Savings Accounts (HSAs)
An HSA is a
tax-exempt trust or custodial account similar to an IRA. It
allows both employers and employees to make deductible cash
contributions on behalf of "eligible individuals." Any HSA
withdrawals used to pay medical expenses that are not deducted for
income tax purposes are excluded from the account beneficiary’s
income. These expenses include, in addition to medical
expenses typically covered by group health plans, the cost of
over-the-counter drugs, vision and dental care (including laser eye
surgery and orthodontia) and long-term care insurance premiums.
For HSA account beneficiaries who attain age 65, funds can be
withdrawn for any non-medical purposes without payment of the 10
percent excise tax that otherwise applies to such withdrawals.
HSAs can be used to
pay medical expenses of family members, including spouses who
themselves are not eligible to set up an HSA, so long as such
expenses are not also reimbursed by another health plan.
Medical expenses incurred after the establishment of the HSA can be
reimbursed years later from the HSA so long as adequate records are
maintained by the account beneficiary. Unlike an IRA, an HSA
is not required to make distributions at any particular time and HSA
balances can be retained indefinitely. Consequently, some
observers regard HSAs as attractive retirement savings vehicles.
eligible to set up an HSA are those who:
are covered by a high deductible health plan (HDHP);
are not covered by any other plan providing general health coverage
(this includes coverage under a spouse’s group health plan, FSA or
health reimbursement account);
are not enrolled in Medicare (i.e., those who have attained age 65
and have elected such coverage); and
are not claimed as a dependent on another person’s tax return.
An HDHP is a health
plan with a minimum annual deductible of $1,000 for individuals (and
an out-of-pocket expense limit of not more than $5,000) and $2,000
for family coverage (with an out-of-pocket expense limit of not more
than $10,000). With the exception of certain "preventive
care" benefits, an HDHP may not provide benefits until the
deductible for the year is met. This means that after a
transition period, separate reduced deductibles for emergency room
treatment and general drug coverage cannot be maintained in an HDHP.
from all sources are limited during any year to an amount equal to
the applicable deductible up to $2,600 for single coverage and
$5,150 for families (these figures are indexed and increase with
increases in the cost of living). Individuals who have
attained age 55 by the end of the year can contribute an additional
$500 per year with respect to 2004 and increasing amounts in later
years. The eligible employee is entitled to an income tax
deduction for contributions within the foregoing limits that are
made to the employee’s HSA by the employee and family members.
The deduction is "above the line" and can be taken regardless of
whether or not the individual itemizes deductible expenses.
An HSA is intended
to cut monthly premium expense through the HDHP and to allow tax
benefits through the payment of medical expenses from the HSA with
pre-tax dollars. Some employers will contribute a portion of
their premium savings to employee HSAs, giving them additional
pre-tax dollars to use to pay medical expenses. By giving each
employee a stake in medical expenditures starting with the first
dollar of such expense, HSA participation can help control overall
health care costs. If employees spend less on medical care for
this reason, the HDHP claims experience will be favorable and the
rate of health insurance premium increases could be reduced.
HSAs are not for everyone. Consider offering an HDHP to
employees as an option to an existing PPO or other group plan.
Eligible employees who are interested can then choose to participate
in an HSA. However, it probably makes sense to wait until 2005
to set up an HDHP. Even the largest insurance companies have
not worked out all the details in their HSA programs, and it may
take time to do so. Further, getting into an HSA now will
offer limited opportunities for participants to realize medical cost
savings through the end of the calendar year, but will still expose
participants to significantly higher deductibles under the related
HDHP. Employers and HR professionals should also consider the
significant challenge of analyzing the details of an HDHP-HSA
program and effectively communicating those details to
employees in a timely fashion.
Dated: November 30,
Golan & Christie LLP
70 West Madison St.
Chicago, Illinois 60602