PricewaterhouseCoopers 2008 Guide to Tax and Financial Planning

Chapter 6. Account‐Based Health‐Care Arrangements

The Medicare Prescription Drug, Improvement, and Modernization Act that was designed in 2003 primarily to create prescription drug programs for Medicare beneficiaries, also established health savings accounts (HSAs), which provide individuals with a tax‐advantaged vehicle for paying medical expenses. Moreover, over the past few years, the Internal Revenue Service (IRS) has supported company plans to provide medical benefits to employees on a tax‐advantaged basis by issuing a number of favorable rulings, including through the recognition of health reimbursement arrangements (HRAs). The HSA and HRA plans are in addition to health flexible spending accounts (FSAs) that employers have traditionally made available to employees. This chapter discusses HSA, HRA, and FSA plans.

Health Savings Accounts

You can use HSAs (tax‐advantaged investment or retirement accounts) to pay for qualified medical expenses. To be eligible to contribute to an HSA, you must be covered under a qualifying high deductible health plan (HDHP). You and/or your employer may contribute to the HSA up to a specific limit. You can make contributions and claim a tax deduction, or, if your employer allows, you can make pretax contributions through your employer's cafeteria plan. If your employer contributes to your HSA on your behalf, those contributions are not taxable to you (and are not subject to Social Security and Medicare taxes). Once money is in your HSA, it belongs ...