The increasing cost of health insurance has become a critical issue for individuals and employers in this country. With the number of uninsured people on the rise and employers struggling to maintain quality benefit plans, a new savior may be on the horizon in the form of health savings accounts.
The ultimate goal of a health savings account is to encourage participants to control their health care costs through a savings plan. However, an HSA also rewards those individuals who can either reduce their health care costs or, if fortunate enough, have limited health care costs up-front.
Although HSAs are not a new development, some of the new aspects of these accounts make them a much more attractive investment than earlier versions. For example, an individual solely owns an HSA, even if an employer makes contributions to the account each year.
Any unexpended funds in the HSA at retirement are the property of the employee. Thus, in some cases, this accumulation of funds can help pay for the employee’s retirement.
Even when changing jobs, an HSA puts employees in a position to take this account with them as they move on to their next business endeavor. These accounts have some similarity to an individual retirement account in that, if funds are not used for qualified and medical expenses, the amounts withdrawn can be included in gross income and could be subject to a 10 percent excise tax unless made after the individual’s death, disability or attainment of the age of Medicare eligibility (which is currently age 65).
An HSA is a tax-favored account in which the individual is covered by a plan with a high deductible. Some specific exceptions apply; however, generally speaking, to be eligible for an HSA you could not be covered by any other health plan that did not meet the definition of a high-deductible health plan.
If you are entitled to benefits under Medicare, you are not eligible to contribute to an HSA, nor are individuals who may be claimed as a dependent on another’s tax return.
A high-deductible health plan is one that has a deductible of at least $1,000 for self-only coverage, or $2,000 for family coverage. Also, its out-of-pocket expense limit cannot exceed $5,100 for self-only coverage or $10,200 for family coverage. Both the deductible and out-of-pocket limits are indexed for inflation.
One of the major attractions of HSAs is the fact that an account can be established by self-employed or unemployed individuals. In addition, an eligible individual who is an employee may establish an HSA with or without the involvement of the employer. If the employer establishes a plan and makes the contributions to the plan, these contributions are not treated as income to the employee.
Contributions to an HSA must be made in cash. For 2005, the maximum contribution to a HSA is $2,650 for self-only coverage and $5,250 for family coverage.
The contributions made by or on behalf of an eligible individual that do not exceed the above limits are deductible by the individual in computing adjusted gross income and are deductible whether or not the individual itemizes his/her deductions on individual retirement. Similar to the IRA, individuals who have reached age 55 may contribute an additional $600 in 2005 to their HSA.
In any given year, contributions to an HSA can be made at any time before the time prescribed by law (without extensions) for filing the federal income tax return for that year. If an employer makes contributions to the employee’s HSA, the employer must make available comparable contributions on behalf of all employees with comparable coverage during the same period.
The qualified medical expenses that can be paid from an HSA include long-term care insurance, COBRA premiums, premiums for health care coverage while an individual is receiving unemployment compensation, and health insurance premiums for individuals eligible for Medicare other than premiums for Medigap policies.
When establishing an HSA for employees, employers may want to take into consideration that the funds must be set aside in a trust fund and, therefore, cannot be forfeited.
Some employees covered by plans with lower deductibles also may be unwilling to switch to a high-deductible plan. In addition, there is some concern that these types of accounts may be more attractive to the younger and healthier employees, which might cause other types of coverage to become more expensive.
Certainly, the HSAs provide a feasible alternative to increasing health care costs that should be considered by both individuals and employers. Since the flexibility of these plans is more attractive than earlier versions, it is likely that more insurance companies will offer plans that meet these requirements. This should ultimately provide employers the flexibility, as well as the added benefit of competition between health care providers, when evaluating their health care options.
Cary Jones, CPA, is a tax partner with the Springfield office of BKD LLP.
