White House Office of Communications

HOW HSAs WORK

Health Savings Accounts (HSAs) give workers the opportunity to save tax-free for routine expenses; the security of insurance against major illness, and the freedom of knowing you can take your account with you whenever you change jobs.

Last year, President Bush signed legislation creating tax-free Health Savings Accounts – a new option in coverage, which will give millions of Americans access to affordable health care. These accounts can reduce health insurance premiums for families by thousands of dollars annually.

How HSAs Work
You can set up an HSA with the purchase of a low-cost, high-deductible insurance policy to cover major medical expenses.

The money you contribute to your HSA is tax-deductible. Contributions can be made each year up to the amount of the major medical policy’s annual deductible, with a cap of $2,600 for individuals and $5,150 for families. 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.

Money from the HSA can be withdrawn tax-free when used to pay routine medical bills, like doctor visits or medicines.

The money can also be saved in the account and carried over into the next year, earning interest tax-free. You own and control the HSA and keep it whether you change jobs or move. You can spend money from your HSA on the doctor or pharmacy of your choice. You and your doctor determine which medical goods and services you need, without interference from an insurance company. With HSAs, less of your money goes to insurance companies and more money stays with you and your family.

Money from the Health Savings Account can be used to pay medical bills below the insurance policy’s deductible. It can also be used to pay for expenses that insurance does not cover, like contact lenses, over-the-counter medicines, or braces for your children.

Most individuals and families have few medical bills during some years and higher expenses in others. During years when your health care spending is low, you can leave the money in your HSA – where it will earn tax-free interest and be available in years when unexpected medical expenses arise.

The major medical insurance policy protects you against big medical expenses, like hospital stays, and provides peace of mind by limiting total out-of-pocket medical costs in the event of serious illness.

Premiums for these plans are substantially less than for standard health insurance coverage, and once you meet the deductible, the insurance covers most or all of the medical expenses. Families and individuals faced with a significant accident or illness have enough to worry about without the fear of financial devastation. With an HSA and a major medical insurance policy, you can focus completely on fighting the illness, knowing there is a manageable limit to your share of the cost of treatment.

The President has also proposed allowing you to deduct the cost of the premiums you pay for a major medical policy, thus reducing the cost of these policies substantially.

This above-the-line deduction would be available whether or not you itemize your deductions on your tax return

Your employer also can contribute to these accounts, and their contributions are tax-free.

While many small businesses cannot afford to pay $8,000 to $10,000 annually for a standard family policy for each of their employees, they may be able to make a contribution to an employee’s HSA, which can go a long way to help a family cover routine medical expense.

Tens of thousands of individuals and families already are saving on their health care costs through HSAs

Americans from all income levels are already taking advantage of HSAs, according to ehealthinsurance, an Internet-based insurance brokerage that offers coverage to individuals and small firms throughout the country. It recently published an analysis of people who had purchased HSAs through its Internet portal over the first six months of this year. Key findings include:
The majority of HSA purchasers (52 percent) were 40 years of age or older.
Nearly half of HSA purchasers (49 percent) were families with children.
Two-fifths of HSA purchasers (41 percent) had incomes of $50,000 or less.
Three of ten HSA purchasers (30 percent) had previously been uninsured.

The President’s Plan to Extend Benefits of HSAs to Low-income Americans

To extend the benefits of HSAs to low-income families and individuals, the President proposes giving low-income families a $1,000 contribution made directly to their HSA, along with a $2,000 refundable tax credit to help purchase a policy to cover major medical expenses.

A family of four making $25,000 or less will be able to get $1,000 from the Federal government to put into their HSA.

These families can use the money to pay for doctor visits, medicines, and other routine medical expenses. What the family doesn’t spend in a year can be saved in the account and carried over into the next year, earning interest tax-free. Each year that the family remains eligible, the government will deposit another $1,000 into their HSA. The family – not the government and not the employer – owns the HSA and keeps it whether a family member changes jobs or increases his or her earnings. Low-income individuals could receive a $300 contribution to their HSAs.

In addition to the $1,000 contribution to their HSA, the same low-income family of four will be able to get a $2,000 refundable tax credit to help them buy an insurance policy that covers major medical expenses.

The $2,000 will cover a significant amount of the premiums on the insurance policy. Average premiums for family major medical coverage cost a little over $3,300 a year, according to a report issued by the Kaiser Family Foundation based on data collected by eHealthInsurance. Low-income individuals could receive a refundable tax credit of about $700.

Low-income families who elect not to set up an HSA may use the refundable $3,000 tax credit to buy standard medical coverage instead.

Individuals will be able to claim a $1,000 refundable tax credit.

Low-income families will not have to wait until tax time to get their tax credits.

The low-income health care credits will be advanceable and available immediately to qualifying families.

President Bush’s Plan to Extend the Benefits Of HSAs to Small Business Employees and the Self-Employed

More than half of the uninsured are small business employees and their families. Small businesses face obstacles in providing health benefits including high costs, complicated regulations, and a lack of bargaining power with insurance companies. The President’s plan helps them make contributions to their employees’ HSAs in a cost-effective way.

A refundable tax credit for contributions small business owners make to their employees’ HSAs.

To help individuals and families who work for small businesses fund their HSAs, President Bush proposes to give small business owners a tax credit on contributions they make to their employees’ HSAs. The credit would apply to the first $500 per worker with family coverage and the first $200 per worker with individual coverage.

The President’s proposal to make tax-free HSAs even more affordable to small businesses, combined with his support for creation of Association Health Plans (AHP’s), will help even more small businesses provide coverage to their workers.