Reading Room

HEALTH SAVINGS ACCOUNT PRIMER

by Jeff Storch
Boardman Law Firm

The 2003 Medicare law created Health Savings Accounts (HSAs). Claimed benefits include better consumer health care choices, reduced employer benefits costs, and more people covered by health insurance. Regardless of whether these occur, HSAs have caught the interest of many. Employees are asking about them, insurers are promoting HSA-compatible products, and the IRS and DOL have been issuing HSA guidance regularly. The following primer on some HSA basics under current federal law (state law may vary) may help you evaluate whether HSAs are right for you or your organization.

HSA Overview

• An HSA is a tax-advantaged savings account established to pay qualified medical expenses.
• Like an IRA, contributions are tax-deductible and earnings are not taxed before distribution.
• Once an HSA is set up, distributions may be made at any time for any purpose.
  • If used to pay qualified medical expenses, there is no tax on distributions.
  • If used for other purposes, regular income tax is imposed. There is an additional ten percent tax if the distribution is made before the HSA holder is age 65, becomes disabled, or dies.

Eligibility

• To establish or have contributions made to HSAs, individuals:
  • Must be covered by a High Deductible Health Plan (HDHP); and
  • Must not be covered by any other health plan (with certain exceptions), entitled to Medicare, or a dependent.

High Deductible Health Plan Requirements

• HDHPs must have an annual deductible of at least $1000* for single coverage, $2000* for family.
• Maximum annual out of pocket expense cannot exceed $5000* single/$10,000* family (*indexed for inflation).

Contributing to a HSA

• HSA contributions may be made by eligible individuals, their family members or their employers.
• Maximum annual contribution is based on the deductible (for example, a $1500 deductible single coverage HDHP would allow a $1500 HSA contribution for an individual eligible the entire year).
• Additional "catch-up" contributions are permitted for those between ages 55 and 65.

Other Features

• Portability: HSAs belong to the individual and may be rolled over to another HSA (similar to IRAs).
• Additional employer savings: Employees may make pre-tax HSA contributions through a cafeteria (flex) plan, saving both the employer and employee payroll taxes on such contributions.
• Another retirement savings vehicle? HSA funds are treated similarly to IRAs once reaching age 65 and so there may be opportunities to use HSAs to fund retirement or do estate planning. However, further IRS guidance in this area may clarify to what extent this is permissible.

HSAs may be especially attractive to mid-sized and small employers, the self-employed, and those wanting to increase overall savings and willing to accept a higher deductible. However, before implementing an HSA and related HDHP, you should consult with a qualified benefits attorney about details not addressed above and to evaluate potential savings.

Jeffrey J. Storch is an associate in the business, tax and employee benefit groups at Boardman Law Firm and works with employers, insurers and administrators in implementing and maintaining all types of benefit plans. Questions are welcome at jstorch@boardmanlawfirm.com.

June 2004