Medicare bill includes tax-free accounts

ASSOCIATED PRESS

New health savings accounts included in Medicare legislation would let individuals save, invest and then spend money tax-free.

To avoid all taxes, the dollars must pay for medical expenses. The lure of “tax-free asset accumulation,” as advertised by the House Ways and Means Committee, coaxed some conservative Republicans into supporting a vast new Medicare drug benefit.

“I’m just thrilled by it,” said Rep. John Kline, Minnesota Republican. “It’s fair to say the health savings accounts are what has me most excited about this bill.”

Critics contend the accounts establish a tax shelter for the wealthy and set a precedent for future accounts to let affluent families evade taxes.

Sen. John B. Breaux of Louisiana, one of only two Democrats involved in the Medicare negotiations, said the accounts do little to help the retirees that the new drug coverage aims to benefit.

“I don’t like them. I think they’re bad policy,” he said.

The accounts, expected to bring in $6.4 billion less to the Treasury over a decade, would be available to individuals with high-deductible health insurance. The deductible must be at least $1,000 for an individual or $2,000 for a family.

Individuals, their employers or their family members could put away the amount of the annual deductible, up to $2,600 a year for individuals and $5,150 a year for families. People ages 55 to 65 could make additional contributions to build a medical nest egg.

Money deposited into the accounts could be invested, then withdrawn free of taxes for insurance premiums, prescription drugs, long-term care services, Medicare premiums and other health care costs. Employers would not pay payroll taxes on amounts they contribute as an employee benefit.

An account stays with a person for a lifetime. Upon death, assets may be transferred tax-free to a spouse.

Ways and Means Committee Chairman Rep. Bill Thomas, California Republican, said tax-free health spending is not as revolutionary as it may appear because employers already receive tax deductions for money spent on their workers’ health care.

The appeal of tax-free investing gives individuals incentive to use the new accounts, and tax-free withdrawals make the money readily available for health needs, Mr. Thomas said.

“The last thing you want to do is have someone have a second thought about spending money on health care because there’s a tax consequence,” he said.

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