Health savings account: another option for paying the rising cost of medical care.

• Author: Hollensbe, Mary Jo
• Position: Employee Benefits

THE MEDICARE PRESCRIPTION Drug, Improvement and Modernization Act of 2003 created the Internal Revenue Code Section 223 that established health savings accounts (HSAs).

Prior to HSAs, Congress created medical savings accounts, subsequently renamed Archer MSAs. An Archer MSA is a high-deductible health insurance plan combined with a side account for qualified medical expenses. The benefits of the Archer MSA, and subsequently the HSA, are that contributions to the account are tax-deductible, earnings on the account accumulate tax-deferred, and qualified distributions are tax-free. The HSA replaced the Archer MSA that expired at the end of 2003.

The purpose of the HSA is similar to the Archer MSA. An HSA is a tax-exempt trust or custodial account administered by a bank, insurance company or other approved entity for paying qualified medical expenses of an account owner covered by a high-deductible health-insurance plan. Taxpayers may not establish an HSA if they have coverage under another health-insurance plan that is not a high-deductible health plan, nor may anyone eligible for Medicare establish an HSA. In addition, the tax deduction is not available for anyone claimed as a dependent of another taxpayer.

High deductible insurance plan. A high-deductible health-insurance plan is an insurance plan that has an annual deductible of at least $1,000 for individual coverage, or $2,000 for family coverage and a maximum annual out-of-pocket deductible of $5,000 for individual coverage or $10,000 for family coverage. A high-deductible health-insurance plan may include preventive care benefits. These benefits may be included in the plan without applying a deductible limit.

Annual tax-deductible contributions to an HSA are limited to the lesser of the deductible, or $2,600 for individual coverage, $5,150 for family coverage. Taxpayers ages 55 to 64 may increase the contribution by $500 for 2004. This catch-up contribution increases annually until it reaches $1,000 in 2009. Employers can make HSA contributions to the employee's account subject to the limitations. These contributions are treated as an employer-provided medical expense and are not included in...