Will Health Savings Accounts Stay Popular With Health Care Reform?

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With the passage of The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010, the U.S. has made the greatest strides to improve access to healthcare since Medicare was enacted.

Beginning in 2014, anyone who is not covered through Medicaid, Medicare or another government-sponsored program will be required to carry at least minimum health insurance. This is expected to increase the already rapidly growing market for high-deductible health insurance plans.

Will There Be Penalties For Inadequate Health Insurance?

Minimum coverage will include eligible employer-sponsored plans, plans in the individual market and “grandfathered in” group health plans. Anyone who is incarcerated, not legally present in the U.S. or who qualifies for a religious exemption won’t be required to have any health insurance.

Beyond those exemptions, inadequate insurance could leave you facing a penalty equal to the greater of either a flat amount or a percentage of income. The flat-amount penalty will be $95, and the income percentage penalty will be one percent of your income, but not until 2014.

The new law specifies that liens and seizures are will not be authorized as enforcement. Nor, will people who fail to comply be subject to any criminal penalties.

Will This Create More Demand For Health Savings Accounts?

These tax-advantaged accounts have been reported to be growing exponentially in the past few years as the cost of health insurance rose even faster. High-deductible health insurance plans are particularly popular because they offer lower premiums in exchange for high deductibles.

This attractive combination of lower-premiums with accounts that earn tax-free interest while allowing tax deductions for health care expenses has sparked record investments. The demand is expected to continue growing as more people search for health care insurance in the coming years.

Will Legislation Change The Rules For Health Savings Accounts?

While HSA Plans remain top contenders, the recent legislation has had less favorable impacts on such plans. Under the Patient Protection Act, over-the-counter drugs will no longer be reimbursable through an HSA. That change does not affect medications prescribed by a doctor or insulin, though. This particular change will be effective for expenses incurred as of 2011.

The same will be true for similar accounts, including Archer medical savings accounts, health flexible spending accounts and health reimbursement arrangements.

Will HSA Distributions Not Used For Qualified Expenses Face Increased Taxes?

Beginning in 2011, the tax on distributions from an HSA or Archer MSA that are not used for qualified medical expenses will be increased to 20 percent of the disbursed amount. Before the new legislation, that tax was just 10 percent. Higher taxes will make it more important to follow the rules on which purchases will be treated as qualified medical expenses.

Will Health Savings Accounts Continue In The Future?

Despite the reduction in qualified expenses and increased penalties, the opportunity for tax deductions and higher earnings with tax-free interest is expected to keep HSA Plans in demand. The lower premiums of qualified high-deductible health insurance may make HSA Plans the number one choice in coming years.