Guidance On HSAs Is Issued By IRS, Treasury

The Internal Revenue Service (IRS) and Treasury Department have issued a notice (No. 2004-2) explaining health savings accounts (HSAs). Any individual who has a high-deductible health plan may establish an HSA, which is completely portable, remains in the account until spent, and gains tax-free interest.

According to the notice, a "high-deductible health plan" or HDHP has an annual deductible of at least $1,000 with out-of-pocket expenses not exceeding $5,000 (for individuals), or at least a $2,000 deductible and annual out-of-pocket expenses not exceeding $10,000 (for families). Amounts are indexed for inflation.

The guidance also notes that a plan does not fail to qualify as an HDHP merely because it does not have a deductible (or small deductible) for preventive care. Furthermore, except for preventive care, the notice says a plan may not provide benefits for any year until the deductible for that year is met.

According to the guidance, tax-advantaged contributions to HSAs can be made in three ways: (1) the individual and family members can make tax-deductible contributions even if the individual does not itemize deductions, (2) the employer can make contributions that are not taxed to either the employer or employee, and (3) an employer with a cafeteria plan can allow employees to contribute untaxed salary through a salary reduction plan.

The IRS and Treasury Department said they plan to issue additional guidance in the summer of 2004. As a result, public comments are being solicited from taxpayers regarding information in the current notice, as well as on the following questions: What kinds of preventive care can be offered without a deductible in an HDHP? What relationships exist among HSAs, flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs)? Should HDHPs being used in conjunction with HSAs be allowed to impose a lifetime limit on benefits? The notice can viewed online at http://www.irs.gov/pub/irs-drop/n-04-2.pdf.