Here's the problem with the Health Savings Accounts. He wants to continue to contribute but he can't not directly because he's on Medicare but because he's not eligible once he's 65. Opting out of Medicare is beside the point. He'd still be 65.
I don't have a clue as to what possible reason he might have for not taking Medicare Part A.
Pros and Cons of Health Savings Accounts
Sue Stevens, 04.08.04, 7:00 AM ET
One of my clients called me the other day and said, "What do you know about the new health savings accounts? They're the hot topic at our cocktail parties." My first thought was that he needed to find more-interesting parties to attend. My second thought was that maybe this is something we all need to know more about.
What's an HSA?
Health Savings Accounts (HSAs) were recently created by a provision in the Medicare Prescription Drug Improvement and Modernization Act signed into law in December 2003. Anyone meeting the eligibility requirements (below) can set up an HSA. Individuals can contribute up to the lesser of their deductible or $2,600 dollars in 2004 (families can contribute $5,150). If an individual contributes to an HSA, he or she can take an "above-the-line" deduction on his or her tax return (dollar for dollar). If an employer makes a contribution, it is not taxable to the employee. Self-employed individuals and employers can not only deduct their contributions, they can deduct the premiums. Individuals who are not covered by an employer health insurance plan can set up an account and make tax-deductible contributions (although their premiums are not tax deductible).
Contributions accrue over time. It's not like the "use it or lose it" type of flexible spending accounts that you may have had before. HSA contributions grow tax-deferred. Withdrawals are tax-free if used for qualified medical expenses. If you're over age 50, you can also make a catch-up contribution of $500 in 2004 (increasing by $100 per year to a maximum of $1,000 in 2009).
Who's Eligible?
To be eligible, you have to meet four requirements: +You have to be covered by a "high-deductible" health insurance plan. "High-deductible" is defined as a deductible (where you pay the first dollars for medical service) of $1,000 or higher for singles, $2,000 or higher for families. The out-of-pocket maximum for singles can't be more than $5,000 ($10,000 for families). The "high-deductible" plans may have no deductible for preventive care and higher out-of-pocket expenses for non-network services. +You can't be covered by another health insurance plan, such as a spouse's plan. +You can't be age 65 and older. +You can't be claimed as a dependent on someone else's tax return.
What's Covered?
Traditional medical costs like diagnosis and treatment of disease are covered. In addition, many expenses not covered by traditional medical insurance would be covered: eye care, dental care, prescription and some non-prescription drugs, COBRA premiums, acupuncture, Braille books, midwife, seeing-eye dog, qualified long-term care services, and more. The same things you can deduct on Schedule A are considered medical expenses for HSAs. For more on exactly what qualifies, see IRS Publication 502: Medical and Dental Expenses.
If you take a distribution for non-medical expenses and you are under age 65 or not disabled, you'll pay a 10% penalty in addition to ordinary income tax.
What Happens Once You Are Age 65 and Older?
The accumulated dollars can be used tax-free for qualified medical expenses such as Medicare Part A&B premiums, Medicare HMO, and the employee's share of retiree medical insurance premiums. You can't use the money to purchase a Medigap policy. If you use the money for non-medical expenses, you'll pay tax on your withdrawals (but no penalty).
Where Can You Set Up an HSA?
So far, HSAs are primarily offered by insurance companies or banks. Insurance companies providing HSAs include UniCare, Fortis, Blue Cross Blue Shield, and Golden Rule. You can also try calling some local banks to see if they offer HSAs. Remember, you have to invest in whatever the institution offers--so choices may be limited at first.
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