NCPA - National Center for Policy Analysis

Health Savings Accounts Empower Consumers

January 15, 2004

As of January 1, 2004, nonelderly Americans now have access to Health Savings Accounts (HSAs). According to health economist John Goodman, HSAs empower individuals to make their own health care decisions. With HSAs physicians will be free to act as the agents of their patients rather than third-party payers.

Deposits to HSAs enjoy the same tax advantages formerly granted only to health insurance premiums, explains Goodman:

  • Deposits from employers and/or employees to HSAs will avoid all federal income and payroll taxes.
  • Combined with individually owned insurance, HSA deposits will be a deductible expense, even for income tax filers who do not itemize.
  • Withdrawals for medical purposes will not be taxed and unused funds can be used in retirement.
  • Individuals and/or employers make deposits each year equal to the accompanying health insurance policy's deductible -- which must be at least $1,000 for an individual or $2,000 for a family policy.
  • Annual HSA deposits cannot exceed the health insurance deductible, and typically cannot exceed $2,600 for individuals and $5,150 for families.
  • Account balances can earn interest or be invested in stocks or mutual funds, and they will grow tax free; thus they could grow to hundreds of thousands of dollars by retirement.
  • HSAs belong to the individual account holders and remain theirs if they switch jobs, become unemployed or retire.
  • The funds can be used for expenses not covered by insurance, insurance premiums while unemployed and health expenses during retirement, and unused balances may be bequeathed to a spouse or other heirs.

Individuals will typically spend first from their HSA. If they exhaust their HSA funds before reaching the deductible, they will then pay out-of-pocket. But once they reach their deductible, insurance pays all remaining costs.

Source: John C. Goodman (NCPA president), "Health Savings Accounts Will Revolutionize American Health Care," Brief Analysis No. 464, January 15, 2004, National Center for Policy Analysis.

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