Definition of Health Saving Account
< b>Health Saving Account: An account that allows individuals to pay for
current health expenses and save for future qualified medical and retiree health
expenses on a tax free basis.
Health Savings Accounts (HSAs) were created by H. R. 1, the "Medicare Prescription
Drug, Improvement and Modernization Act of 2003," which was signed into law by US
President George W. Bush on December 8, 2003.
HSAs allow employers and/or employees to contribute to a tax-deferred personal
savings account which is used to pay smaller and routine medical expenses. HSAs
must be linked to a high-deductible health insurance policy with a minimum $1,000
deducible for an individual or $2,000 for a family.
HSAs have met with criticism as well as praise. One criticism of HSAs is that
they do little to reduce the number of people without health insurance in the US.
Another criticism of HSAs is only younger, healthier and more affluent white-collar
workers buy them. Professional and managerial applicants for HSAs make up the majority
of the application pool. Less than a third of purchasers of HSAs have family incomes
less than $50,000 per year.
On a more positive note, the following statement is from the US Treasury Department:
New innovative Health Savings Accounts will change the way millions can save
to meet their health care needs.
Any individual who is covered by a high-deductible health plan may establish
an HSA. Amounts contributed to an HSA belong to individuals and are completely portable.
Every year the money not spent would stay in the account and gain interest tax-free,
just like an 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 individual's 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 age 55 and 65 are allowed to make additional catch-up contributions
($500 in 2004) to their HSAs. Individuals eligible for Medicare, may not open an
HSA.
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 individual's 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 age 55 and 65 are allowed to make additional catch-up contributions
($500 in 2004) to their HSAs. Individuals eligible for Medicare, may not open an
HSA.
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