Congress creates new Health Savings Accounts (HSAs) to help
individuals save for qualified medical and retiree health
expenses on a tax-free basis.
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Individuals under the age of 65 are eligible to contribute
to an HSA if they have a qualified health plan. |
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For self-only policies, a qualified health plan must
have a minimum deductible of $1,000 with a $5,000
cap on out-of-pocket expenses (indexed annually).
For family policies, a qualified health plan must
have a minimum deductible of $2,000 with a $10,000
cap on out-of-pocket expenses (indexed annually).
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Contributions are allowed up to 100% of the health
plan deductible. The maximum annual contribution is $2,600
for self-only policies and $5,150 for family policies
(indexed annually). |
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Individuals age 55-65 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. Catch-up contributions will help individuals
accumulate assets for retiree health expenses. |
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Contributions may be made by individuals, family members
and employers. |
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Contributions made by individuals and family members
are tax-deductible (for the account beneficiary) even
if the account beneficiary does not itemize. Employer
contributions are made on a pre-tax basis and are
not taxable to the employee. Employers will be allowed
to offer HSAs through a cafeteria plan.
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Investment earnings accrue tax-free. |
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HSA distributions are tax-free if they are used to
pay for qualified medical expenses, such as: |
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- Amounts paid for the diagnosis, cure, mitigation,
treatment or prevention of disease,
- Prescriptions drugs,
- Qualified long-term care services and long-term
care insurance,
- Continuation coverage required by Federal law (i.e.,
COBRA),
- Health insurance for the unemployed,
- Medicare expenses (but not Medigap), and
- Some qualified retiree health expenses for individuals
age 65 and older.
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Distributions made for any other purpose are subject
to income tax and a 10% penalty. The 10% penalty is waived
in the case of death or disability. Upon death, HSA ownership
may transfer to the spouse on a tax-free basis. |
