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The cost of health insurance in the US is rapidly reaching costs beyond
the grasp of many employers and employees. To offer relief, the federal
government on January 1, 2004, allowed the creation of Health Savings
Accounts, which will give employers and employees the opportunity to make
tax-free contributions to a savings account for medical expenses.
The concept behind the accounts is to create a more consumer-driven health
market for medical expenses. The hope is that as consumers see the real
cost of medical care, they will make more fiscally responsible health
care decisions. Similarly, the lower costs associated with HSA health
plans should make health insurance more available to all.
The following questions and answers provide some basic information about
HSAs:
What Is an HSA?
A health savings account (HSA) is an IRA-style interest-bearing savings
account from which qualified medical expenses may be paid tax-free. Contributions
to HSA accounts are not subject to tax, and investment earnings accrue
tax-free.
An HSA must be accompanied by a qualified health plan with a high
deductible. Such a plan must have a minimum deductible of $1,000 for self-only
coverage or $2,000 for family coverage (indexed annually). The annual
out-of-pocket (including deductibles and co-pays) cannot exceed $5,000
for self-only coverage or $10,000 for family coverage (indexed annually).
In 2005, the minimum deductibles remain the same, but the out-of-pocket
maximum increases to $5,100 for self-coverage and $10,200 for family coverage.
How Does an HSA Work?
High-deductible health plans provide health coverage after a pre-set high
level of deductible has been met. Individuals or families use money saved
in a HSA account to pay out-of-pocket expenses for amounts up to the deductible.
However, plans do allow payments for certain preventative medical expenses
before the deductible has been met, i.e., annual check-ups, immunizations,
gynecological and prostate exams and obesity weight loss programs.
In addition, transition relief covers the months before January 1, 2006,
in the case of an individual who is covered by both a high-deductible
health plan (HDHP) and by a separate plan or rider that provides prescription
drug benefits before the minimum annual deductible of the HDHP is satisfied.
Who Can Have an HSA?
To be eligible for an HSA, an individual must have a high-deductible health
insurance plan, not be enrolled in Medicare, not be covered by other health
insurance and not be claimed as a dependent on another person's tax return
may. Persons enrolled in dental plans, vision plans or other similar non-medical
insurance plans also qualify for an HSA.
Why Have an HSA?
An HSA can be beneficial to employers and employees for several reasons.
First, the high-deductible health insurance plans associated with an
HSA are considerably cheaper than a regular full coverage PPO or HMO policy
because the deductibles attached to such plans are so much higher. Second,
the "qualified medical expenses" that can be paid tax-free from
an HSA are considerably broader than what is covered by most "normal"
health insurance plans. Qualified expenses include things beyond doctors'
visits, such as vision correction, non-prescription drugs and dental treatments.
Who Can Contribute to an HSA?
Employers and employees can contribute to HSA accounts as long as the
account holder meets the requirements for HSA eligibility. If contributions
are made by the employee, it is an "above-the-line" deduction.
If contributions are made by the employer, it is not taxable to the employee
(excluded from income).
HSA contributions must be paid into an account that is maintained by
an IRS approved HSA trustee or custodian. Most insurance companies offering
HSA high-deductible group or individual insurance programs will have a
preferred trustee linked to the plan. However, contributors may use any
trustee provided they are IRS approved.
How Much Can I Contribute to My HSA?
On an annual basis, eligible individuals and families may only contribute
an amount equal to the deductible of their high-deductible insurance plan.
The maximum annual contribution is $2,600 for self-only policies and $5,150
for family policies (indexed annually).
Individuals age 55 to 65 may make additional "catch-up" contributions
of up to $500 in 2004, increasing to $1,000 annually in 2009 and thereafter.
A married couple can make two catch-up contributions as long as both spouses
are at least 55.
For 2005, the maximum annual contribution for an individual with self-only
coverage is $2,650, and the maximum for family coverage is $5,250. Catch-up
contributions for individuals who are 55 or older are increased from $500
to $600 for 2005.
What If I Don't Use All of My Contribution During The Year?
Contributions to HSA accounts roll over year to year. Contributions may
be saved and used tax-free for future long term care insurance.
How Can HSA Distributions Be Used?
The amounts can be distributed for either qualified medical or other expenses.
If the amount distributed is used for qualified medical expenses, then
the distribution is tax-free. If the amount distributed is used for other
than qualified medical expenses, the amount distributed will be taxed
and, for individuals who are not disabled or over age 65, subject to a
10 percent tax penalty.
How Do I Pay HSA Eligible Medical Expenses?
One may pay medical expenses from an HSA account by debit card linked
to the account, check drawn on the account or in cash withdrawn from the
account. Account holders are responsible for recording health expense
payments and reporting them accurately to the IRS. Non-medical expenses
paid from an HSA account are subject to applicable taxes and a 10 percent
penalty.
Is an HSA Available In Missouri?
Yes, many major insurance companies in the state of Missouri now offer
HSA eligible high-deductible insurance plans. Blue Cross and Blue Shield
of Missouri was one of the first in the state to offer such a plan. Their
trustee of choice, Chase Manhattan Bank, offers an HSA account linked
to a debit card for convenience.
How Does an Employer Set Up an HSA?
HSA group plans are available from major insurance companies offering
the high-deductible medical plans linked to HSA accounts. Employers wishing
to set up HSA plans for their employees need only contact their insurance
provider and set up a group HSA plan. Employees may set up their own HSA
account with any IRS approved institution they choose. Contributions to
HSA accounts may be made by direct deposit, check or any other means accepted
by IRS-approved trustee organizations.
What's the Positive Angle for the Small Business Owner?
An HSA program should appeal to the small business community since this
group is at a disadvantage in the health insurance marketplace. An HSA
will be helpful for small business owners, their families and their employees.
The ability for both individuals and employers to contribute to the accounts
provides many options and a great deal of flexibility for a small group
struggling to keep costs reasonable for both parties. Employer contributions
to an employee HSA are not subject to FICA taxes, and individual contributions
can be deducted on their taxes.
This information was compiled and edited by Brennan P. Flanigan, a
student working at the Center for Entrepreneurship & Outreach on the
University of Missouri-Rolla campus.
This article provides general coverage of the subject area. It is
provided to the reader as a resource for a preliminary understanding of
the law involved and is not intended to be legal advice or service.
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