On December 8, 2003, the Medicare Reform Bill was signed into law. Part of the Medicare Reform Bill was to allow individuals to start their own HSA.

HSA's are "Health Savings Accounts"

In their simplest form, HSAs work very much like Individual Retirement Accounts or IRAs. While IRAs are tax-favored accounts for retirement savings, HSAs are tax-favored accounts for medical expense savings - medical expenses that are not reimbursed or paid for by a health insurance plan.

Individuals - as well as employers who provide their employees with health insurance - can open HSAs. HSAs are made up of two parts: a high deductible, low premium health insurance plan and a special savings account. The new HSA law defines these high-deductible plans as those with total out-of-pocket costs (which are the deductible and any co-insurance) from $1,000 to $5,000 for single people and from $2,000 to $10,000 for families. This high-deductible, low premium insurance is used to pay for expensive, catastrophic medical expenses caused by illness or injury. The part of the HSA including the savings account is owned by the individual or employee and is used to pay for everyday, lower cost medical expenses.

HSAs are considered a truly innovative approach to paying for healthcare because these accounts provide people with flexibilty, choice and tax advantages. The savings account, because it's owned by the individual, is portable. That means an employee can maintain the account even if there is a change of employers. In the case of a group HSA, both the employer and the employee can contribute to the account. Individuals can deposit up to $2,250 into their account in 2004 and families $4,500. These amounts will index upward annually based on the Medical Consumer Price Index (CPI).

The tax advantages are many. First, contributions by an individual, employer or employee are all tax-free. Second, contributions qualify for both state and federal tax deductibility (for example, individuals with an HSA can deduct up to $2,600 on their federal taxes and families up to $5,150). Third, employers can save on their FICA taxes. Fourth, because any interest earned on the funds are used for qualified medical expenses, withdrawals are tax-free.

The money in an HSA can be used for a wide range of medical expenses - many that are not covered by traditional health insurance. Funds can also be used to pay health insurance premiums, deductibles and co-pays, long-term care insurance, COBRA, as well as health insurance purchased during a period of unemployment.

HSAs put consumers in control of their healthcare spending because each individual decides how to use the money in his or her account. HSA owners can even plan for retirement by growing their HSA accounts and using the funds to pay for medical expenses not covered by Medicare.

During these times of rising medical inflation and a growing healthcare affordability crisis, HSAs offer a real answer to individuals, employers and their employees. HSAs will play a major role in ensuring that all Americans get the healthcare they need.

Here are some links to additional resources:

HSA Insider

US Treasury site info on HSAs