Health Savings Accounts Debut in 2004
Last year's passage of the Medicare Prescription Drug and Modernization Act was - along with the tax relief and job creation bill passed earlier the year - one of 2003's most high-profile domestic policy initiatives spearheaded by President Bush and Congress. Throughout the coming year, seniors will learn more about the new prescription drug benefits under Medicare, beginning with the establishment of a short-term drug discount card in mid-2004. 2004 also will be marked by the debut of another "new era" in health care made possible by the Medicare reform bill - only this one is not geared specifically toward Medicare beneficiaries, but instead to millions of working Americans not yet eligible for Medicare.
Health Savings Accounts - or HSAs - are available beginning in 2004 and will give families across the nation a new way to save for their lifetime health care needs. To qualify, a person must be under the age of 65 and covered only by a high-deductible health insurance policy: one with annual out-of-pocket costs of at least $1,000 for an individual or $2,000 for a family. About 40 million Americans are expected to be eligible for HSAs right away, and by 2013, estimates indicate as many of 50 percent of those with health insurance will open an account.
What makes these accounts unique is that they are completely tax-free. That means contributions to them are tax-deductible, interest earned within each account is tax-free, and withdrawals are not taxed if they are used to pay for qualified medical expenses. While other tax-advantaged savings plans such as Roth IRAs and 401(k)s offer either a federal tax deduction for deposits or tax-free withdrawals, none offers both. That is, until now: Health Savings Accounts do.
The maximum annual contribution to an HSA can be as high as your deductible, up to $2,600 for individual policies and $5,150 for family policies. Contributions can be made by anyone: an individual, an employer, or a family member. And those between the ages of 55 and 64 will be able to make additional "catch-up" contributions ($500 extra in 2004 and amounts yet to be decided for later years).
Withdrawals from HSAs can be used for medical expenses not covered by your insurance policy, including: insurance premiums, prescription drug costs, long-term care insurance, Medicare expenses, and even dental and orthodontic care. If money is withdrawn for non-medical expenses, however, the withdrawal is subject to income tax and a 10 percent penalty.
A Health Savings Account stays with a person for a lifetime. And as assets build in HSAs, they are yours; they can be carried from job to job and into retirement. Upon death, these assets can be transferred tax-free to a spouse, who also would be able to use the money for similar out-of-pocket medical expenses. Another perk of HSAs is that - unlike the "flexible savings accounts" that are currently offered by some employers - unused money in Health Savings Accounts will not be forfeited at the end of the year. Instead, the money can be rolled over year to year, making them even more attractive working families.
For those interested in contributing to Health Savings Accounts, be patient and shop around. Within the next several months, health insurance companies and even financial institutions likely will establish funds available to both individuals and families. Many employers may opt to do the same for their employees. But as 2004 wears on, it will be clear to millions of Americans eligible for HSAs that the Medicare law enacted in 2003 is not just for senior citizens. It offers innovative solutions to enhance access to medical care and allow more Americans to control their own health care dollars.