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 the 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 over year if not spent. HSAs are owned by the individual, which differentiates them from the company-owned Health Reimbursement Arrangement (HRA) that is an alternate tax-deductible source of funds paired with HDHPs. Funds may be used to pay for qualified medical expenses at any time without federal tax liability. Withdrawals for non-medical expenses are treated very similarly to those in an 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 gate keeper 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.
History
HSAs were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act 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 Accounts), 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.
How they work
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-discrimination 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 FICA and Medicare Tax deduction, which amounts to a savings of 7.65% each to the employer and employee. 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 IRS limits. Congress later abolished the limit based on the deductible and set statutory limits for maximum contributions. For example, the 2008 statutory limits are $2,900 individual and $5,800 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. Contribution limits for 2009 are $5950 for Family, $3,000 for individual, and $1,000 for catch-up contributions.
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. Depending upon the state, HSA contributions and earnings may or may not be subject to state taxes.
Contribution Limits
According to IRS Publication 969, "Health Savings Accounts and Other Tax-Favored Health Plans", you can make contributions to your HSA for 2008 until April 15, 2009. The IRS has released 2010 limits via Revenue Procedure (Rev Proc) 2009-29.
Investments
Funds in an HSA can be invested in a manner similar to investments in an Individual Retirement Account (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.
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 taxation 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. Non-prescription, over-the-counter medications are also eligible.
There are several ways that funds in an HSA can be withdrawn. Some HSAs include a debit
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