Health savings account
Encyclopedia
A health savings account (HSA) is a tax-advantaged
medical savings account
available to taxpayers in the United States
who are enrolled in a high-deductible health plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account
(FSA), funds roll over and accumulate year to year if not spent. HSAs are owned by the individual, which differentiates them from company-owned Health Reimbursement Arrangements (HRA) that are an alternate tax-deductible source of funds paired with either HDHPs or standard health plans. HSA funds may currently be used to pay for qualified medical expense
s at any time without federal tax liability or penalty. However, beginning in early 2011 OTC (over the counter) medications cannot be paid with HSA dollars without a doctor's prescription. Withdrawals for non-medical expenses are treated very similarly to those in an individual retirement account
(IRA) in that they may provide tax advantages if taken after retirement age, and they incur penalties if taken earlier. These accounts are a component of consumer-driven health care.
Proponents of HSAs believe that they are an important reform that will help reduce the growth of health care costs and increase the efficiency of the health care system. According to proponents, HSAs encourage saving for future health care expenses, allow the patient to receive needed care without a gatekeeper to determine what benefits are allowed and make consumers more responsible for their own health care choices through the required High-Deductible Health Plan.
Opponents of HSAs say they worsen, rather than improve, the U.S. health system's problems because people who are healthy will leave insurance plans while people who have health problems will avoid HSAs. There is also debate about consumer satisfaction with these plans. Some opponents believe medical expenses should be tax-deductible for all individuals, not only those who have a savings plan.
which was signed into law by President George W. Bush
on December 8, 2003. They were developed to replace the Medical Savings Account
system.
A survey of employers published by the Kaiser Family Foundation
in September 2008 found that 8% of covered workers were enrolled in a consumer-driven health plan (including both HSAs and Health Reimbursement Account
s), up from 4% in 2006. The study found that roughly 10 percent of firms offered such plans to their workers. Large firms were more likely to offer a high-deductible plan (18%), but enrollment was higher in small firms (8% of covered workers, versus 4% in larger firms).
A survey of health insurers performed by America’s Health Insurance Plans (AHIP) found that 4.5 million Americans were covered by HSA-qualified health plans as of January 2007. Of those, 3.4 million were covered through employer-sponsored plans, and 1.1 million were covered by individually purchased HSA-qualified plans. This represented an increase of 1.3 million since January 2006. In the individual market, 25% of new purchasers bought HSA-qualified plans. HSA-qualified plans represented 17% of new policies sold in the small group market and 8% of new policies sold in the large group market. A follow-up survey by AHIP reported that the number of Americans covered by HSA-qualified plans had grown to 6.1 million as of January 2008 (4.6 million through employer-sponsored plans and 1.5 million covered by individually purchased HSA-qualified plans). HSA-qualified plans represented 27% of new purchases in the individual market, 31% of new enrollment in the small group market and 6% of new enrollment in the large group market.
In January 2008, market research firm Celent moderated its earlier projections, citing the HSA market's "disappointing early showing", and projected 12.5 million accounts by 2012. A survey published by AHIP in May 2009 found that 8 million people were covered by HSA/High-Deductible health plans in January 2009. Of those, 1.8 million were covered by individual policies and approximately 6.2 million were covered by a group plan.
The Government Accountability Office
(GAO) reported in April 2008 that many individuals enrolled in HSA-qualified health plans did not open tax-qualified HSA accounts, and individuals that had HSA accounts had higher incomes than others. According to the report, nationally representative surveys conducted by Blue Cross Blue Shield Association in 2005 to 2007 found that 42 to 49 percent of HSA-eligible plan enrollees did not open HSAs in those years. Based on an examination of Internal Revenue Service (IRS) data, GAO found that tax filers who reported HSA account activity had higher average incomes than other tax filers. Contributions into HSA accounts ($754 million in 2005) were roughly double withdrawals from the accounts ($366 million). Average contributions were also roughly twice average withdrawals ($2,100 versus $1,000). 41% of tax filers who made an HSA contribution did not make any withdrawals; 22% withdrew more than they contributed during the year.
rules do not apply. Employers may treat full-time and part-time employees differently, and employers may treat individual and family participants differently. (The treatment of employees who are not enrolled in a HSA-eligible high-deductible plan is not considered for non-discrimination purposes.) Also, for 2007, employers may contribute more for non-highly compensated employees than highly compensated employees.
Contributions from an employer or employee may be made on a pre-tax basis through an employer. If this option is not available through the employer, contributions may be made on a post-tax basis and then used to decrease gross taxable income on the following year's Form 1040. The main advantage of making pre-tax contributions is the Federal Insurance Contributions Act tax
(FICA) and Medicare Tax deduction, which amounts to a savings of 7.65% (5.65% for the employee in 2011 due to Social Security rate holiday) each to the employer and employee(subject to limits of the Social Security Wage Base
). The self-employed must pay self-employment tax on their contributions. Regardless of the method or tax savings associated with the deposit, the deposits may only be made for persons covered under an HSA-eligible high-deductible plan, with no other coverage beyond certain qualified additional coverage.
Initially, the annual maximum deposit to an HSA was the lesser of the actual deductible or specified Internal Revenue Service
(IRS) limits. Congress later abolished the limit based on the deductible and set statutory limits for maximum contributions. For example, the 2012 statutory limits are $3,100 for an individual and $6,250 for a family. All contributions to an HSA, regardless of source, count toward the annual maximum.
A catch-up provision also applies for plan participants who are age 55 or over, allowing the IRS limit to be increased.
All deposits to an HSA become the property of the policyholder, regardless of the source of the deposit. Funds deposited but not withdrawn each year will carry over into the next year. If the policyholder ends their HSA-eligible insurance coverage, he or she loses eligibility to deposit further funds, but funds already in the HSA remain available for use.
The Tax Relief and Health Care Act of 2006
signed into law on December 20, 2006, added a provision allowing a one-time rollover of IRA assets to be used to fund up to one year's maximum HSA contribution.
State tax treatment of HSAs varies. As of 1/25/11, only three states that have income taxes, do not conform with Federal Tax treatment: Alabama, California and New Jersey.
(IRA). Investment earnings are sheltered from taxation until the money is withdrawn (and can be sheltered even then, as discussed in the section below).
While HSAs can be "rolled over" from fund to fund, an HSA cannot be rolled into an IRA or a 401(k)
, and funds from these types of investment vehicles cannot be rolled into an HSA, except for the one-time IRA transfer allowed above. Unlike some employer contributions to a 401(k) plan, all HSA contributions belong to the participant immediately, regardless of the deposit source. A person contributing to an HSA is under no obligation to contribute to his or her employer-sponsored HSA, although employers may require that payroll contributions be made only to the sponsored HSA plan.
ation if made for qualified medical expenses. These include costs for services and items covered by the health plan but subject to cost sharing such as a deductible
and coinsurance
, or co-payments, as well as many other expenses not covered under medical plans, such as dental, vision
and chiropractic
care; durable medical equipment
such as eyeglasses and hearing aids; and transportation expenses related to medical care. Through December 31, 2010, non-prescription, over-the-counter medications were also eligible. Beginning January 1, 2011 the Patient Protection and Affordable Care Act
, also known as Health Care Reform, stipulates HSA funds can no longer be used to buy over-the-counter drugs without a doctor's prescription.
There are several ways that funds in an HSA can be withdrawn. Some HSAs include a debit card
, some supply check
s for account holder use, and some allow for a reimbursement process similar to medical insurance
. Most HSAs have more than one possible method for withdrawal, and the methods available vary from HSA to HSA. Checks and debits do not have to be made payable to the provider. Funds can be withdrawn for any reason, but withdrawals that are not for documented qualified medical expenses are subject to income taxes and a 20% penalty. The 20% tax penalty is waived for persons who have reached the age of 65 or have become disabled at the time of the withdrawal. Then, only income tax is paid on the withdrawal, and in effect the account has grown tax deferred (similar to an IRA). Medical expenses continue to be tax free. Prior to January 1, 2011, when new rules governing HSAs in the Patient Protection and Affordable Care Act
went in to effect, the penalty for non-qualified withdrawals was 10%.
Account holders are required to retain documentation for their qualified medical expenses. Failure to retain and provide documentation could cause the IRS to rule withdrawals were not for qualified medical expenses and subject the taxpayer to additional penalties.
When a person dies, the funds in their HSA are transferred to the beneficiary named for the account. If the beneficiary is a surviving spouse, the transfer is tax-free.
(Archer MSA) plans that were authorized by the federal government before HSA plans. HSAs can be used with some high-deductible
health plans. HSAs came into being after legislation
was signed by George W. Bush
on December 8, 2003. The law went into effect on January 1, 2004.
HSAs differ in several ways from MSAs. Perhaps the most significant difference is that employers of all sizes can offer an HSA account and insurance plan to employees. MSAs were limited to the self-employed and employers of 50 or fewer people.
and controlling inflation in health care and health insurance were among the government's goals in establishing these plans.
With HSAs, in catastrophic situations, the maximum out-of-pocket expense liability
can be less than that of a traditional health plan. This is because a qualified HDHP can cover 100% after the deductible, involving no coinsurance
.
HSAs also give the flexibility not available in some traditional health plans to pay on a pretax basis for qualified medical expenses not covered in standard or HSA insurance plans, which may include dental, orthodontic, vision, and other approved expenses.
HSA accounts also have an advantage over Flexible Spending Accounts since deposits are not necessarily tied to expenses in a particular plan or calendar year. They are automatically rolled over for future medical expenses or may be used to reimburse qualified expenses from prior years as long as the expense was qualified under an HSA plan at the time that the expense was incurred.
Over time, if medical expenses are low and contributions are made regularly to the HSA, the account can accumulate significant assets that can be used for health care tax free or used for retirement on a tax-deferred basis.
A recent industry survey found that in July 2007 over 80% of HSA plans provided first-dollar coverage for preventive care. This was true of virtually all HSA plans offered by large employers and over 95% of the plans offered by small employers. It was also true of over half (59%) of the plans which were purchased by individuals.
All of the plans offered first-dollar preventive care benefits included annual physicals, immunizations, well-baby and well-child care, mammograms and Pap tests; 90% included prostate cancer screenings and 80% included colon cancer screenings.
, and many medical organizations, such as the American Public Health Association
, oppose HSAs because, in their opinion, they benefit only healthy, younger people and make the health care system more expensive for everyone else. According to Stanford economist Victor Fuchs
, "The main effect of putting more of it on the consumer is to reduce the social redistributive element of insurance."
Critics contend that low-income people, who are more likely to be uninsured, do not earn enough to benefit from the tax breaks offered by HSAs. These tax breaks are too modest, when compared to the actual cost of insurance, to persuade significant numbers to buy this coverage.
One industry study matched HSA account holders to the neighborhood income ("neighborhood" was defined as their census tract from the 2000 Census) and found that 3% of account holders lived in "low-income" neighborhoods (median incomes below $25,000 in 1999 dollars), 46% lived in lower-middle-income neighborhoods (median incomes between $25,000 and $50,000), 34% lived in middle-income neighborhoods (median incomes between $50,000 and $75,000), 12% lived in upper-income neighborhoods (median incomes between $75,000 and $100,000) and 5% lived in higher income neighborhoods (median incomes above $100,000).
In testimony before the US Senate Finance Committee's Subcommittee on Health in 2006, advocacy group Commonwealth Fund
said that all evidence to date shows that health savings accounts and high-deductible health plans worsen, rather than improve, the US health system's problems.
HSA funds that are not held in savings accounts insured by the Federal Deposit Insurance Corporation
are subject to market risk, as is any other investment. While the potential upside from investment gains can be viewed as a benefit, the subsequent downside, as well as the possibility of capital loss, may make the HSA a poor option for some.
Association found widespread satisfaction among HSA customers, a survey published in 2007 by employee benefits consultants Towers Perrin came to the opposite conclusion; it found that employees currently enrolled in such plans were significantly less satisfied with many elements of the health benefit plan compared to those enrolled in traditional health benefit plans.
In 2006, a Government Accountability Office report concluded: "HSA-eligible plan enrollees who participated in GAO's focus groups generally reported positive experiences, but most would not recommend the plans to all consumers. Few participants reported researching cost before obtaining health care services, although many researched the cost of prescription drugs. Most participants were satisfied with their HSA-eligible plans and would recommend them to healthy consumers, but not to those who use maintenance medication, have a chronic condition, have children, or may not have the funds to meet the high deductible."
According to the Commonwealth Fund, early experience with HSA-eligible high-deductible health plans reveals low satisfaction, high out-of-pocket costs, and cost-related access problems. A survey conducted with the Employee Benefit Research Institute found that people enrolled in HSA-eligible high-deductible health plans were much less satisfied with many aspects of their health care than adults in more comprehensive plans.
Some policy analysts say that consumer satisfaction doesn't reflect quality of health care. Researchers at Rand Corp. and Department of Veterans Affairs asked 236 vulnerable elderly patients at 2 managed care plans to rate their care, then examined care in medical records, as reported in Annals of Internal Medicine. There was no correlation. "Patient ratings of health care are easy to obtain and report, but do not accurately measure the technical quality of medical care," said John T. Chan, UCLA, lead author.
Tax advantage
Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free...
medical savings account
Medical savings account
Medical savings account refers to an account in which tax-deferred deposits can be made for medical expenses.-In Singapore:Medisave was introduced in April 1984 as a national medical savings system for Singaporeans...
available to taxpayers in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
who are enrolled in a high-deductible health plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account
Flexible spending account
A flexible spending account , also known as a flexible spending arrangement, is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States...
(FSA), funds roll over and accumulate year to year if not spent. HSAs are owned by the individual, which differentiates them from company-owned Health Reimbursement Arrangements (HRA) that are an alternate tax-deductible source of funds paired with either HDHPs or standard health plans. HSA funds may currently be used to pay for qualified medical expense
Itemized deduction
An itemized deduction is an eligible expense that individual taxpayers in the United States can report on their federal income tax returns in order to decrease their taxable income....
s at any time without federal tax liability or penalty. However, beginning in early 2011 OTC (over the counter) medications cannot be paid with HSA dollars without a doctor's prescription. Withdrawals for non-medical expenses are treated very similarly to those in an individual retirement account
Individual Retirement Account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
(IRA) in that they may provide tax advantages if taken after retirement age, and they incur penalties if taken earlier. These accounts are a component of consumer-driven health care.
Proponents of HSAs believe that they are an important reform that will help reduce the growth of health care costs and increase the efficiency of the health care system. According to proponents, HSAs encourage saving for future health care expenses, allow the patient to receive needed care without a gatekeeper to determine what benefits are allowed and make consumers more responsible for their own health care choices through the required High-Deductible Health Plan.
Opponents of HSAs say they worsen, rather than improve, the U.S. health system's problems because people who are healthy will leave insurance plans while people who have health problems will avoid HSAs. There is also debate about consumer satisfaction with these plans. Some opponents believe medical expenses should be tax-deductible for all individuals, not only those who have a savings plan.
History
HSAs were established as part of the Medicare Prescription Drug, Improvement, and Modernization ActMedicare Prescription Drug, Improvement, and Modernization Act
The Medicare Prescription Drug, Improvement, and Modernization Act is a federal law of the United States, enacted in 2003. It produced the largest overhaul of Medicare in the public health program's 38-year history.The MMA was signed by President George W...
which was signed into law by President George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
on December 8, 2003. They were developed to replace the Medical Savings Account
Medical savings account (United States)
In the United States, a Medical Savings Account refers to an American medical savings account program, generally associated with self-employed individuals, in which tax-deferred deposits can be made for medical expenses. Withdrawals from the MSA are tax-free if used to pay for qualified medical...
system.
A survey of employers published by the Kaiser Family Foundation
Kaiser Family Foundation
The Henry J. Kaiser Family Foundation , or just Kaiser Family Foundation, is a U.S.-based non-profit, private operating foundation headquartered in Menlo Park, California. It focuses on the major health care issues facing the nation, as well as the U.S. role in global health policy...
in September 2008 found that 8% of covered workers were enrolled in a consumer-driven health plan (including both HSAs and Health Reimbursement Account
Health Reimbursement Account
Health Reimbursement Accounts or Health Reimbursement Arrangements are Internal Revenue Service -sanctioned programs that allow an employer to set aside funds to reimburse medical expenses paid by participating employees...
s), up from 4% in 2006. The study found that roughly 10 percent of firms offered such plans to their workers. Large firms were more likely to offer a high-deductible plan (18%), but enrollment was higher in small firms (8% of covered workers, versus 4% in larger firms).
A survey of health insurers performed by America’s Health Insurance Plans (AHIP) found that 4.5 million Americans were covered by HSA-qualified health plans as of January 2007. Of those, 3.4 million were covered through employer-sponsored plans, and 1.1 million were covered by individually purchased HSA-qualified plans. This represented an increase of 1.3 million since January 2006. In the individual market, 25% of new purchasers bought HSA-qualified plans. HSA-qualified plans represented 17% of new policies sold in the small group market and 8% of new policies sold in the large group market. A follow-up survey by AHIP reported that the number of Americans covered by HSA-qualified plans had grown to 6.1 million as of January 2008 (4.6 million through employer-sponsored plans and 1.5 million covered by individually purchased HSA-qualified plans). HSA-qualified plans represented 27% of new purchases in the individual market, 31% of new enrollment in the small group market and 6% of new enrollment in the large group market.
In January 2008, market research firm Celent moderated its earlier projections, citing the HSA market's "disappointing early showing", and projected 12.5 million accounts by 2012. A survey published by AHIP in May 2009 found that 8 million people were covered by HSA/High-Deductible health plans in January 2009. Of those, 1.8 million were covered by individual policies and approximately 6.2 million were covered by a group plan.
The Government Accountability Office
Government Accountability Office
The Government Accountability Office is the audit, evaluation, and investigative arm of the United States Congress. It is located in the legislative branch of the United States government.-History:...
(GAO) reported in April 2008 that many individuals enrolled in HSA-qualified health plans did not open tax-qualified HSA accounts, and individuals that had HSA accounts had higher incomes than others. According to the report, nationally representative surveys conducted by Blue Cross Blue Shield Association in 2005 to 2007 found that 42 to 49 percent of HSA-eligible plan enrollees did not open HSAs in those years. Based on an examination of Internal Revenue Service (IRS) data, GAO found that tax filers who reported HSA account activity had higher average incomes than other tax filers. Contributions into HSA accounts ($754 million in 2005) were roughly double withdrawals from the accounts ($366 million). Average contributions were also roughly twice average withdrawals ($2,100 versus $1,000). 41% of tax filers who made an HSA contribution did not make any withdrawals; 22% withdrew more than they contributed during the year.
Deposits
Deposits to an HSA may be made by any policyholder of an HSA-eligible high-deductible health plan or by their employer, or any other person. If an employer makes deposits to such a plan on behalf of its employees, non-discrimination rules still apply—that is, all employees must be treated equally. However, if contributions are made through a Section 125 plan, non-discriminationDiscrimination
Discrimination is the prejudicial treatment of an individual based on their membership in a certain group or category. It involves the actual behaviors towards groups such as excluding or restricting members of one group from opportunities that are available to another group. The term began to be...
rules do not apply. Employers may treat full-time and part-time employees differently, and employers may treat individual and family participants differently. (The treatment of employees who are not enrolled in a HSA-eligible high-deductible plan is not considered for non-discrimination purposes.) Also, for 2007, employers may contribute more for non-highly compensated employees than highly compensated employees.
Contributions from an employer or employee may be made on a pre-tax basis through an employer. If this option is not available through the employer, contributions may be made on a post-tax basis and then used to decrease gross taxable income on the following year's Form 1040. The main advantage of making pre-tax contributions is the Federal Insurance Contributions Act tax
Federal Insurance Contributions Act tax
Federal Insurance Contributions Act tax is a United States payroll tax imposed by the federal government on both employees and employers to fund Social Security and Medicare —federal programs that provide benefits for retirees, the disabled, and children of deceased workers...
(FICA) and Medicare Tax deduction, which amounts to a savings of 7.65% (5.65% for the employee in 2011 due to Social Security rate holiday) each to the employer and employee(subject to limits of the Social Security Wage Base
Social Security Wage Base
For the Old Age, Survivors and Disability Insurance tax or Social Security tax, the Social Security Wage Base is the maximum earned gross income or upper threshold on which a wage earner's Social Security tax may be imposed...
). The self-employed must pay self-employment tax on their contributions. Regardless of the method or tax savings associated with the deposit, the deposits may only be made for persons covered under an HSA-eligible high-deductible plan, with no other coverage beyond certain qualified additional coverage.
Initially, the annual maximum deposit to an HSA was the lesser of the actual deductible or specified Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
(IRS) limits. Congress later abolished the limit based on the deductible and set statutory limits for maximum contributions. For example, the 2012 statutory limits are $3,100 for an individual and $6,250 for a family. All contributions to an HSA, regardless of source, count toward the annual maximum.
A catch-up provision also applies for plan participants who are age 55 or over, allowing the IRS limit to be increased.
All deposits to an HSA become the property of the policyholder, regardless of the source of the deposit. Funds deposited but not withdrawn each year will carry over into the next year. If the policyholder ends their HSA-eligible insurance coverage, he or she loses eligibility to deposit further funds, but funds already in the HSA remain available for use.
The Tax Relief and Health Care Act of 2006
Tax Relief and Health Care Act of 2006
The Tax Relief and Health Care Act of 2006 , includes a package of tax extenders, provisions affecting health savings accounts and other provisions in the United States.-Extenders:...
signed into law on December 20, 2006, added a provision allowing a one-time rollover of IRA assets to be used to fund up to one year's maximum HSA contribution.
State tax treatment of HSAs varies. As of 1/25/11, only three states that have income taxes, do not conform with Federal Tax treatment: Alabama, California and New Jersey.
Contribution limits
According to IRS Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans, you can generally make contributions to your HSA for a given tax year until the deadline for filing your income tax returns for that year (often April 15). The IRS released 2010 contribution limits via Revenue Procedure (Rev Proc) 2009-29, and the 2011 limits were included in Revenue Procedure (Rev Proc) 2010-22.| Year | Contribution Limit (Single) |
Contribution Limit (Family) |
Catch-Up Contribution (55 or older) (Single and Family) |
|---|---|---|---|
| 2004 | $2,600 | $5,150 | $500 |
| 2005 | $2,650 | $5,250 | $600 |
| 2006 | $2,700 | $5,450 | $700 |
| 2007 | $2,850 | $5,650 | $800 |
| 2008 | $2,900 | $5,800 | $900 |
| 2009 | $3,000 | $5,950 | $1,000 |
| 2010 | $3,050 | $6,150 | $1,000 |
| 2011 | $3,050 | $6,150 | $1,000 |
| 2012 | $3,100 | $6,250 | $1,000 |
Investments
Funds in an HSA can be invested in a manner similar to investments in an Individual Retirement AccountIndividual Retirement Account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
(IRA). Investment earnings are sheltered from taxation until the money is withdrawn (and can be sheltered even then, as discussed in the section below).
While HSAs can be "rolled over" from fund to fund, an HSA cannot be rolled into an IRA or a 401(k)
401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
, and funds from these types of investment vehicles cannot be rolled into an HSA, except for the one-time IRA transfer allowed above. Unlike some employer contributions to a 401(k) plan, all HSA contributions belong to the participant immediately, regardless of the deposit source. A person contributing to an HSA is under no obligation to contribute to his or her employer-sponsored HSA, although employers may require that payroll contributions be made only to the sponsored HSA plan.
Withdrawals
HSA participants do not have to obtain advance approval from their HSA trustee or their medical insurer to withdraw funds, and the funds are not subject to income taxIncome tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
ation if made for qualified medical expenses. These include costs for services and items covered by the health plan but subject to cost sharing such as a deductible
Deductible
In an insurance policy, the deductible is the amount of expenses that must be paid out of pocket before an insurer will pay any expenses. It is normally quoted as a fixed quantity and is a part of most policies covering losses to the policy holder. The deductible must be paid by the insured,...
and coinsurance
Coinsurance
Co-insurance is an insurance-related term that describes a splitting or spreading of risk among multiple parties.-In the United States:In the US insurance market, coinsurance is the joint assumption of risk between the insurer and the insured...
, or co-payments, as well as many other expenses not covered under medical plans, such as dental, vision
Visual perception
Visual perception is the ability to interpret information and surroundings from the effects of visible light reaching the eye. The resulting perception is also known as eyesight, sight, or vision...
and chiropractic
Chiropractic
Chiropractic is a health care profession concerned with the diagnosis, treatment and prevention of disorders of the neuromusculoskeletal system and the effects of these disorders on general health. It is generally categorized as complementary and alternative medicine...
care; durable medical equipment
Durable medical equipment
Durable medical equipment is a term of art used to describe any medical equipment used in the home to aid in a better quality of living. It is a benefit included in most insurances. In some cases certain Medicare benefits, that is, whether Medicare may pay for the item...
such as eyeglasses and hearing aids; and transportation expenses related to medical care. Through December 31, 2010, non-prescription, over-the-counter medications were also eligible. Beginning January 1, 2011 the Patient Protection and Affordable Care Act
Patient Protection and Affordable Care Act
The Patient Protection and Affordable Care Act is a United States federal statute signed into law by President Barack Obama on March 23, 2010. The law is the principal health care reform legislation of the 111th United States Congress...
, also known as Health Care Reform, stipulates HSA funds can no longer be used to buy over-the-counter drugs without a doctor's prescription.
There are several ways that funds in an HSA can be withdrawn. Some HSAs include a debit card
Debit card
A debit card is a plastic card that provides the cardholder electronic access to his or her bank account/s at a financial institution...
, some supply check
Cheque
A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...
s for account holder use, and some allow for a reimbursement process similar to medical insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
. Most HSAs have more than one possible method for withdrawal, and the methods available vary from HSA to HSA. Checks and debits do not have to be made payable to the provider. Funds can be withdrawn for any reason, but withdrawals that are not for documented qualified medical expenses are subject to income taxes and a 20% penalty. The 20% tax penalty is waived for persons who have reached the age of 65 or have become disabled at the time of the withdrawal. Then, only income tax is paid on the withdrawal, and in effect the account has grown tax deferred (similar to an IRA). Medical expenses continue to be tax free. Prior to January 1, 2011, when new rules governing HSAs in the Patient Protection and Affordable Care Act
Patient Protection and Affordable Care Act
The Patient Protection and Affordable Care Act is a United States federal statute signed into law by President Barack Obama on March 23, 2010. The law is the principal health care reform legislation of the 111th United States Congress...
went in to effect, the penalty for non-qualified withdrawals was 10%.
Account holders are required to retain documentation for their qualified medical expenses. Failure to retain and provide documentation could cause the IRS to rule withdrawals were not for qualified medical expenses and subject the taxpayer to additional penalties.
When a person dies, the funds in their HSA are transferred to the beneficiary named for the account. If the beneficiary is a surviving spouse, the transfer is tax-free.
HSAs vs. other types of medical savings plans
Health Savings Account are similar to medical savings accountMedical savings account
Medical savings account refers to an account in which tax-deferred deposits can be made for medical expenses.-In Singapore:Medisave was introduced in April 1984 as a national medical savings system for Singaporeans...
(Archer MSA) plans that were authorized by the federal government before HSA plans. HSAs can be used with some high-deductible
Deductible
In an insurance policy, the deductible is the amount of expenses that must be paid out of pocket before an insurer will pay any expenses. It is normally quoted as a fixed quantity and is a part of most policies covering losses to the policy holder. The deductible must be paid by the insured,...
health plans. HSAs came into being after legislation
Legislation
Legislation is law which has been promulgated by a legislature or other governing body, or the process of making it...
was signed by George W. Bush
George W. Bush
George Walker Bush is an American politician who served as the 43rd President of the United States, from 2001 to 2009. Before that, he was the 46th Governor of Texas, having served from 1995 to 2000....
on December 8, 2003. The law went into effect on January 1, 2004.
HSAs differ in several ways from MSAs. Perhaps the most significant difference is that employers of all sizes can offer an HSA account and insurance plan to employees. MSAs were limited to the self-employed and employers of 50 or fewer people.
Benefits
The premium for an HDHP generally is less than the premium for traditional health insurance. A higher deductible lowers the premium because the insurance company no longer pays for routine healthcare, and insurance underwriters believe that Americans who see a relationship between medical cost and their bank accounts will consume less medical care, shop for lower-cost options, and be more vigilant against excess and fraud in the health care industry. Introducing consumer-driven supply and demandSupply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
and controlling inflation in health care and health insurance were among the government's goals in establishing these plans.
With HSAs, in catastrophic situations, the maximum out-of-pocket expense liability
Legal liability
Legal liability is the legal bound obligation to pay debts.* In law a person is said to be legally liable when they are financially and legally responsible for something. Legal liability concerns both civil law and criminal law. See Strict liability. Under English law, with the passing of the Theft...
can be less than that of a traditional health plan. This is because a qualified HDHP can cover 100% after the deductible, involving no coinsurance
Coinsurance
Co-insurance is an insurance-related term that describes a splitting or spreading of risk among multiple parties.-In the United States:In the US insurance market, coinsurance is the joint assumption of risk between the insurer and the insured...
.
HSAs also give the flexibility not available in some traditional health plans to pay on a pretax basis for qualified medical expenses not covered in standard or HSA insurance plans, which may include dental, orthodontic, vision, and other approved expenses.
HSA accounts also have an advantage over Flexible Spending Accounts since deposits are not necessarily tied to expenses in a particular plan or calendar year. They are automatically rolled over for future medical expenses or may be used to reimburse qualified expenses from prior years as long as the expense was qualified under an HSA plan at the time that the expense was incurred.
Over time, if medical expenses are low and contributions are made regularly to the HSA, the account can accumulate significant assets that can be used for health care tax free or used for retirement on a tax-deferred basis.
A recent industry survey found that in July 2007 over 80% of HSA plans provided first-dollar coverage for preventive care. This was true of virtually all HSA plans offered by large employers and over 95% of the plans offered by small employers. It was also true of over half (59%) of the plans which were purchased by individuals.
All of the plans offered first-dollar preventive care benefits included annual physicals, immunizations, well-baby and well-child care, mammograms and Pap tests; 90% included prostate cancer screenings and 80% included colon cancer screenings.
Criticism
Some consumer organizations, such as Consumers UnionConsumers Union
Consumers Union is a non-profit organization best known as the publisher of Consumer Reports, based in the United States. Its mission is to "test products, inform the public, and protect consumers."...
, and many medical organizations, such as the American Public Health Association
American Public Health Association
The American Public Health Association is Washington, D.C.-based professional organization for public health professionals in the United States. Founded in 1872 by Dr. Stephen Smith, APHA has more than 30,000 members worldwide...
, oppose HSAs because, in their opinion, they benefit only healthy, younger people and make the health care system more expensive for everyone else. According to Stanford economist Victor Fuchs
Victor Fuchs
Victor R. Fuchs is an American health economist. He has been called "the dean of health economists" by New York Times economics columnist David Leonhardt.He is the Henry J. Kaiser, Jr. Professor at Stanford University, emeritus...
, "The main effect of putting more of it on the consumer is to reduce the social redistributive element of insurance."
Critics contend that low-income people, who are more likely to be uninsured, do not earn enough to benefit from the tax breaks offered by HSAs. These tax breaks are too modest, when compared to the actual cost of insurance, to persuade significant numbers to buy this coverage.
One industry study matched HSA account holders to the neighborhood income ("neighborhood" was defined as their census tract from the 2000 Census) and found that 3% of account holders lived in "low-income" neighborhoods (median incomes below $25,000 in 1999 dollars), 46% lived in lower-middle-income neighborhoods (median incomes between $25,000 and $50,000), 34% lived in middle-income neighborhoods (median incomes between $50,000 and $75,000), 12% lived in upper-income neighborhoods (median incomes between $75,000 and $100,000) and 5% lived in higher income neighborhoods (median incomes above $100,000).
In testimony before the US Senate Finance Committee's Subcommittee on Health in 2006, advocacy group Commonwealth Fund
Commonwealth Fund
The Commonwealth Fund is a private U.S. foundation whose stated purpose is to promote a high-performing health care system that achieves better access, improved quality, and greater efficiency, especially for society's most vulnerable.-History:...
said that all evidence to date shows that health savings accounts and high-deductible health plans worsen, rather than improve, the US health system's problems.
HSA funds that are not held in savings accounts insured by the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
are subject to market risk, as is any other investment. While the potential upside from investment gains can be viewed as a benefit, the subsequent downside, as well as the possibility of capital loss, may make the HSA a poor option for some.
Consumer satisfaction
Consumer satisfaction results have been mixed. While a 2005 survey by the Blue Cross and Blue ShieldBlue Shield
Blue Shield may refer to:*Blue Cross and Blue Shield Association*International Committee of the Blue Shield*Blue Shield , a Marvel Comics Superhero...
Association found widespread satisfaction among HSA customers, a survey published in 2007 by employee benefits consultants Towers Perrin came to the opposite conclusion; it found that employees currently enrolled in such plans were significantly less satisfied with many elements of the health benefit plan compared to those enrolled in traditional health benefit plans.
In 2006, a Government Accountability Office report concluded: "HSA-eligible plan enrollees who participated in GAO's focus groups generally reported positive experiences, but most would not recommend the plans to all consumers. Few participants reported researching cost before obtaining health care services, although many researched the cost of prescription drugs. Most participants were satisfied with their HSA-eligible plans and would recommend them to healthy consumers, but not to those who use maintenance medication, have a chronic condition, have children, or may not have the funds to meet the high deductible."
According to the Commonwealth Fund, early experience with HSA-eligible high-deductible health plans reveals low satisfaction, high out-of-pocket costs, and cost-related access problems. A survey conducted with the Employee Benefit Research Institute found that people enrolled in HSA-eligible high-deductible health plans were much less satisfied with many aspects of their health care than adults in more comprehensive plans.
- People in these plans allocate substantial amounts of income to their health care, especially those who have poorer health or lower incomes.
- Adults in high-deductible health plans are far more likely to delay or avoid getting needed care, or to skip medications, because of the cost. Problems are particularly pronounced among those with poorer health or lower incomes.
- Few Americans in any health plan have the information they need to make decisions. Just 12 to 16 percent of insured adults have information from their health plan about the quality or cost of care provided by their doctors and hospitals.
Some policy analysts say that consumer satisfaction doesn't reflect quality of health care. Researchers at Rand Corp. and Department of Veterans Affairs asked 236 vulnerable elderly patients at 2 managed care plans to rate their care, then examined care in medical records, as reported in Annals of Internal Medicine. There was no correlation. "Patient ratings of health care are easy to obtain and report, but do not accurately measure the technical quality of medical care," said John T. Chan, UCLA, lead author.
HSAs and health policy
According to a 2006 Zogby poll, seven in ten voters back Congressional action to allow HSA participants to pay for their insurance premiums using money in their savings plans.See also
- Consumer driven health careConsumer driven health careDefined narrowly, consumer-driven health care refers to third tier health insurance plans that allow members to use personal health savings accounts , Health Reimbursement Accounts , or similar medical payment products to pay routine health care expenses directly, while a high-deductible health...
(CDHC) - High Deductible Health PlanHigh Deductible Health PlanA high-deductible health plan is a health insurance plan with lower premiums and higher deductibles than a traditional health plan. Being covered by an HDHP is also a requirement for having a health savings account. Some HDHP plans also offer additional "wellness" benefits, provided before a...
(HDHP) - Flexible spending accountFlexible spending accountA flexible spending account , also known as a flexible spending arrangement, is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States...
(FSA) - Health care in the United StatesHealth care in the United StatesHealth care in the United States is provided by many separate legal entities. Health care facilities are largely owned and operated by the private sector...
- Health reimbursement arrangement (HRA)
- Medical savings accountMedical savings accountMedical savings account refers to an account in which tax-deferred deposits can be made for medical expenses.-In Singapore:Medisave was introduced in April 1984 as a national medical savings system for Singaporeans...
(MSA) - Direct primary careDirect primary careIn the USA Direct Primary Care is primary care offered direct to the consumer, without insurance intervention. It is an umbrella term which incorporates various health care delivery systems that involve direct financial relationships between patients and health care providers.One niche variant of...
- Single-payer health careSingle-payer health careSingle-payer health care is medical care funded from a single insurance pool, run by the state. Under a single-payer system, universal health care for an entire population can be financed from a pool to which many parties employees, employers, and the state have contributed...
External links
- U.S. Treasury site on HSAs
- List of banks offering HSAs
- HSA Contribution limits for 2007
- HSA Contribution limits for 2008
- HSA Contribution limits for 2009
- List of Eligible Medical Expenses
- Federal Tax Savings from HSA contributions made in 2007
- IRS Forms for HSAs
- Council for Affordable Health Insurance
- A Guide to Health Care Spending Accounts from America’s Health Insurance Plans (July 2005)
- State Tax treatment of HSAs
- FAQs on HSAs: Frequently Asked Questions on Health Savings Accounts from the American Academy of ActuariesAmerican Academy of ActuariesThe American Academy of Actuaries, also known as the “Academy” or the AAA, is the body that represents and unites United States actuaries in all practice areas...
(October 2007) - SEC. 9003. DISTRIBUTIONS FOR MEDICINE QUALIFIED ONLY IF FOR PRESCRIBED DRUG OR INSULIN.