Medicare Compliance & Reimbursement

The Internal Revenue Service in new guidelines outlines the broadly favorable tax treatment and other details of health spending accounts established under the Medicare prescription-drug bill, which went into effect Jan. 1, 2004.

HSAs are tax-exempt trust or custodial accounts established to pay qualified medical expenditures and are open to all non-Medicare-covered individuals and families, IRS explains. HSA holders must be covered by high-deductible health plans during the months in which they, their employers, and/or family members make contributions to the accounts.

Eligible HDHPs must have annual deductibles of at least $1,000 for individuals and $2,000 for families. Out-of-pocket payment requirements - including deductibles and copays but not premiums - may not exceed $5,000 for individuals or $10,000 for families. HDHPs may be network plans, i.e., health plans that offer more favorable benefits if patients use in-network providers. In the case of network HDHPs, out-of-pocket expenses may exceed the $5,000 and $10,000 limit if services are obtained from out-of-network providers. All the above amounts are indexed for inflation.

Not all covered services under HDHPs must have high deductibles. An HDHP may waive or decrease deductibles for preventive care, the guidelines note. In 2004, the maximum monthly HDHP contribution for an individual is one-twelfth of the plan's annual deductible or one-twelfth of $2,600, whichever is less. For families, the maximum monthly contribution is the lesser of one-twelfth of the annual deductible or one-twelfth of $5,150.

People older than 55 also may make so-called catch-up contributions: Their maximum annual contribution cap will be $500 higher than younger people's cap in 2004 and increase by $100 each year until it is $1,000 greater than the general cap in 2009. Money may be rolled over from year to year in an HSA and rolled-over funds don't count toward contribution limits.

HSAs are generally tax exempt. Up to the stated limits, contributions are excluded from the recipient's taxable income, if they are made by an employer, and are deducted when determining gross income for tax purposes, if they are made by the individual, even if the person does not otherwise itemize tax deductions. Earnings on amounts held in HSAs also aren't considered part of gross income.

Amounts withdrawn from an HSA to pay qualified medical expenses are excluded from taxable income, whether or not the HSA owner is currently eligible to make contributions.

Qualified medical expenses include items like over-the-counter drugs but don't include health-insurance premiums or Medicare supplemental premiums. But premiums for long-term-care insurance, COBRA health-care continuation coverage, and health-care coverage while a person receives unemployment benefits, as well as premiums for Medicare itself, Medicare private health plans, or employer-sponsored retiree coverage, do count as qualified medical expenses.

The agency seeks comment on matters including how to define the preventive care for which coverage is allowable under HSA plans, and how HSAs relate to flexible spending accounts and health reimbursement accounts.