There has been a great amount of discussion over the past few years regarding Health “Savings” Accounts in the US. Since Health “Spending” Accounts are starting to take off in Canada, I thought I would devote a page to Canada’s healthcare cousin south of the border. In Canada, we have two types of HSA currently on the market – Health & Welfare Trusts (HWT) and Private Health Services Plans (PHSP).
Hopefully, this will help to provide some insight to our readers on the differences between the US and Canadian solutions.
Health Savings Accounts
A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a High Deductible Health Plan (HDHP). The combination of these two products are the foundation of what is commonly referred to as consumer driven health care.
American taxpayers can make contributions to the account to finance their healthcare spending. The contributions are not subject to federal income tax at the time of deposit. The funds in the account may be used to pay for qualified medical expenses at any time without federal tax penalties. Withdrawals for non-medical expenses are treated similarly to an IRA account in that they may provide a degree of tax advantage if taken after retirement age. Similarly, they incur penalties if taken earlier.
The HSA in the U.S. is a true savings vehicle open to individual consumers. Contributions are tax-free and the funds can accumulate interest. The major difference is the requirement of a high-deductible insurance product to accompany the account. The annual amount an individual can deposit into their HSA and claim as a tax deduction is based on the greater of the annual insurance deductible, up to a maximum of $2,700 per single and $5,450 per family. The owner of the HSA can invest the funds, however, the account must be their only source of insurance.
History/Background
The HSA is a new concept in the U.S., first started with the establishment of Medical Savings Accounts in 1996, followed by HRAs by the IRS in 2002. However, the real catalyst for the recent growth activity was the passage in 2003 of the Medicare Modernization Act.
Since then, the HSA has been a front-page news item in the US with many companies adopting the program as a defined contribution model for health benefits. In a country where the cost of healthcare continues to rise, a growing number of companies are moving towards the HSA model to contain costs and deliver a degree of budget certainty. In the past 2 years, U.S. companies have been giving employees more of a stake in their healthcare spending with the hope that they will make wiser, more cost-effective choices. Companies such as Microsoft, Fujitsu Ltd., General Motors, Nokia, and Daimler Chrysler have already implemented the DC model for their US-based employees through an HSA.
According to a study done by the Kaiser Family Foundation, an estimated 3.8 million U.S. workers, about 5 percent of the covered workforce, were enrolled in consumer-driven plans as of 2007. The study also found that 10% of firms offered such plans to their workers.
How They Work
Funds in an HSA can be invested, and earnings are sheltered from taxation until the funds are withdrawn. The account holder (the employee) does not have to obtain advance approval from the HSA trustee or medical insurer to withdraw funds. And if the funds are used to reimburse eligible medical expenses-which
include deductibles and co-insurance, as well as many other expenses not covered under traditional medical plans-they are not subject to income tax.
The account holder is responsible for ensuring that claims are made only for eligible expenses and for keeping receipts on file to validate the claims in case of an audit. Since the responsibility for eligibility belongs to the account holder and not to a third-party trustee, many suppliers offer debit cards that
allow the account holder to pay healthcare expenditures directly from his or her account.
Deposits to U.S. HSAs can be made by any policyholder, individual or corporate entity of a minimum-deductible health plan, by the employer or by any other person. However, the tax treatment depends on the contributor. Employers can contribute on behalf of employees on a pre-tax basis, and the main advantage of making pre-tax contributions is the Federal Insurance Contributions Act deduction. However, if the employee wishes to make additional contributions, he or she can only do so on a post-tax basis, and the
post-tax funds will decrease the employee’s gross taxable income on the following year’s income tax Form 1040. Self-employed individuals must also pay self-employment tax on their contributions.
Contributions, Taxes, & Investments
Funds in an HSA can be invested in a manner similar to an Individual Retirement Account (IRA). Investment earnings are sheltered from taxation until the money is withdrawn. If the withdrawal is for an eligible medical expense then the amount is not taxed. Withdrawing funds from the account for reasons other to pay for an eligible medical expense are subject to income taxes and a 10% penalty. The 10% tax penalty is waived for persons who have reached the age of 65 or have become disabled at or before the time of the withdrawal. Then, only income tax is paid if not an eligible medical expense.
While HSAs can be “rolled over” from fund to fund, an HSA cannot be rolled into an IRA or a 401(k) plan. Unlike some employer contributions to a 401(k) plan, all contributions immediately become the property of the recipient, regardless of the source of funds.
Making Claims
American taxpayers who own an HSA do not have to obtain advance approval from their HSA trustee or their medical insurer to withdraw funds, a major difference from the Canadian model. The funds are not subject to income taxation if made for qualified medical expenses. These costs include…
- services and items covered by the health plan but subject to cost sharing such as a deductible and coinsurance
- co-payments to an insurance plan
- dental services not covered by a core plan
- vision services not covered by a core plan
- chiropractic care and other paramedical servcies not covered by the core drug plan
- medical equipment such as eyeglasses and hearing aids
- transportation expenses related to medical care
Some HSA providers in the US offer a debit card for account holders to use at pharmacies and medical practitioners. Others supply checks or allow for a reimbursement process similar to traditional insurance.
Account holders are required to retain documentation (i.e. receipts, prescriptions) for their qualified medical expenses. Failure to do so could cause the IRS to rule withdrawals were not for qualified medical expenses and then re-assess the tax situation of the individual – including the issuance of penalties.
Valuable Links
Some valuable links, resources and blogs available to learn more about HSAs in the USA…
United States Treasury Site – HSAs
United States Internal Revenue Service – List of Eligible Expenses
HSA Information for Canadians 
Leave a comment
Comments feed for this article