Health Savings Accounts: Basic Components and Estate Planning Issues
The introduction from the article is below:
Until recently, a client’s health insurance posed few issues for the estate planning lawyer. But as the federal government struggles with health care reform and as various pre-tax health savings plans have proliferated, the estate planner has a variety of issues to address. Health savings accounts (HSAa) are available for employees who participate in high-deductible health plans (HDHPs). As employers seek to control health insurance costs, these plans are gaining popularity at an exponential rate. According to the U.S. Department of the Treasury, only 438,000 individuals were covered by HDHPs in 2004. Today, that number has increased to 3.2 million and is projected to rise to between 14 million and 21 million by 2010. Although HDHPs have lower premiums, their is also because of the public’s increasing awareness of the substantial tax benefits of the HSA. Still early in their development, HASs were created in 2004 as part of the Medicare Prescription Drug Improvement and Modernization Act, Pub. L. No. 108-173, 117 Stat. 2006, in response to the increasing cost of health care. As such, they are designed to give an incentive to the consumer to control his or her own health care costs. Unlike flexible savings accounts, HSAs do not have a “use-it-or-lose-it” functionality; account holders can carry over balances from year to year until the account holder’s date of death or, with proper planning, until the account holder’s spouse’s date of death.
The basic concept that controls the HSA is tax-focused: all contributions to, distributions from, and income earned in the account occur on a federal income tax-free basis, as long as the assets are used to pay for qualified medical expenses (note that state tax treatment of HSAs varies from state to state). As the wave of HSAs sweeps across the health care landscape, it is important for estate planners to be conversant with the basic operations of HSAs and the attendant estate planning implications of the accounts, which, if not addressed properly, can provide surprising and unfavorable results. This article will first discuss the basic components of HSAs and then turn to the unexposed estate planning issues raised by HSAs for which each lawyer in the practice should prepare.