gain interest tax-free, just like an IRA. And people will have an incentive to live more healthy lifestyles because they want to see their savings account grow. These accounts will be good for small business owners and employees. More businesses can focus on covering workers for major medical problems, such as hospitalization for an injury or illness. And at the same time, employees and their families will use these accounts to cover doctors' visits or lab test or other smaller costs. Some employees will contribute to employee health accounts. This will help more American families get the healthcare they need at the price they can afford.

Exactly how popular HSAs will become and what their effect on health costs will be is not yet known. A recent survey of HMOs and PPOs has indicated that there will be a significant increase in the supply of consumer-driven healthcare products available in 2005, including HDHPs with integrated HSAs. On the "demand" side of the equation, one recent study indicates that up to 60% of large employers may offer HSAs in the workplace in the near future. And the Federal Office of Personnel Management (OPM) has announced that HDHPs and HSAs will be among the choices offered in 2005 under the Federal Employees Health Benefits Program.

The HSA Tax Break

Treasury officials, in informal comments, have referred to the HSA as a "super-charged vehicle." And in fact, the three-tiered tax savings (tax-free contributions, growth, and distributions) are hard to beat. What's more, an HSA can benefit anyone who currently pays taxes, and it can be established with or without employer involvement.

An individual with HDHP coverage can make contributions (subject to statutory limits) and get an "above-the-line" tax deduction, which means that the contributions reduce the individual's adjusted gross income before any itemized or standard deductions are considered. Investment earnings on HSA funds generally are tax-free. Ultimately, HSA funds can escape taxation entirely if they are withdrawn for qualified medical expenses.

An employer that contributes to an HSA and/or that offers an HSA under a cafeteria plan gets a deduction for those contributions. Employer contributions are treated as employer-provided coverage for medical expenses under an accident or health plan, are excludable from an employee's gross wages, and are exempt from FICA, FUTA, and Railroad Retirement Act (RRTA) withholding, if the employer reasonably believes that the contributions will be excludable.

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