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Tax-free savings accounts for health care
Americans can set aside funds beginning Jan. 1
The Associated Press
Updated: 6:56 p.m. ET Dec. 22, 2003
WASHINGTON - The Bush administration advertised new tax-free
health savings accounts, which will be available beginning next week,
as a way for Americans to gain greater control of health-care spending.
To escape taxation on both contributions and withdrawals, dollars set
aside in the accounts must be spent for medical expenses.
"This account is a good option and available to all Americans.
Every year the money not spent would stay in the account and gain interest
tax-free, just like an IRA," White House spokesman Scott McClellan
said Monday.
However, guidance issued Monday by the Treasury Department limits eligibility
for the special savings accounts to people who have health insurance
policies with annual deductibles, the amount paid to cover expenses
before benefits begin, of at least $1,000 for individuals and $2,000
for families.
In addition, Americans 65 years and older cannot open the new health
accounts.
The conditions were stipulated in the Medicare law passed by Congress
and signed this month by President Bush.
Despite the limitations, millions of Americans will qualify for the
accounts, Treasury officials said.
Money deposited in the accounts could be invested, then withdrawn free
of taxes for most medical expenses, including prescription drugs, long-term
care services and Medicare premiums. Employers also would pay no taxes
on amounts they contribute as employee benefits.
Individuals, their employers or their family members can put away the
amount of their annual insurance deductibles, up to $2,600 a year for
individuals and $5,150 a year for families. People age 55 to 64 could
make additional contributions to build a medical nest egg.
'If health savings accounts prove popular, as congressional scorekeepers
expect, low-deductible insurance will gradually become more expensive
or even disappear.'
- LEONARD BURMAN &
LINDA BLUMBERG
Tax & health expert, Urban Institute
An account stays with a person for a lifetime. Upon death, assets can
be transferred tax-free to a spouse, who also would be limited to using
the money for out-of-pocket medical expenses.
The accounts can be set up beginning Jan. 1 and are expected to reduce
Treasury revenues by $6.4 billion over a decade.
Critics contend the accounts establish a tax shelter for the wealthy
and are a precedent for future accounts to let affluent families evade
taxes.
They also worry that the accounts will increase health costs gradually
for many people by drawing young, healthy and affluent people out of
the general pool of health insurance into high-deductible insurance
plans.
"If health savings accounts prove popular, as congressional scorekeepers
expect, low-deductible insurance will gradually become more expensive
or even disappear," wrote tax expert Leonard Burman and health
expert Linda Blumberg of the Urban Institute, a private think tank in
Washington.
Burman and Blumberg said that would hurt the sick and the poor most,
but it also could affect middle-income wage earners if their employers
should switch to higher-deductible group plans.
Aetna and UnitedHealth Group already have signaled their intention to
offer the accounts. Several other insurers are expected to follow suit,
said Joe Walshe, a principal in PricewaterhouseCoopers HR Services.
"It certainly is a very important contribution to the whole consumer-directed
health-care movement," Walshe said.
Just 5 percent of all companies, but 17 percent of firms with 5,000
or more employees, offered high-deductible health plans in 2003, according
to the Kaiser Family Foundation.
Smaller employers and people who buy their own insurance are generating
the most interest in the new accounts for 2004, Walshe said. "The
bigger companies are locked into their health plans for 2004,"
he said.
The federal Office of Personnel Management is considering establishing
high-deductible plans and health savings accounts for federal employees,
Treasury officials said.
