Health Savings Accounts

Health savings accounts (HSAs) were introduced in 2004 as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. They are tax free medical savings accounts and must be used in conjunction with High Deductible Health Plans (HDHP). Important aspect of HSAs are, but not limited to: contributions, deductions, custodians, taxes, and retirement.

Contributions

The maximum contributions change on a yearly basis. As of 2007 the maximum contributions for individuals is $2,850 and $5,650 for families. Contributions can be made in lump sums, varied amounts and different frequencies. Contributions can be made by both employee and employer and the difference to meet the maximum can be made up by either party. An employee can take their HSA to a new job, unlike a Health Reimbursement Account (HRA). HRAs are funded solely by an employer and therefore not portable.

Deductibles

The minimum deductibles are $1,100 for individuals and $2,200 for families. Out of pocket expense limits including deductibles, and amounts other than premiums are $5,500 for individuals and $11,000 for families. Individuals pay for their health care out of their HSA until they have met their deductible. Then, the high-deductible health plan takes over.

Custodians

Those who administer the account (Guardians or Custodians) are anyone who is authorized to administer an Individual Retirement Arrangements (IRA). Examples: banks, credit unions, or insurer. Any entity already approved by the IRS to be an Archer MSA Trustee or custodian is automatically approved to be an HSA custodian. HSA custodians are required to report all distributions to the IRS. Each employee receives a copy and it is up to them to be honest about reporting which withdrawals are qualified medical expenses.

Taxes

During tax time your contribution is deducted directly from your gross income. An itemized report is not required. The amount of the deduction should (ideally) match the limit of the allowable deduction of the insurance plan. Like a 401(K), you can contribute until April 15th of the following year. Be aware that contributing too much can also result in a penalty.

Before and After Retirement

Those under 65 can withdraw money for non-health-expenses, but would be subject to income taxes plus a 10-percent penalty on the amount withdrawn. At 65 the individual can withdraw any dollars not used, although it will then be subject to income taxes.

Considerations

It is advisable to research the benefits and limitations a HSA can make to individuals and/or families, employee and employer. HSAs are not for everyone and it is best to know if you are an ideal candidate for a different type of health care.

Information for this article was taken from the MGMA conference in Philadelphia during Susan Child's October 29th, 2007 presentation, "Consumer Driven Healthcare And Impact On Practices".