We’re getting more details about the most significant parts of the Medicare prescription drug law that was enacted in late 2003. The two key provisions are Health Savings Accounts (HSAs) and prescription discount cards.
The new Health Savings Accounts (HSAs) for people under age 65 were reviewed in detail in January. Recall that the accounts are available to individuals with “high deductible” medical insurance plans (at least $1,000 for individuals; $2,000 for families). Contributions to the plans are deducted from gross income if made by individuals and are excluded from income if made by employers up to limits ($2,600 for individuals; $5,150 for family coverage). Additional contributions of $500 in 2004 are available to those ages 55 and over. The HSA balance can be invested tax free. If spent on qualified medical expenses, HSA distributions are not taxed.
Here are some new details from the IRS.
Contributions can be made on any day during the year. They don’t have to be paid in equal installments or on any other schedule. The contribution limit is pro rated by the number of months during the year the owner was eligible for an HSA. For example, if you had a high deductible policy for only 10 months of the year, your contribution limit is ten-twelfths of the regular limit.
The HSA rules closely track IRA rules. Any current IRA custodian automatically is qualified to be an HSA sponsor. Other banks and other financial institutions can apply to be HSA custodians.
Only a few HSAs are on the market. For example, Golden Rule and Fortis Health now offer HSAs combined with their own insurance policies. Other health insurers say they are preparing similar offerings. Even more financial institutions are planning to offer HSAs after the IRS issues another set of regulations planned for Summer 2004.
The law does not require that the HSA and the medical insurance be from the same company. If a number of financial institutions start to offer HSAs, you can buy the best insurance policy you find and open the best HSA, regardless of who sponsors them.
Before selecting an HSA wait until later in the year when a number of HSAs are likely to be available. Shop for an HSA the same way you would for an IRA. Look for low expenses and a range of investment options that also have low expenses. Ideally, you will be able to buy a good insurance policy and a good HSA separately.
Because contributions must stop at age 65, most of those already retired will not benefit from HSAs. The accounts might be ideal, however, for younger people who want to plan for retirement health care spending. They can make maximum contributions when they are younger and medical expenses are fairly low. Then, they will have tax-free money to pay for the extra expenses that occur after age 65. For those who retire before 65, an HSA can get you through the “bridge years” when neither employer coverage nor Medicare is available.
HSAs also are attractive to sole proprietors and to businesses of 100 to 1000 employees that find traditional health care plans too expensive and prone to huge cost increases.
The Medicare discount prescription drug discount cards are the other major benefit. Remember that these are privately-issued cards that are endorsed by Medicare. Each card provider will negotiate its own discounts with different drug companies. Drug companies are free to offer whatever discounts they want and to vary discounts for each drug.
Eli Lilly & Co. looks like the first with definite plans. Lilly, according to The Wall Street Journal, will offer all its medicines for $12 monthly to lower income seniors through pharmacy benefit managers and insurers. Approximately 70% of seniors are expected to qualify for the discount for those with incomes up to $18,000 for individuals and $24,000 for households.
You are about to be hit with a wave of advertising and information about the discount cards. Plans that are approved by Medicare can begin enrolling people in May 2004, and the plans can become effective in June 2004. You can get updates and details about the approved programs available to you by using Medicare’s web site at www.medicare.gov. Or you can call Medicare at 1-800-MEDICARE or your state health insurance assistance program.