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.”