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Health savings account

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A Health Savings Account (HSA) is a tax-advantaged savings account available to taxpayers in the United States who are enrolled in a High Deductible Health Plan (HDHP). The funds contributed to the account are not subject to income tax, but can only be used to pay for qualified health expenses. HSAs were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act which was signed into law by President Bush on December 8, 2003. These accounts are a component of Consumer Driven Health Plans.

Deposits

Deposits to an HSA may be made by any policyholder of a Qualified High Deductible Health Plan (HDHP), or by an employer on behalf of a policyholder. If an employer makes deposits to an HDHP on behalf of its employees, non-discrimination rules apply — that is, all employees must be treated equally. The only exceptions to the non-discrimination rules are that employers may treat full-time and part-time employees differently, and employers may treat individual and family participants differently. (The treatment of employees who are not enrolled in a HDHP is not considered for non-discrimination purposes.) Also, for 2007, employers my contribute more for non-highly compensated employees than highly compensated employees.

The deposits may be made on a pre-tax basis through an employer if the employer's fringe benefits plan permits such deposits under its setup. If this option is not available through the employer, contributions may be made on a post-tax basis and then used to decrease taxable income on the following year's Form 1040. Regardless of the method or tax savings associated with the deposit, the deposits may only be made for persons covered under a HDHP, with no other coverage beyond certain qualified additional coverage.

Previously, the annual maximum deposit to an HSA was the lesser of the HDHP deductible or specified IRS limits. As of 2007 plan years, Congress has abolished the lower limit based on the deductible, and the maximum contribution will simply be the statutory limit. In 2006, the IRS statutory limits are $2,700 for individual plans and $5,450 for family plans.[1] The 2007 statutory limits are $2,850 individual and $5,650 family. All contributions to an HSA, regardless of source, count toward the annual maximum.

For plan years starting prior to 2007, if a person is a participant in an HDHP for less than an entire year, the maximum deposit is prorated based on the number of months the person is enrolled in the HDHP. As of 2007, this provision has been abolished. A catch-up provision also applies for HDHP participants who are age 55 or over, allowing the IRS limit to be increased. In 2006, the maximum catch-up amount is $700 (catch-up amounts are also prorated for partial-year participants).[1]

All deposits to an HSA become the property of the policyholder, regardless of the source of the deposit. Funds deposited but not withdrawn each year will carry over into the next year. If the policyholder ends participation in the HDHP, he or she loses eligibility to deposit further funds, but funds already in the HSA remain available for use.

The Tax Relief and Health Care Act of 2006 signed into law on December 20, 2006 added a provision allowing a one time rollover of IRA assets to be used to fund up to one year's maximum HSA contribution.

Investments

Funds in an HSA can be invested in a manner similar to investments in an Individual Retirement Account (IRA). Investment earnings are sheltered from taxation until the money is withdrawn (and can be sheltered even then, as discussed in the section below).

While HSAs can be "rolled over" from fund to fund, an HSA cannot be rolled into an IRA or a 401(k), and funds from these types of investment vehicles cannot be rolled into an HSA, except for the one time IRA rollover allowed above. Unlike some employer contributions to a 401(k) plan, all HSA contributions belong to the participant immediately, regardless of the deposit source. A person contributing to an HSA is under no obligation to contribute to his or her employer-sponsored HSA, although employers may require that payroll contributions be made only to the sponsored HSA plan.

Withdrawals

HSA participants do not have to obtain advance approval from their HSA trustee or their medical insurer in order to withdraw funds, and the funds are not subject to income taxation if made for qualified medical expenses. These include deductibles and coinsurance as well as many other expenses not covered under medical plans, such as dental, vision and chiropractic care; durable medical equipment such as eyeglasses and hearing aids; purchase and use of qualifying over-the-counter medications; and transportation expenses related to medical care.

There are several ways that funds in an HSA can be withdrawn. Some HSAs include a debit card, some supply checks for account holder use, and some allow for a reimbursement process similar to other types of insurance. Most HSAs have more than one possible method for withdrawal. The exact method of withdrawal varies from HSA to HSA and can be considered a marketing design issue. Checks and debits do not have to be made payable directly to the provider. However, in the case of an audit, account holders will be expected to provide documentary evidence that the transaction was for a qualified expense in order to avoid serious tax penalties.

Generally, if funds are withdrawn for a reason other than a qualified medical expense, those funds become subject to income tax and a 10% penalty. Once a person reaches the age of 65 or becomes disabled, however, funds can be withdrawn from an HSA for any reason without penalty. For funds that are used for non-medical expenses, regular income tax needs to be paid.

When a person dies, the funds in their HSA are transferred to the beneficiary named for the account. If the beneficiary is a surviving spouse, the transfer is tax-free.

Benefits

The maximum out-of-pocket expense liability can be less than that of a traditional health plan. This is because a qualified HDHP can cover 100% after the deductible, involving no co-insurance. There are no separate deductibles for prescriptions or office visits. All money spent on these expenses are typically credited to one's deductible.

The premium for a HDHP generally is less than the premium for traditional health care coverage. This is mostly due to the elimination of coverage for expenses that are less than the higher deductibles. Their elimination lowers premiums because insurance underwriters are betting that Americans will consume less medical care and supplies, be more vigilant against excess and fraud in the healthcare industry, and shop for bargains if they see a relationship between medical cost and their bank accounts. Introducing consumer-driven supply and demand and controlling inflation in healthcare and health insurance were among the government's goals in establishing these plans.

Over a period of time, if medical expenses are low and contributions are made to the HSA, the account can accumulate significant assets that can be used for health care tax free or used for retirement on a tax deferred basis.

Drawbacks

Many consumer organizations, such as Consumers Union, and many medical organizations, such as the American Public Health Association, have rejected HSAs because they benefit only healthy, younger people and make the health care system more expensive for everyone else. The fundamental problem for individuals is that the plans don't pay anything until you've paid a large deductible. Some HSAs pay for basic preventive care, such as annual physicals and mammograms, but others do not. For example, a patient with a suspicious mammogram may have to pay $1,000 out of pocket for a biopsy to find out whether the breast really has cancer.

In her testimony before the U.S. Senate Finance Committee's Subcommittee on Health, Commonwealth Fund Assistant Vice President Sara R. Collins, Ph.D., said that all evidence to date shows that health savings accounts and high-deductible health plans worsen, rather than improve, the health system's problems.[2]

Early experience with HSA-eligible high-deductible health plans reveals low satisfaction, high out-of-pocket costs, and cost-related access problems, Collins said. A survey conducted with the Employee Benefits Research Institute found that people enrolled in HSA-eligible high-deductible health plans were much less satisfied with many aspects of their health care than adults in more comprehensive plans:

  • People in these plans allocate substantial amounts of income to their health care, especially those who have poorer health or lower incomes.
  • Adults in high-deductible health plans are far more likely to delay or avoid getting needed care, or to skip medications, because of the cost. Problems are particularly pronounced among those with poorer health or lower incomes.
  • Few Americans in any health plan have the information they need to make decisions. Just 12 to 16 percent of insured adults have information from their health plan about the quality or cost of care provided by their doctors and hospitals.

HSAs vs. other types of medical savings plans

Health Savings Account are similar to medical savings account (Archer MSA) plans that were authorized by the federal government before HSA plans. HSAs can be used with health plans with decreased minimum deductibles, and a higher fraction of the population is eligible to enroll in them. The changes were made in legislation signed by George W. Bush on December 8, 2003. The law went into effect on January 1 2004.

HSAs differ in several ways from MSAs. Perhaps the most significant difference is that employers of all sizes can offer an HSA account and insurance plan to employees. MSAs were limited to employers who employed 50 or fewer people. That change is important, because employers are the sponsor of health insurance for most people in the US.

HSAs and Health Policy

A number of individuals and groups working in healthcare policy believe that HSAs are an important reform that will help reduce the growth of health care costs and increase the efficiency of the health care system. According to proponents, HSAs encourage saving for future health care expenses, encourage the adoption of High Deductible Health Plans, and move health care away from third party payment. Under an HSA with a High Deductible Health Plan, a consumer has greater financial control over their health care than in a traditional health plan. Day to day expenses come out of the health savings account while catastrophic expenses are covered by insurance.

For example, an individual might come down with an illness and have a choice between a $200 brand name medication and a $20 generic medication. Under traditional health insurance, the generic drug might have a $5 copay and the brand name might have a $15 copay. The individual in this case might just take the brand name for $15, costing the health insurance company $185 that the health insurance company later recoups by charging everyone higher premiums. If the individual had a high deductible health plan, the individual would have to pay $200 for the brand name drug and would likely make the economically efficient choice by choosing the generic drug. This would in turn translate into lower premiums for participants in the High Deductible Health Plan. By giving the consumer a choice and proper incentives, money is saved. If a truly catastrophic event happens, like a heart attack, health insurance is there to cover expenses over the deductible.

Critics of HSAs question the validity of this argument and question whether individuals have the training and information necessary to make intelligent, cost-effective decisions. There is significant debate in the policy community over these issues.

Notes

  1. ^ a b "2006 IRS Guidelines". healthinsurance.com. Retrieved 2006-08-11.
  2. ^ http://www.cmwf.org/publications/publications_show.htm?doc_id=405167 Testimony, Committee on Finance, September 26, 2006

See also

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