In response to escalating growth in health care costs, more and more employers are exploring the viability of consumer-driven health plans (CDHP).  The basic difference with these plans and traditional insurance plans is these types of plans typically shift health care decision-making responsibilities to employees and encourage them to actively participate in their health care management.

A critical component to these consumer-driven health plans is the medical savings account (MSA), or healthcare savings account as it is commonly referred to. These medical savings accounts are  savings plans whereby pre-tax dollars are used for health care expenses, providing an incentive for reduced use of health care services.

What are your Medical Savings Account Choices?

Currently, there are three different types of medical savings accounts to help you save for health care costs,

• flexible spending Account (FSA)
• Health Reimbursement Arrangements (HRA)
• Health Savings Accounts (HSA)

The first of these, the Flexible Spending Account (FSA), is also referred to as a Section 125 plan or “cafeteria plan.” This plan allows participants to put pre-tax money into the account each year to cover their health insurance deductibles, co-payments, dental care and other medical expenses. Cafeteria plan money cannot accumulate from year to year, unfortunately, so it needs to be depleted at the end of the year or it will be returned to the employer.

The second type of medical savings account is a Health Reimbursement Arrangement (HRA). It is similar to an FSA but the employer contributes to the account instead of the employee. The employer makes contributions contingent on the employee participating in designated health and wellness programs. In June 2002 it was updated to allow funds to rollover from year to year, but it cannot be rolled over from employer to employer so if you change employers, you lose the accrued benefit.

The last and most recently created plan is the Health Savings Account (HSA). This plan provides for employees with high-deductible health insurance plans to set aside and invest money to use to pay the deductibles or other healthcare costs in the future. These health savings accounts are designed to put healthcare decisions into the hands of the employees. These plans are also portable so they move with you when you change employers and they can be rolled over from year to year. They can also operate as a type of IRA and accumulate assets to be used upon retirement. Similar rules apply regarding taxation policy and penalties incurred upon early withdrawal of funds.

For even more information on the difference between these various consumer-driven health spending accounts, check out “Health Spending Accounts – A Comparison.” Also, if you’re looking for flexible spending account rules and guidelines, you can find that information in “Other Flexible Spending Account Rules & Guidelines to Consider.”

–Submitted by Susan Smith, HSA Insurance super fan

Health Savings Account: What is it?

A health savings account (HSA) is a medical savings account for individuals enrolled in a High Deductible Health Plan (HDHP). Monies contributed to an HSA insurance plan are not taxed at the time of deposit. But unlike a flexible spending account (FSA) which returns unspent funds to the employer at the end of the year, HSA funds roll over and continue to accumulate year after year. Heath Savings Accounts are owned by the individual and are used to pay for qualified medical expenses without incurring federal tax liability. Withdrawals for non-medical expenses, on the other hand, are treated similar to those of an IRA…a tax advantage if taken after retirement age but penalties incurred if withdrawn earlier.

HSA Benefits

• Lower premiums. Premiums for an HDHP is usually less than the premium for traditional health insurance. Higher deductibles lower the premium since the insurance company is no longer paying for preventive healthcare. The insurance experts believe that if Americans see a relationship between medical costs and their bank accounts, they will consume less medical care, shop for bargains, and be more sensitive to excess and fraud in the health care industry.
• Lower out-of-pocket expenses. In catastrophic situations the maximum out-of-pocket expense liability with HSAs can be less than that of a traditional health plan because a qualified HDHP typically covers 100% after the deductible without a coinsurance.
• No time constraints. HSA insurance accounts have an advantage over Flexible Spending Accounts because deposits aren’t tied to expenses in a particular plan or calendar year. They are automatically rolled over for future medical expenses, or used to reimburse qualified expenses from prior years (as long as the expense was qualified under an HSA plan at the time incurred).
• Supplemental retirement funds. Over time, if medical expenses are low and contributions are made regularly to the HSA, the account accumulates significant assets and can be used for retirement on a tax-deferred basis.
• Tax-free money for dental, eyewear, etc. Most medical expenses not covered by the underlying HSA insurance policy may still be considered allowable expenses under the health savings account. For example, dental work, including braces, vision care, including glasses, eye surgery, alternative therapies such as acupuncture, etc. can all be paid for with tax-free money from the HSA.

Potential Downsides

• Benefit a few. Some consumer organizations have rejected HSAs because it is their opinion that they benefit only healthy people and make the health care system more expensive for everyone else.
• Exclude the poor. Critics also say that low-income people do not earn enough to benefit from the tax-breaks offered by HSAs. The tax breaks are too modest—when compared to the actual cost of insurance—to encourage significant numbers to buy this coverage. There is also concern that the lower premiums of HSA-qualified high-deductible health plans might attract lower-income individuals who cannot afford to fund an HSA account, and may avoid necessary health care services under the HDHP.
• Financial risk. As is the case with any investment, HSAs are subject to market risk. While the potential upside from investment gains can be viewed as a benefit, the downside and possibility of capital loss may make the HSA a poor choice for some.

Bills have been introduced in the Senate and House of Representative to raise the limit on dependent care flexible spending accounts (FSAs) where dependent-care expenses (including child-care) are paid with pretax dollars. Unchanged since 1986, the current cap for qualifying expenses is set at $5000. Unfortunately, more than 20 years later with no change to the limit, this benefit has become significantly outdated.

Dependent Care Flexible Spending Accounts – What Are They?

A dependent care flexible spending Account (FSA) enables you to take pretax dollars and pay for dependent care while at the same time lowering your taxable income. You allot part of your before-tax dollars to help pay for your work-related dependent care costs for the year.

So what qualifies as valid dependent care costs?

Eligible dependent care expenses for flexible spending accounts are expenses that allow a couple, if married, to be employed. Dependents can include a child under the age of 13, or elderly parents or a spouse who may live with you but are incapable of taking care of themselves.

There is a bipartisan effort in both houses of Congress to raise the cap, but it is complicated by worries over the federal budget deficit.  The House proposal, co-sponsored by Rep. John Yarmuth (D-Ky) and Rep. Sam Johnson (R-Tex), would raise the limit to $7,500 from $5,000. A Senate bill co-sponsored by Sen. Blanche Lincoln (D-Ark.) and Sen. Olympia Snowe (R-Me.), would make it $7,500 for one dependent, and $10,000 for two or more dependents. Both bills suggest raising the cap as necessary to keep pace with inflation. However, opposition is expected because these changes would further cut into federal revenue at a time of spiraling deficits.

Everyone agrees the cap is outdated; advocates say prospects for an increase “are very positive.” Nevertheless, opposition is likely because of the potential impact on tax revenue at a time when federal budget deficits loom large.