Health Savings Account Act Exposed

The Health Savings Account Act was adopted by ALEC's Health and Human Services Task Force at the Spring Task Force Summit in May, 2005, approved by the ALEC Board of Directors June, 2005. An updated version of the Act is available on ALEC.org, re-approved by the Board of Directors on January 28, 2013. Any language removed from the original version is indicated with strikethrough text and additions are given in bold. (Accessed on 2/5/2016).

ALEC Bill Text

Summary

A bill to permit the establishment and maintenance of health savings accounts; to provide penalties and remedies; to exempt contributions from taxation; and to prescribe the requirements of and restrictions on health savings accounts.

Model Legislation Policy

Section 1. {Title}

This Act shall be known and may be cited as the "Health Savings Account Act."

Section 2. {Definitions}

As used in this Act

(A) “Eligible individual” means the individual taxpayer, including employees of an employer who contributes to health savings accounts on the employees’ behalf, whom:

(1) Must be covered by a “High Deductible Health Plan” individually or with dependent; and;

[Note: HSA eligible individuals must be covered by a qualified high deductible health plan. See: IRC Sec. 223 (c) (1) (A).]

(2) May not be covered under any health plan that is not a high deductible health plan, except for:

(i) coverage for accidents, disability, dental care, vision care, long term care,

(ii) workers compensation insurance

(iii) insurance for a specified disease or illness

(iv) insurance paying a fixed amount per day per hospitalization and

(v) coverage for tort liabilities or liabilities relating to ownership or use of property; and

[Note: HSA eligible individuals may be covered by certain other types of insurance coverage. See: IRC Sec. 223 (c)(1)(B) and (c)(3).]

(3) Who establishes or on whose behalf the health savings account is established

(B) “Deductible” means the total deductible for an eligible individual and all the dependents of that eligible individual for a calendar year

(C) “Dependent” means the spouse or child of the eligible individual as defined in Section 152 of the Internal Revenue Code subject to any additional modifications imposed by Section 223(d)(2) of the Internal Revenue Code.

[Note: The Working Families Tax Relief Act of 2004 amended the definition of “dependent” in IRC Sec. 152 and unintentionally placed limits on who could be considered a dependent for purposes of an HSA. Congress intends to correct this problem later this year by amending the HSA law in IRC Sec. 223. See: Tax Technical Corrections Act of 2004 (S. 3019).]]

(D) “Qualified medical expense” means an expense paid by the taxpayer for medical care described in Section 213(d) for the Internal Revenue Code

(E) “High deductible health plan” means a health plan with:

(1) In the case of self-only coverage, an annual deductible (increased each year by a cost of-living adjustment) which is not less than $1000 and the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits does not exceed $5000 $5,-1000, or such other amounts for an annual deductible and out-of-pocket expenses established in accordance with Section 6.

[Note: The stated dollar amounts are those permitted for HSAs for tax year 2005. (Treasury Department Revenue Ruling 2004-71) and Section 6 allows for automatic increases for cost-of-living adjustments.]

(2) In the case of family coverage, an annual deductible (increased each year by a cost of-living adjustment) of not less that $2000 and the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits does not exceed $10,000 $10,200, or such other amounts for an annual deductible or out-of pocket expenses established in accordance with Section 6.

[Note: The stated dollar amounts are those permitted for HSAs for tax year 2005. (Treasury Department Revenue Ruling 2004-71) and Section 6 allows for automatic increases for cost-of-living adjustments.]

(3) A plan shall not fail to be treated as a high deductible plan by reason of failing to have a deductible for preventive care or, in the case of network plans, for having out-of-pocket expenses that exceed these limits on an annual deductible for services provided outside the network. or annual deductibles for services provided outside the network that exceed the limitations in this section.

[Note: This clarifies the exemption from the applicability of the limitations to out-of-network services under IRC Sec. 223(c)(2)(D).]

(F) “Health savings account” or “account” means a trust or custodian established in this state pursuant to a health savings account program exclusively to pay the qualified medical expenses of an eligible individual or his or her dependents, but only if the written governing instrument creating the account meets the following requirements:

[Note: There is no limitation on where HSA accounts can be established so long as the trustee or custodian meets the qualifications in the Internal Revenue Code. See: IRC Sec. 223 (d)(1)(B).]

(1) Except in the case of a rollover contribution, no contribution will be accepted

• (a) unless it is in cash; or

• (b) to the extent such contribution, when added to the previous contributions to the Account for the calendar year, exceeds 100 percent of the eligible individual’s deductible or $2600 for an individual or $5150 per family, (or such dollar amounts as established in accordance with Section 6.), whichever is lower;

[Note: Dollar amounts are those permitted for HSAs for tax year 2005 (Treasury Department Revenue Ruling 2004-71) and Section 6 allows for automatic increases for cost-of-living adjustments.]

(2) The trustee or custodian is a bank, an insurance company, or another person approved by the Secretary of Health and Human Services. U.S. Department of Treasury;

[Note: The HHS Secretary does not approve trustees or custodians.]

(3) No part of the trust assets will be invested in life insurance contracts

(4) The assets of the account will not be commingled with other property except as allowed for under Individual Retirement Accounts

(5) Eligible individual’s interest in the account is non-forfeitable

(6) Eligible individuals who have attained age 55 before the end of the year may make additional catch-up contributions into the account in the amount determined in accordance with the following table:

2005 $600

2006 $700

2007 $800

2008 $900

2009 and thereafter $1,000

[Note: Individuals age 55 and older are permitted to make additional catch-up contributions into an HSA. See: IRC Sec. 223 (b)(3).]

(G) “Health Savings Account program” or “program” means a program that includes all of the following:

(1) The purchase by an eligible individual or by an employer of a high deductible health plan and

(2) The contribution into a health savings account by an eligible individual or on behalf of an employee or by his or her employer. The total annual contribution may not exceed the amount of the plan’s higher deductible or the amounts listed in Section F (1)(b)

(H) “High Deductible Health Plan” means a health coverage policy, certificate, or contract that provides for payments for covered benefits that exceed the higher deductible.

[Note: Family members and others may contribute to an HSA of an eligible individual. See: IRC Sec. 223 (a).]

[Note: High deductible health plan is defined in subsection 2.E.]

Section 3. {Applicability and Scope}

[Note: This section is stricken to avoid confusion since the rest of the model follows federal law for purposes of defining an HSA.]

(A) The provisions of this Act shall apply also to taxpayers who are not receiving preferred federal tax treatment for a health savings account (under I.R.C. Section 223)

(A) For taxable years beginning after {insert year}, contributions may be made into a health savings account by or on behalf of a resident of {insert state}, pursuant to subsection 2.F.

[Note: This clarifies that others may contribute to an individual’s account and that the definition of health savings account sets forth the requirements for contributions.]

(B) For taxable years beginning after (insert year) a resident of (insert State) or an employer shall be allowed to deposit contributions to a health savings account. The amount of deposit for (insert year) shall not exceed the amount of the plan’s high deductible, nor $2600 for an individual policy, and $5150 for a family policy.

(B) Except as provided in Section 5, principal contributed to and interest earned on a health savings account and money reimbursed to an eligible individual or an employee for qualified medical expenses are exempt from taxation under (the Income Tax Act).

(C) Except as provided in Section 5, principal contributed to and interest earned on a health savings account and money reimbursed to an eligible individual or an employee for qualified medical expenses are exempt from taxation under (the Income Tax Act).

Section 4. {Distribution of HSA Funds}

The trustee or custodian shall utilize the funds held in a health savings account solely for the purpose of paying the qualified medical expenses of the eligible individual or his or her dependents, or to purchase a health coverage policy certificate, or contract, if the eligible individual is receiving unemployment compensation, is exercising continuation privileges under federal law, is purchasing a long term care insurance contract, or to pay for health insurance other than a Medicare supplemental policy for those who are Medicare eligible. Funds held in a health savings account shall not be used to cover expenses of the eligible individual or his or her dependents that are otherwise covered, including but not limited to, medical expense covered pursuant to an automobile insurance policy, worker’s compensation insurance policy or self-insured plan, or another employer-funded health coverage policy, certificate, or contract.

Section 5. {HSA Withdrawals}

(A) Notwithstanding Section (C), (D), (E), or (F) an eligible individual may withdraw money from his or her health savings account for any purpose other than a purpose described in Section 4 (A).

(B) Subject to subsection (C), if the eligible individual withdraws money for any purpose other than a purpose described in section 4 (A) at any other time, all of the following apply:

(1) The amount of the withdrawal is income for the purposes in the (Income Tax Act) in the tax year of the withdrawal

(2) Interest earned on the account during the tax year in which a withdrawal under this subsection is made is income for the purposes of the (Income Tax Act)

(C) The amount of disbursement of any assets of a health savings account pursuant to a filing for protection under Title 11 of the United States Code, 11 U.S.C. 101, et seq. By an eligible individual or person for whose benefit the account was established is not considered a withdrawal for purposes of this section. The amount of a disbursement is not subject to taxation under (the Income Tax Act) and subsection (B) does not apply

(D) The transfer of an eligible individual’s interest in a health savings account to an eligible individual’s spouse or former spouse under a divorce or separation instrument shall not be considered a taxable transfer made by such eligible individual, notwithstanding any other provision of this subtitle, and such interest shall, after such transfer, be treated as a health savings account with respect to which such spouse is the eligible individual

(E) Upon the death of the eligible individual, the trustee or custodian shall distribute the principle and accumulated interest of the health savings account to the estate of the deceased.

(F) If an employee becomes employed with a different employer that participates in a health savings account program, the employee may transfer his or her health savings account to that new employer’s trustee or custodian, or to an individually purchased account program.

Section 6. Dollar Amounts.

The U.S. Department of Treasury may make cost-of-living adjustments to dollar amounts for requirements for deductibles and out-of-pocket expenses in accordance with Internal Revenue Code Section 223. If such adjustments are made, then the corresponding amounts in subsections 2.(E) and 2.(F) will be considered to be increased to reflect such adjustments.

[Note: This is intended to avoid the need to amend the Act to reflect Treasury cost-of-living adjustments.]

Section 6. {Severability clause}

Section 7. {Repealer clause}

Section 8. {Effective date}

Adopted by the Health and Human Services Task Force at the Spring Task Force Summit, May 2005.

Approved by the ALEC Board of Directors, June 2005.