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Fact Sheet: Guidance Released on Health Savings Accounts (HSAs)

December 22, 2003

Today, the Bush Administration issued guidance on the new Health Savings Accounts (HSAs), which were established by the Medicare Prescription Drug, Improvement, and Modernization Act signed by President Bush on December 8, 2003. The new law will create HSAs effective January 1, 2004.

The President promised rapid action to implement the Medicare Act.

The Department of Health and Human Services issued regulations for the discount drug card within two days of the bill signing. Today, the Department of the Treasury released guidance for HSAs.

These tax-free accounts are designed to help individuals save for qualified health expenses that they, their spouse, or their dependents incur. An individual who is covered by a high deductible health plan can make a tax-deductible contribution to an HSA, and use it to pay for out-of-pocket medical expenses. This will help more American families get the health care they need at a price they can afford.

Background on Health Savings Accounts (HSAs)

The bipartisan Medicare Prescription Drug, Improvement, and Modernization Act includes a provision for establishing HSAs. HSAs are tax-free savings accounts that can be used to pay for medical expenses incurred by individuals, spouses, or dependents.

HSAs are open to individuals covered by a high deductible health insurance plan. The annual deductible must be at least $1,000 for individual coverage, and at least $2,000 for family coverage. HSAs are a significant improvement over previous savings vehicles, which were limited to employees of small businesses and the self-employed and required health insurance policies with much higher deductibles.

Individuals with existing medical savings accounts (MSAs) can either retain them or roll the amounts over into a new HSA.

Contributions to HSAs by individuals are deductible, even if the taxpayer does not itemize. Contributions by an employer are not included in the individual's taxable income. Individuals, their employers, or both can contribute tax-deductible funds each year up to the amount of the policy's annual deductible, subject to a cap of $2,600 for individuals and $5,150 for families. In addition, individuals over age 55 can make extra contributions to their accounts ($500 in 2004, increasing to $1000 by 2009) and still enjoy the same tax advantages.

The interest and investment earnings generated by the account are also not taxable while in the HSA.

Amounts distributed are not taxable as long as they are used to pay for qualified medical expenses. HSA funds can be used to cover the health insurance deductible and any co-payments for medical services, prescriptions, or products. In addition, HSA funds can be used to purchase over-the-counter drugs and long-term care insurance, and to pay health insurance premiums during any period of unemployment.

Amounts distributed that are not used to pay for qualified medical expenses will be taxable, plus a 10% penalty to be applied to deter the use of the HSA for non-medical purposes.

HSAs are portable, so an individual is not dependent on a particular employer to enjoy the advantages of having an HSA. Like an individual retirement account (IRA), the HSA is owned by the individual, not the employer. If the individual changes jobs, the HSA goes with the individual.

George W. Bush, Fact Sheet: Guidance Released on Health Savings Accounts (HSAs) Online by Gerhard Peters and John T. Woolley, The American Presidency Project

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