New Medicare Law Creates “Health Savings Accounts”

A summary of the new law’s main features.

Congress enacted a comprehensive Medicare reform bill in November. While the most publicized feature of the new law is prescription benefits, it also creates new “health savings accounts” with the following features: (1) Workers under the age of 65 will be allowed to accumulate tax-free savings for health care needs if they have qualified health plans. A qualified health plan has a minimum deductible of $1,000 with a $5,000 cap on out-of-pocket expenses for self-only policies. These amounts are doubled for family policies. (2) Individuals can make pre-tax contributions of up to 100% of the health plan deductible. (3) The maximum annual contribution is $2,600 for individuals with self-only policies and $5,150 for families (indexed annually for inflation). Pre-tax contributions can be made by individuals, their employers and family members. (4) Individuals age 55-65 can make additional pre-tax “catch-up” contributions of up to $1,000 annually (phased in). (5) Tax-free distributions are allowed for health care needs not covered by insurance. (6) The individual owns the account. The savings follow the individual from job to job and into retirement. (7) HSA savings can be drawn down to pay for retiree health care once an individual reaches Medicare eligibility age. (8) Tax-free distributions can be used to pay for retiree health insurance (with no minimum deductible requirements), Medicare expenses, prescription drugs, and long-term care services, among other retiree health care expenses. (9) Upon death, HSA ownership may be transferred to the spouse on a tax-free basis. HSAs become available in 2004. While patterned after the Archer Medical Savings Account, they are more generous and do not have “quotas” on the number of persons who can participate in them.

This article first appeared in Church Treasurer Alert, January 2004.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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