Archive for Tuesday, December 23, 2003

Tax-free health care accounts to start Jan. 1

December 23, 2003


— The Bush administration advertised new tax-free health savings accounts, which will be available beginning next week, as a way for Americans to gain greater control of health care spending.

To escape taxation on both contributions and withdrawals, dollars set aside in the accounts must be spent for medical expenses.

"This account is a good option and available to all Americans. Every year the money not spent would stay in the account and gain interest tax-free, just like an IRA," White House spokesman Scott McClellan said Monday.

However, guidance issued Monday by the Treasury Department limits eligibility for the special savings accounts to people who have health insurance policies with annual deductibles -- the amount paid to cover expenses before benefits begin -- of at least $1,000 for individuals and $2,000 for families.

In addition, Americans 65 years and older cannot open the new health accounts.

The conditions were stipulated in the Medicare law passed by Congress and signed this month by President Bush.

Despite the limitations, millions of Americans will qualify for the accounts, Treasury officials said.

Money deposited in the accounts could be invested, then withdrawn free of taxes for most medical expenses, including prescription drugs, long-term care services and Medicare premiums. Employers also would pay no taxes on amounts they contribute as employee benefits.

Individuals, their employers or their family members can put away the amount of their annual insurance deductibles, up to $2,600 a year for individuals and $5,150 a year for families. People age 55 to 64 could make additional contributions to build a medical nest egg.

An account stays with a person for a lifetime. Upon death, assets can be transferred tax-free to a spouse, who also would be limited to using the money for out-of-pocket medical expenses.

The accounts can be set up beginning Jan. 1 and are expected to reduce Treasury revenues by $6.4 billion over a decade.

Critics contend the accounts establish a tax shelter for the wealthy and are a precedent for future accounts to let affluent families evade taxes.

They also worry that the accounts will increase health costs gradually for many people by drawing young, healthy and affluent people out of the general pool of health insurance into high-deductible insurance plans.

Aetna and UnitedHealth Group already have signaled their intention to offer the accounts. Several other insurers are expected to follow suit, said Joe Walshe, who works for PricewaterhouseCoopers HR Services.

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