Jottings By An Employer's Lawyer

Tuesday, November 25, 2003

Something to Be Thankful For From Congress - Health Savings Accounts for All

Lost in all the hoopla about the new Medicare bill and presciption cards for "seniors" (or at least I didn't hear much about it) is the expansion of Health Savings Accounts (HSA), which is much like an IRA. In the past they were available only on a limited basis, but now are potentially open to anyone. The major news organizations are talking about it today including an article in the Guardian and a brief description in a USA Today story.

Since I am certainly no benefits lawyer, I had the temerity to summarize a brief summary by one of my colleagues who is a benefits lawyer, Peter Kelly. Since it is a summary of a summary, you can be sure any errors are mine, not Peter's. The highlights, without any of the really technical stuff, as I understand them are:

Employees who select a high deductible coverage for their healthcare insurance may establish an HSA. A coverage option will qualify as a high deductible at any level of deductible of $1,000 or more for self-only coverage ($2,000 for spouse/family coverage).

Employees, employers and even family members can contribute to an employee's HSA The overall limit on the amount that can be deducted each year is the lesser of the deductible or a dollar limit. For employees under 55, the dollar limit is $2,250 plus COLA for self-only coverage and $4,500 plus COLA for spouse/family coverage. If COLA applies for 2004 (and the legislative history indicates it might) the 2004 limits could be as much as $2,600 and $5,150, respectively. In addition the annual contribution for employees aged 55 or more is increased by $500 (a differential that increases by $100 each year until it is $1,00 per year more in 2009).

An HSA is much like an IRA. It is a tax exempt, individual account that must be invested with a bank, insurance company or other entity approved by the Treasury Department. (Just wait for the ads from the brokerage companies to start rolling out.) As long as amounts withdrawn are only used to pay for medical expenses they will not ever be taxed. HSA's may not be used to pay insurance premiums other than COBRA coverage costs or Medicare premiums (Medicare itself, not Medigap). Virtually any other medical cost is permitted. The accounts are vested, and like any IRA completely portable.

HSA's may be offered through cafeteria plans. Like IRA contributions, HSA contributions may be made at year end or even early in the following tax year.

According to the politics, it was the HSA provision that got a number of conservative Republicans to go along with the otherwise sweeping expansion of a government program. I can't help but think of one of the early champions of HSA's who never saw them come to pass while he was still the senior Senator from Texas, Phil Gramm.. Maybe that will be a bright spot in his week, as I hope he has a bad Friday as Texas crushes his beloved Aggies.

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