U.S. Issues Rules for Health Savings Accounts

The Treasury Department issued rules Monday governing how companies will market tax-free savings accounts that Americans can use to pay for medical expenses under the new Medicare law.

The so-called health savings accounts, included in the Medicare overhaul legislation President Bush signed into law Dec. 8, are designed for Americans in health plans with high out-of-pocket costs and those who anticipate needing long-term care when they retire.

“We want Americans to be able to take advantage of HSAs as soon as possible,” Treasury Secretary John W. Snow said. Under the rules announced Monday, Americans who qualify for the accounts may open them starting Jan. 1.

Democratic critics such as Rep. Charles Rangel of New York say the accounts are a tax shelter for those wealthy enough to be able to save as much as $5,150 a year in them. The accounts work like 401(k) plans; contributions are deducted from taxable income and the accounts’ proceeds grow untaxed.

An account’s funds remain tax-free as long as they’re applied to expenses such as prescription drugs, disease prevention, chronic care, health insurance for the unemployed and retiree health plans.

Withdrawals for purposes such as most plastic surgery and other medical procedures that are not otherwise tax-deductible wouldn’t qualify.

To qualify for the accounts, an individual must have at least a $1,000 deductible in his or her health plan or already be contributing to the accounts’ predecessor, called an Archer Medical Savings Account.

The accounts are similar to flexible spending accounts offered by many companies. One difference is that unspent money in health savings accounts rolls over, while unused funds in an annual flexible spending account are forfeited. The health savings accounts also would allow a $500 increase in the contribution limits for people ages 55 to 65 to allow them to save more for long-term care needs.

UnitedHealth Group Inc. and Aetna Inc. are among the firms that have said they would sell the accounts or have made moves to begin marketing them.