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The Medicare
Prescription Drug, Improvement and
Modernization Act of 2003 amended the
Internal Revenue Code to permit eligible
individuals to establish a Health Savings
Account (HSA) as of January 1, 2004. An HSA
is a tax-exempt account (similar to an IRA)
established for the purpose of paying
qualified medical expenses (QME) for
individuals who are under age 65 and are
covered under a high deductible health plan
(HDHP). The maximum HSA annual contribution
is the actual plan deductible, up to
$2,600/individual and $5,150/family, and
“catch-up” contributions ($500 in ’04) are
permitted through 2009 for individuals over
age 55.
To qualify as an HDHP, the plan must include
a minimum annual deductible of $1,000 and a
maximum out-of-pocket expenses of $5,000.
These amounts are doubled for family
coverage and will be indexed for future
inflation. Contributions to an HSA are tax-exempt,
interest earnings are non-taxable,
withdrawals for any QME are non-taxable and
any unused balance in the account can be
rolled over in to following years. Unlike
other similar accounts (MSAs, HRAs, FSAs),
the HSA belongs to the employee/owner and is
portable.
Other benefits of an HSA include:
- lower health insurance cost
- ownership transfers to spouse upon deathç
- pre-tax dollars: savings on FICA, FUTA
- non-QME withdrawals permitted (subject to
10% tax penalty)
- no tax penalties for withdrawals due to
death, disability or after age 65ç
- QME include dental, vision care, non-prescription
drugs, COBRA premiums
- contributions allowed through April 15 of
the following year
- employer, employee and family
contributions acceptable
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