Are health savings accounts in your future? New Medicare law offers more than just drug benefits.

When Congress passed a law that included major new changes to Medicare last November, headlines proclaimed that the federal health insurance program for people over 65 would provide prescription drug coverage for the first time. In truth, the coverage will he partial and it won't take effect until 2006.

"It remains to be seen how much this new law will help retirees," says Earl J. Romero, 72, who heads a tax and advisory firm in New York City. "My wife and I now receive prescription d rug coverage from her former employer, a private university. If the college decides that the government will be providing adequate d rug coverage to retirees through Medicare, it may drop its own coverage and we'll wind up having to pay more."

Ironically, the new Medicare law may immediately impact Americans who are not yet eligible for Medicare. "A health savings account (HSA) has been available for individuals and small groups since Janum7 2004," says Scott Krienke, vice president for individual medical products at Milwaukee-based Fortis Health. Tim Bireley, vice president of small group products at Fortis Health, says a similar product is or will be available for companies providing employee health plans. Other insurers may push HSAs, too.

What are HSAs? They're accounts created by the new Medicare law that offer you the chance to pay healthcare bills with untaxed dollars. Here's more information about them:

* HSAs will be available to working Americans and their families. They're fur people who buy their own health insurance, as well as for those covered by employers who provide HSAs. Under the new law, all employers can offer HSAs.

* HSAs are combined with high-deductible health insurance. "An individual or an employer who is interested should start with his or her insurance agent," says Krienke. HSAs can only be applied to insurance plans that carry a $1,000 deductible, or a $2,000 deductible for family coverage, and that require you to pay that amount, or more before the insurance kicks in.

* The amount of the deductible can be invested in an HSA. With a $1,000 deductible, for example, you can put up to $1,000 per year into an HSA. The maximum contribution is $2,250 per year or $4,500 for those with family coverage. "The money you'll save by buying high-deductible health insurance may be enough to fund a large part of your contribution to art HSA," says Bireley.

* HSAs will resemble tax-deductible IRAs. Money that you or your employer (or both) contribute to your HSA won't be subject to income tax. You can choose among various investment choices, depending on what the insurance company offers. Inside the HSA, any investment earnings can pile up, tax-tree.

Then, you can tap your HSA to pay a wide variety of healthcare costs, including those you incur before your health insurance policy pays off. You won't owe income tax when you make such payments, either.

"Money that you don't, need to pay medical bills can remain in the HSA year after year," says Krienke. "You can use it some time in the future when you do need the money for healthcare. Even after you enroll in Medicare and you no longer contribute to an HSA, you can tap your account to pay healthcare expenses, tax-free."

If all this sounds familiar, don't be surprised. HSA rules are very similar to MSA (medical savings account) provisions. MSAs have been around for several years and have relatively few customers. Larry G. Jackson, a financial planner with Lincoln Financial Advisors in Columbus, Ohio, is not so sure HSAs will catch on any better than MSAs have: "We have explained MSAs to many of our clients and only a couple wound up with those accounts. Most people don't like the idea of high-deductible health insurance because they pay their own medical bills until they meet the deductible." The late of the new HSAs may depend on whether enough insurance agents have enough incentive to persuade consumers to overcome this reluctance.