Wednesday, April 04, 2007

COMPARING AND CONTRASTING HEALTH EXPENSE ACCOUNTS

Health Savings Accounts (HSA) are the newest addition to an array of tax advantaged accounts that people can use to pay for unreimbursed medical expenses, such as deductibles, copayments, and services not covered byinsurance. First available January 1, 2004, HSAs have largely replaced the similar but more restrictive Archer Medical Savings Accounts (MSAs), which never attracted many participants. In addition, people may have access to two employment-based accounts, Health Reimbursement Accounts (HRAs) and health care Flexible Spending Accounts (FSAs). Collectively, these accounts have some features and objectives in common, but they also differ in important respects. Keeping these accounts straight can be difficult, especially when they are discussed informally using different names.

To help taxpayers learn the differences between the various types of plans, the Congressional Research Service has summarized the key attributes of each. Be warned - even with this summary it is still difficult to tell the relative advantages and disadvantages of each. This area is crying out for simplification - are four different types of accounts really needed. The summaries follow below:

HEALTH CARE FLEXIBLE SPENDING ACCOUNTS (FSAs)
-In General--These are employer-established arrangements that are usually funded through salary reduction agreements under Code Sec. 125. The employee's contribution isn't subject to either income or employment taxes.
-Eligibility--Employees whose employers offer this benefit. Former employees may be included. Employers not restricted by size.
-Definition of Qualifying Health Insurance--No health insurance requirements.
-Contributions--By employer, employee, or both. Usually funded by employee through salary reduction agreement.
-Annual Contribution Limits--None required, though employers usually impose a limit.
-Qualifying Expenses--Most unreimbursed medical expenses, though employers may impose additional limitations. May not be used for long-term care or health insurance premiums.
-Allowable Nonmedical Withdrawals--None.
-Carryover of Unused Funds--Balances remaining at year’s end (or up to 2½ months after year’s end, if employer permits) are forfeited to employer. A limited, one-time rollover to an HSA is allowed.
-Portability--Balances generally forfeited at termination, although COBRA extensions sometimes apply.

HEALTH CARE FLEXIBLE SPENDING ACCOUNTS (FSAs)
-In General--These are employer-established arrangements that are usually funded through salary reduction agreements under Code Sec. 125. The employee's contribution isn't subject to either income or employment taxes.
-Eligibility--Employees whose employers offer this benefit. Former employees may be included. Employers not restricted by size.
-Definition of Qualifying Health Insurance--No health insurance requirements.
-Contributions--By employer, employee, or both. Usually funded by employee through salary reduction agreement.
-Annual Contribution Limits--None required, though employers usually impose a limit.
-Qualifying Expenses--Most unreimbursed medical expenses, though employers may impose additional limitations. May not be used for long-term care or health insurance premiums.
-Allowable Nonmedical Withdrawals--None.
-Carryover of Unused Funds--Balances remaining at year’s end (or up to 2½ months after year’s end, if employer permits) are forfeited to employer. A limited, one-time rollover to an HSA is allowed.
-Portability--Balances generally forfeited at termination, although COBRA extensions sometimes apply.

ARCHER MEDICAL SAVINGS ACCOUNTS (MSAs)

-In General--These accounts under Code Sec. 220 can be established generally only when account owners have qualifying high deductible insurance and no other coverage. Contributions made by employers are exempt from income and employment taxes, and contributions by account owners (which are allowed only if the employer doesn't contribute) are deductible. Withdrawals are not taxed if used for medical expenses, but those used for other purposes generally are and are subject to an additional 15% penalty.
-Eligibility--Individuals with qualifying health insurance who are employees of a small employer (50 or fewer workers) with a high deductible plan or self
employed. Ineligible individuals may keep previously established accounts but cannot make contributions.
-Definition of Qualifying Health Insurance--Self-only deductible must be at least $1,900 but not over $2,850; the family deductible must be at least $3,750 but notover $5,650. Annual out-of-pocket expenses for covered benefits cannot exceed $3,750 and $6,900, respectively. Deductible need not apply to preventive care if absence of deductible is required by state law.
-Contributions--By employer or account owner, but not both.
-Annual Contribution Limits--65% of the deductible for self-only coverage and 75% of the deductible for family coverage.
-Qualifying Expenses--Most unreimbursed medical expenses. May be used for premiums for long term care insurance, COBRA, and health insurance for those receiving unemployment compensation under federal or state law.
-Allowable Nonmedical Withdrawals--Permitted, subject to income tax and 15% penalty except in cases of disability, death, or attaining age 65.
-Carryover of Unused Funds--Full amount may be carried over indefinitely.
-Portability--Portable.

HEALTH SAVINGS ACCOUNTS (HSAs)
-In General--These are tax-exempt accounts under Code Sec. 223 that can be established (and to which contributions can be made) only when the owner has qualifying high deductible insurance and generally no other coverage, including Medicare. Contributions made by employers are exempt from income and employment taxes, and account owners may deduct contributions they make. Withdrawals for medical expenses are not taxed, but those for other purposes are and are subject to an additional 10% penalty, except in cases of disability, death, or attaining age 65.
-Eligibility--Individuals with qualifying health insurance. Ineligible individuals may keep previously established accounts but cannot make contributions.
-Definition of Qualifying Health Insurance--Self-only deductible must be at least $1,100; the family deductible must be at least $2,200. Annual out-of-pocket expenses for covered benefits cannot exceed $5,500 for self-only coverage and $11,000 for family coverage. Deductible need not apply to preventive care.
-Contributions--By any person on behalf of an eligible individual.
-Annual Contribution Limits--$2,850 for self-only coverage and $5,650 for family coverage. Account owners 55 years old or older and not in Medicare can contribute an
additional $800 in 2007.
-Qualifying Expenses--Most unreimbursed medical expenses. May be used for premiums for long-term care insurance, COBRA, health insurance for those receiving unemployment compensation under federal or state law, and health insurance (other than Medigap policies) for individuals who are 65 years of age and older.
-Allowable Nonmedical Withdrawals--Permitted, subject to income tax and 10% penalty except in cases of disability, death, or attaining age 65.
-Carryover of Unused Funds--Full amount may be carried over indefinitely.
-Portability--Portable.
Post a Comment