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Click here to return to this month's Article Index The Cutting Edge™October 2004Public PolicyHealth Savings AccountsBy John Satagaj, WMMA® Legislative Counsel, (email@jslaw.com) I am caught in a time warp. I am writing this column before Congress finishes its business and before the country goes to the polls. Sadly, since Congress hasn't done anything since July, this marks the third column that deals with "old" news. I do hope you will vote on November 2. I think it is the general consensus within WMMA® that we have made some great strides in our public policy program over the last few years. However, our ability to shape public policy is directly connected to what we do on November 2. The right to vote is an extraordinary right. Please use it. Thank you. In the interim let me bring you up to date on one of the hot topics in employee health care benefit circles: the potential for Health Savings Accounts (HSAs) as a way to provide health care coverage to employees. HSAs were created by the Medicare Prescription Drug Improvement and Modernization Act of 2003, P.L. No. 108-173, signed into law by President Bush on December 8, 2003. The basic concept allows any individual who is covered by a high-deductible health plan to establish an HSA. Amounts contributed to an HSA belong to the individual and are completely portable. Every year, the money not spent would stay in the account and gain interest tax-free, just like an Individual Retirement Account (IRA). Unused amounts remain available for later years (unlike amounts in Flexible Spending Arrangements that are forfeited if not used by the end of the year). Tax-advantaged contributions can be made in three ways: the individual and family members can make tax-deductible contributions to the HSA, even if the individual does not itemize deductions, the individualOs employer can make contributions that are not taxed to either the employer or the employee, and employers with cafeteria plans can allow employees to contribute untaxed salary through a salary reduction plan. Funds distributed from the HSA are not taxed if they are used to pay qualifying medical expenses. To encourage saving for health expenses after retirement, HSA owners between the ages of 55 and 65 are allowed to make additional catch-up contributions ($500 limit in 2004) to their HSAs. As of January 1, 2004, an employer or any eligible individual can establish an HSA with a qualified HSA trustee or custodian, in much the same way that individuals establish IRAs or Archer Medical Savings Accounts (MSAs) with qualified IRA or Archer MSA trustees or custodians. No permission or authorization from the Internal Revenue Service (IRS) is necessary to establish an HSA. An eligible individual who is an employee may establish an HSA with or without involvement of the employer. Any insurance company or any bank (or similar financial institution) can be an HSA trustee or custodian. In addition, any other person already approved by the IRS to be a trustee or custodian of IRAs or Archer MSAs is automatically approved to be an HSA trustee or custodian. Any eligible individual may contribute to an HSA. For an HSA established by an employee, the employee, the employee's employer or both may contribute to the HSA of the employee in a given year. For an HSA established by a self-employed (or unemployed) individual, the individual may contribute to the HSA. Family members may also make contributions to an HSA on behalf of another family member as long as that other family member is an eligible individual. In the case of an employee who is an eligible individual, employer contributions to the employee's HSA are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from the employee's gross income. The employer contributions are not subject to withholding from wages for income tax or subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act. Contributions to an employeeOs HSA through a cafeteria plan are treated as employer contributions. The employee cannot deduct employer contributions on his or her federal income tax return as HSA contributions or as itemized medical expense deductions. The High Deductible Health Plan (HDHP) required for the program for self-only coverage must have an annual deductible of at least $1,000 and annual out-of-pocket expenses required to be paid (deductibles, co-payments and other amounts, but not premiums) not exceeding $5,000. For family coverage, an HDHP must an annual deductible of at least $2,000 and annual out-of-pocket expenses required to be paid not exceeding $10,000. There is a great deal of information on the Internet about HSAs. You can start with a website maintained by the Department of the Treasury. Table of Contents
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