January 2, 2004
Community bankers may be interested in the new "Health Savings Accounts" (HSAs), established when President Bush recently signed into law the Medicare/Prescription Drug bill. On December 22, the Treasury Department issued its first set of guidance for HSAs. Basically, an HSA is a medical savings account with few restrictions or limitations. The key is that an HSA must be linked to a high-deductible health insurance policy.
These new tax-favored accounts will take hold starting January 1, 2004. All Americans under the age of 65, regardless of their employment status, qualify for an HSA. Insurance companies, banks and other approved financial institutions can offer an HSA, which does not have to be opened at the same institution that offers the high-deductible health plan. The new law will allow those who buy health insurance policies with deductibles of at least $1,000 for a single person or $2,000 for a family to establish tax-free health savings accounts. They (or their employers) can fund these accounts with an amount equal to the deductible and then use the money to pay health care expenses. If the money isn't needed, the funds can remain invested.
Investment earnings accrue tax-free. Employer contributions are made on a pre-tax basis and are not taxable to the employee. Employer contributions are not subject to withholding from wages for income tax or subject to FICA or FUTA taxes. Employers can offer HSAs through a cafeteria plan.
These accounts may be attractive because all money going in would be pre-tax dollars and withdrawals for medical care would be tax-free. Individuals younger than 65, employers or family members can make pre-tax contributions into their account equal to the plan deductible, up to a maximum of $2,600 a year for individuals and $5,150 for families. After 65 years of age, accumulated earnings and distribution also will be tax-free, provided the money is used for health expenses-which include insurance premiums, prescription drugs and long-term care. Otherwise, a 10% penalty would apply. Additional information and helpful links detailing the new HSAs are available at www.icba.org under tax and budget.