Health Savings Accounts: Overview of Rules for 2007

Publication Date: November 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Health

Type:

Abstract:

Health Savings Accounts (HSAs) are one way people can pay for unreimbursed medical expenses (deductibles, copayments, and services not covered by insurance) on a tax-advantaged basis. HSAs can be established and funded by eligible individuals when they have a qualifying high deductible health plan and no other health plan, with some exceptions. For 2007, the deductible for self-only coverage must be at least $1,100 (with an annual out-of-pocket limit not exceeding $5,500); the deductible for family coverage must be at least $2,200 (with an annual out-ofpocket limit not exceeding $11,000).

The annual HSA contribution limit in 2007 for individuals with self-only coverage is $2,850 or 100% of the insurance deductible, whichever is lower. For family coverage, the annual contribution limit is $5,650, 100% of the overall deductible, or the embedded deductible (the deductible applying to one individual) multiplied by the number of covered family members, whichever of the three is lowest. Individuals who are at least 55 years of age but not yet enrolled in Medicare may contribute an additional $800.

The tax advantages of HSAs can be significant for some people: contributions are deductible (or excluded from income that is taxable if made by employers), withdrawals are not taxed if used for medical expenses, and account earnings are taxexempt. Unused balances may accumulate without limit.

HSAs and the accompanying high deductible health plans are one form of what some call "consumer-driven health plans." One objective of these plans is to encourage individuals and families to set money aside for their health care expenses. Another is to give them a financial incentive for spending health care dollars prudently. Still another goal is to give them the means to pay for health care services of their own choosing, without constraint by insurers or employers. Since HSAs are relatively new, the extent to which they will further these objectives is not yet known. Among other things, it remains to be seen how many people will eventually establish accounts, how much they will contribute to them, and how much they will carry over to subsequent years.

This report is limited to a summary of the principal rules governing HSAs, covering such matters as eligibility, qualifying health insurance, contributions, and withdrawals. It will be updated as the rules change, either by legislation or regulatory action.

For current information about legislative proposals to change HSA rules, see CRS Report RL33505, Tax Benefits for Health Insurance and Expenses: Overview of Current Law and Legislation, by Bob Lyke. Possible legislative issues are also addressed in CRS Report RS22437, HSAs: Some Current Policy Issues, also by Bob Lyke.