According to the Daily Kos, “The Joint Committee on Taxation told Senate leaders recently they could collect $68.6 billion over 10 years by abolishing the accounts, along with separate ones in which employers contribute money for workers to use for health care expenses. Eliminating both types of accounts would pay for four percent or more of the estimated $1 trillion to $1.5 trillion cost of expanding coverage to the 46 million uninsured.”

The search for revenue is revisiting the debate over FSAs, HSAs and other medical savings accounts. Sparking controversy from some healthcare critics, they say these accounts are actually tax shelters for the rich and encourages spending on unnecessary or otherwise frivolous expenses. On the other hand, proponents of these plans say that flexible spending account programs help people pay for high medical expenses that aren’t covered by insurance.

The Daily Koz reports the debate is further complicated by the fact that “the government doesn’t track even basic details on how the accounts are used, how much money is involved and what happens to the unspent funds. The only data available come from the industry-the companies that administer the programs for employers. Even that information is incomplete.”

According to a July 16,2009, Bloomberg news report “The House Ways and Means Committee is proposing to prohibit reimbursements for over-the-counter drug purchases using pretax health-spending plans.

The proposed limits, affecting employer-sponsored flexible spending accounts and privately owned health savings accounts, were added to a 1,018-page bill aimed at overhauling the health- care system. ”

The proposed limit would raise $8.2 billion over a decade, according to official estimates. It would supplement a proposal to increase taxes on the highest-earning Americans, including a 5.4 percent surtax on couples who earn more than $1 million.”

Stay tuned…

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.”

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.

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.

A cafeteria plan is an employee benefit plan offered in the US which follows Section 125 of the tax code. Its name is derived from earlier plans that enabled employees to pick and choose between different types of benefits offered by an employer, as they would pick and choose among food choices in a cafeteria.

In 2005 the federal government announced that employers could design “cafeteria” plans that would reimburse claims for participants that were incurred up to 2½ months after the end of the year.  Before this, reimbursements were only valid for claims during the plan year. But with this new ruling,  a grace period was extended until March 15 to the employee participating in a Flexible Spending Account or FSA plan ending December 31 provided that the grace period was adopted by the employer. This new expansion of the claims reimbursement cycle reduced the  “use it or lose it” fear among many employees  and as a result increased the overall number of employees choosing to participate in an FSA. At the same time, employees were better able to target the funds for purchases that they actually needed.

Cafeteria plan benefits include:

• Accident and health benefits (but not Archer medical savings accounts or long-term care insurance)
• Adoption assistance
• Dependent care assistance
• Group-term life insurance coverage
• Health savings accounts (HSA insurance plans), including distributions to pay long-term care services

A section 125 plan is the only means by which an employer can offer employees a choice between taxable and nontaxable benefits without the choice causing the benefits to become taxable. A plan offering only a choice between taxable benefits is not a section 125 plan.

Why should we care?

Employees who have access to a cafeteria plan frequently obtain benefits such as health insurance, group-term life insurance, and flexible spending accounts through the plan.  Most of these plans are offered through a  “salary reduction agreement”, which is basically a payroll deductions.  These deductions are pre-tax deductions, not considered income and are not taxed for federal income tax purposes.

Reasons for implementing a cafeteria plan? The biggest reason is the tax advantages to the employer and employee. Both parties save on taxes and as a result increase their spendable income.

The most common FSA, the medical expense FSA (also known as medical FSA or health FSA), is similar to a health savings account (HSA) or a health reimbursement account (HRA). However, while HSA insurance plans and HRAs are almost exclusively used as components of a consumer driven health care plan, medical FSAs are commonly offered with more traditional health plans as well. An FSA may be utilized by paper claims or an FSA debit card also known as a Flexcard.

According to Celent, as of May 2006, there were approximately 6 million debit cards in the market tied to an FSA account, representing 25% of the FSA participating community. The outlook for FSA cards in the near future is optimistic. FSA cards will increase FSA adoption rates. The average card participation rate was around 20% as of May 2006. By 2010, it is projected this rate will increase to 85%.

There are three types of health spending accounts that can be used to help fund employee health care expenses: flexible spending accounts, health savings accounts (aka, health spending accounts), and health reimbursement arrangements. A description of each type of health spending accounts follow.

Flexible spending accounts (FSA)

One of the more popular health spending accounts is the flexible spending account or FSA which are employer-established benefit plans that reimburse employees for specified medical expenses as they are incurred. These accounts are allowed under section 125 of the Internal Revenue Code and are also referred to as “cafeteria plans” or “125 plans.” The employee contributes funds to the account through a salary reduction agreement and is able to withdraw the funds set aside to pay for medical bills. The salary reduction agreement means that any funds set aside in a flexible spending account escape both income tax and Social Security tax. Employers may contribute to these accounts as well.

There is no statutory limit on the amount of money that can be contributed to health care flexible spending accounts. However, some companies place a limit of $2,000 to $3,000 on flexible spending accounts. Once the amount of contribution has been designated during the open enrollment period that occurs once each year, the employee is not allowed to change the amount or drop out of the plan during the year unless he or she experiences a change of family status. By law, the employee forfeits any unspent funds in the account at the end of the year. There have been proposals introduced in Congress to ease this “use it or lose it” rule by allowing up to $500 to be carried over to the next year; such proposals have not been enacted.

Health savings accounts (HSA)

The second type of health spending account is a health savings account or HSA is a savings accounts used to pay for unreimbursed health care expenses. These type of health spending accounts can accumulate tax-deferred interest similar to individual retirement accounts (IRAs). Authorized by Title III of the Health Insurance Portability and Accountability Act of 1996, medical savings accounts became available starting on January 1, 1997.

Funds are controlled and owned by the account holder. The employee or the employer–never both–makes contributions. In order to qualify, the employee must be covered by a high-deductible health insurance plan and must be self-employed or employed by a firm with 50 or fewer employees. For 2001, the annual deductible for qualifying high-deductible insurance was between $1,600 and $2,400 for self-only coverage; the ceiling on annual out-of-pocket expenses for covered benefits could not exceed $3,200. For family coverage, the deductible could not be less than $3,200 or more than $4,800, and the ceiling on out-of-pocket expenses could not exceed $5,850.

A health savings account is rolled over every year and are portable, regardless of employment status. Funds can be used on a pretax basis to pay for long-term care insurance premiums, health insurance premiums paid while unemployed, and COBRA premiums (for continuation of health insurance coverage available to formerly covered individuals under provisions of the Consolidated Omnibus Budget Reconciliation Act).

HSA insurance funds can accumulate earnings, which are not taxed unless funds are withdrawn for nonmedical expenses. If withdrawn for nonmedical purposes, savings from these health spending accounts are considered taxable income and are subject to income taxes in addition to a 15-percent penalty tax. If the employee becomes disabled or reaches Medicare eligibility age, however, distributions for nonmedical expenses from the health savings account are subject only to ordinary income tax, not the penalty tax.

The maximum contribution to a health savings account or HSA for single coverage is 65 percent of the deductible on the employee?s health plan and 75 percent of the deductible for family coverage. For example, if an employee has a health plan with a deductible of $2,225, then he is allowed to contribute a maximum of $1,446.25 to a medical savings account for single coverage. With a family plan deductible of $4,500, a maximum contribution of $3,375 is allowed.

Health reimbursement arrangements (HRA)

A third type of health spending account are health reimbursement arrangements, also known as “health reimbursement accounts” or “personal care accounts,” are a type of health insurance plan that reimburses employees for qualified medical expenses. The U.S. Department of the Treasury issued guidance on these type of health spending accounts in a revenue ruling in June 2002. Because these health spending accounts are just emerging, their designs are still evolving.

Health reimbursement accounts consist of funds set aside by employers to reimburse employees for qualified medical expenses, just as an insurance plan will reimburse covered individuals for the cost of services incurred. The guidance provided by the Department of the Treasury makes it clear that health reimbursement accounts are not a new type of account designated within the Internal Revenue Code. Rather, employers qualify for preferential tax treatment of funds placed in a health reimbursement account in the same way that they qualify for tax advantages by funding an insurance plan. (Employers can deduct the cost of an insurance plan — and now a health reimbursement account — as a business expense under Internal Revenue Code section 162.)

Health reimbursement arrangements are open to employees of companies of all sizes, unlike medical savings accounts that are only available for small business employees. A health reimbursement account provides “first-dollar” medical coverage until funds are exhausted. For example, if an employee has a $500 qualifying medical expense, then the full amount will be covered by the health reimbursement arrangement if the funds are available in the account. Under a health reimbursement account, the employer provides funds, not the employee. All unused funds are rolled over at the end of the year. Former employees, including retirees, can have continued access to unused reimbursement amounts. Health reimbursement accounts remain with the originating employer and do not follow an employee to new employment.

Retirement Accounts

IRA stands for Individual Retirement Account. An IRA is meant for those who do not have access to employer sponsored retirement plans such as 401(k) plans or those who would like to contribute more than the maximum allowed by their employer plans. Why choose an IRA? Read the rest of this entry »

Real Needs, Real Solutions

Today, millions of EMPLOYED Americans depend on government aid, charitable organizations, and their own incomes to pay medical expenses. Until an extended illness or hospitalization occurs, these resources usually suffice. Read the rest of this entry »

So what exactly are HSAs?

Established by the Medicare reform bill and signed into law in December 2003, HSA insurance plans enable Americans to pay for near-term medical expenses while saving for future long-term costs with tax-free dollars. These accounts come with an HSA-qualified insurance policy that covers major medical expenses and preventive care. Where they differ from traditional health insurance policies is that these HSA-qualified insurance plans have lower premiums, higher deductibles, and the savings from the lower premiums goes to funding the HSA. Read the rest of this entry »