White House Press
ReleaseToday's Action
Today, the Bush Administration issued guidance on the new Health
Savings Accounts (HSAs), which were established by the Medicare
Prescription Drug, Improvement, and Modernization Act signed by
President Bush on December 8, 2003.
The new law will create HSAs
effective January 1, 2004. The President promised rapid action to
implement the Medicare Act. The Department of Health and Human Services
issued regulations for the discount drug card within two days of the
bill signing. Today, the Department of the Treasury released guidance
for HSAs. These tax-free accounts are designed to help individuals save
for qualified health expenses that they, their spouse, or their
dependents incur. An individual who is covered by a high deductible
health plan can make a tax-deductible contribution to an HSA, and use it
to pay for out-of-pocket medical expenses. This will help more American
families get the health care they need at a price they can afford.
Background on Health Savings Accounts (HSAs)
The bipartisan Medicare Prescription Drug, Improvement, and
Modernization Act includes a provision for establishing HSAs. HSAs are
tax-free savings accounts that can be used to pay for medical expenses
incurred by individuals, spouses, or dependents. HSAs are open to
individuals covered by a high deductible health insurance plan. The
annual deductible must be at least $1,000 for individual coverage, and
at least $2,000 for family coverage. HSAs are a significant improvement
over previous savings vehicles, which were limited to employees of small
businesses and the self-employed and required health insurance policies
with much higher deductibles. Individuals with existing medical savings
accounts (MSAs) can either retain them or roll the amounts over into a
new HSA. Contributions to HSAs by individuals are deductible, even if
the taxpayer does not itemize. Contributions by an employer are not
included in the individual's taxable income. Individuals, their
employers, or both can contribute tax-deductible funds each year up to
the amount of the policy's annual deductible, subject to a cap of $2,600
for individuals and $5,150 for families. In addition, individuals over
age 55 can make extra contributions to their accounts ($500 in 2004,
increasing to $1000 by 2009) and still enjoy the same tax advantages.
The interest and investment earnings generated by the account are also
not taxable while in the HSA. Amounts distributed are not taxable as
long as they are used to pay for qualified medical expenses. HSA funds
can be used to cover the health insurance deductible and any co-payments
for medical services, prescriptions, or products. In addition, HSA funds
can be used to purchase over-the-counter drugs and long-term care
insurance, and to pay health insurance premiums during any period of
unemployment. Amounts distributed that are not used to pay for qualified
medical expenses will be taxable, plus a 10% penalty to be applied to
deter the use of the HSA for non-medical purposes. HSAs are portable, so
an individual is not dependent on a particular employer to enjoy the
advantages of having an HSA. Like an individual retirement account
(IRA), the HSA is owned by the individual, not the employer. If the
individual changes jobs, the HSA goes with the individual.
