INTRODUCTION – The term “health insurance” is commonly used in the United States to describe any program that helps pay for medical expenses, whether through privately purchased insurance, social insurance, or a non-insurance social welfare program funded by the government. Synonyms for this usage include “health coverage,” “health care coverage,” and “health benefits,” and “medical insurance.” In a more technical sense, the term describes any form of insurance that protects against injury or illness.
In America, the health insurance industry has changed rapidly during the last few decades. In the 1970’s most people who had health insurance had indemnity insurance. Indemnity insurance is often called fee-for-service. The traditional health insurance in which the medical provider (usually a doctor or hospital) is paid a fee for each service provided to the patient covered under the policy. An important category associated with the indemnity plans is that of consumer-driven health care (CDHC). Consumer-directed health plans allow individuals and families to have greater control over their health care, including when and how they access care, what types of care they receive, and how much they spend on health care services.
However, these plans are associated with higher deductibles that the insured have to pay from their pocket before they can claim insurance money. Consumer-driven health care plans include Health Reimbursement Plans (HRAs), Flexible Spending Accounts (FSAs), high deductible health plans (HDHps), Archer Medical Savings Accounts (MSAs), and Health Savings Accounts (HSAs). The Health Savings Accounts are the most recent, and they have witnessed rapid growth during the last decade.
WHAT IS A HEALTH SAVINGS ACCOUNT?
A Health Savings Account (HSA) is tax-advantaged medical savings account available to taxpayers in the United States. The funds contributed to the account are not subject to federal income tax at the time of deposit. As a result, these may be used to pay for qualified medical expenses at any time without federal tax liability.
Another feature is that the funds contributed to the Health Savings Account roll over and accumulated year over year if not spent. The employees can withdraw these at the time of retirement without any tax liabilities. Withdrawals for qualified expenses and interest earned are also not subject to federal income taxes. According to the U.S. Treasury Office, ‘A Health Savings Account is an alternative to traditional health insurance; it is a savings product that offers a different way for consumers to pay for their health care.
HSA’s enable you to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.’ Thus, the Health Savings Account is an effort to increase the American health care system’s efficiency and encourage people to be more responsible and prudent towards their health care needs. It falls in the category of consumer-driven health care plans.
Origin of Health Savings Account
The Health Savings Account was established under the Medicare Prescription Drug, Improvement, and Modernization Act passed by the U.S. Congress in June 2003, by the Senate in July 2003, and signed by President Bush on December 8, 2003.
The following individuals are eligible to open a Health Savings Account –
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– Those who are covered by a High Deductible Health Plan (HDHP).
– Those not covered by other health insurance plans.
– Those not enrolled in Medicare4.
Also, there are no income limits on who may contribute to a HAS, and there is no requirement of having earned income to contribute to a HAS. However, HAS’s can’t be set up by those dependent on someone else’s tax return. Also, HSA’s cannot be set up independently by children.
What is a High Deductible Health Plan (HDHP)?
Enrollment in a High Deductible Health Plan (HDHP) is necessary for anyone wishing to open a Health Savings Account. In fact, the HDHPs got a boost from the Medicare Modernization Act, which introduced the HSAs. A High Deductible Health Plan is a health insurance plan which has a certain deductible threshold. This limit must be crossed before the insured person can claim insurance money. It does not cover first dollar medical expenses. So an individual has to himself pay the initial expenses that are called out-of-pocket costs.
In several HDHPs, immunization and preventive health care costs are excluded from the deductible, which means that the individual is reimbursed for them. HDHPs can be taken both by individuals (self-employed as well as employed) and employers. In 2008, HDHPs were being offered by insurance companies in America with deductibles ranging from a minimum of $1,100 for Self and $2,200 for Self and Family coverage. The maximum out-of-pocket limit for HDHPs is $5,600 for self and $11,200 for Self and Family enrollment. These deductible limits are called IRS limits as they are set by the Internal Revenue Service (IRS). In HDHPs, the relation between the deductibles and the premium paid by the insured is inversely proportional, i.e., higher the deductible, lower the premium, and vice versa. The major purported advantages of HDHPs are that they will a) lower health care costs by causing patients to be more cost-conscious and b) make insurance premiums more affordable for the uninsured. The logic is that when the patients are fully covered (i.e., have health plans with low deductibles), they tend to be less health-conscious and also less cost-conscious when going for treatment.
Opening a Health Savings Account
An individual can sign up for HSAs with banks, credit unions, insurance companies, and other approved companies. However, not all insurance companies offer HSAqualified health insurance plans, so it is important to use an insurance company that offers this qualified insurance plan. The employer may also set up a plan for the employees. However, the account is always owned by the individual. Direct online enrollment in HSA-qualified health insurance is available in all states except Hawaii, Massachusetts, Minnesota, New Jersey, New York, Rhode Island, Vermont, and Washington.
Contributions to the Health Savings Account
Contributions to HSAs can be made by an individual who owns the account, by an employer, or any other person. When made by the employer, the contribution is not included in the income of the employee. When made by an employee, it is treated as exempted from federal tax. For 2008, the maximum amount that can be contributed (and deducted) to an HSA from all sources is:
$2,900 (self-only coverage)
$5,800 (family coverage)
The U.S. Congress sets these limits through statutes, and they are indexed annually for inflation. There is a special catch-up provision for individuals above 55 years of age that allows them to deposit an additional $800 for 2008 and $900 for 2009. The actual maximum amount an individual can contribute also depends on the number of months he is covered by an HDHP (pro-rated basis) as of the first day of a month. E.g., If you have family HDHP coverage from January 1, 2008 until June 30, 2008, then cease having HDHP coverage, you are allowed an HSA contribution of 6/12 of $5,800, or $2,900 for 2008. If you have family HDHP coverage from January 1, 2008 until June 30, 2008, and have self-only HDHP coverage from July 1, 2008, to December 31, 2008, you are allowed an HSA contribution of 6/12 x $5,800 plus 6/12 of $2,900, or $4,350 for 2008. If an individual opens an HDHP on the first day of a month, then he can contribute to HSA on the first day itself. However, if he/she opens an account on any other day than the first, he can contribute to the HSA from the next month onwards. Contributions can be made as late as April 15 of the following year. Contributions to the HSA over the contribution limits must be withdrawn by the individual or be subject to an excise tax. In addition, the individual must pay income tax on the excess withdrawn amount.
Contributions by the Employer
The employer can contribute to the employee’s HAS account under a salary reduction plan known as Section 125 plan. It is also called a cafeteria plan. The contributions made under the cafeteria plan are made on a pre-tax basis, i.e., they are excluded from the employee’s income. The employer must contribute on a comparable basis. Comparable contributions are contributions to all HSAs of an employer, which is 1) the same amount or 2) the same percentage of the annual deductible. However, part-time employees who work for less than 30 hours a week can be treated separately. The employer can also categorize employees into those who opt for self coverage only and opt for family coverage. The employer can automatically make contributions to the HSAs on behalf of the employee unless the employee specifically chooses not to have such contributions by the employer.
Withdrawals from the HSAs
The employee owns the HSA, and he/she can make qualified expenses from it whenever required. He/She also decides how much to contribute to it, how much to withdraw for qualified expenses, which company will hold the account, and what type of investments will be made to grow the account. Another feature is that the funds remain in the account and roll over from year to year. There is no use it or lose it rules. The HSA participants do not have to obtain advance approval from their HSA trustee or their medical insurer to withdraw funds. The funds are not subject to income taxation if made for ‘qualified medical expenses. Qualified medical expenses 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. Nonprescription, over-the-counter medications are also eligible. However, the qualified medical expenses must be incurred on or after the HSA was established.