Most of you probably have heard about medical savings accounts. You know, accounts where employers/employees contribute pre-tax money to be used for qualified medical expenses. These accounts are clearly beneficial, and employees tend to be very interested in reaping their rewards, yet it doesn’t take long to become bleary eyed from all the acronyms and nuances among the various types. So I thought it may be useful to lay-out a 10,000-foot-level summary in hope of keeping everyone awake, but if you do need help falling asleep you can always turn to IRS Publication 969 for all the gory details.
Health Flexible Spending Arrangements (FSAs) – Probably the most common of the bunch, this type of medical savings plan is funded by the employee with pretax dollars and does not have to be tied to a specific type of health insurance plan. Your employer may also contribute to your health FSA. All reimbursements need to be for qualified medical expenses incurred during that plan year. It is a “use it or lose it” plan, meaning you forfeit any unused contributions; i.e., you lose your own money. There is a $2,500 annual contribution limit (for 2011). Typically, contributions are taken out of your paycheck in equal installments throughout the year, yet you can be reimbursed for the full amount of any qualified medical expenses on day one. Employers may be at risk since they can be stuck funding the plan if you leave the job on day two.
Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs) – We’ll look at these together since they are basically the same plan, but the MSA is available only to self-employed individuals and “small businesses” (those with an average of 50 or fewer employees during either of the last two calendar years). Here, the employee funds the account on a pre-tax basis (you get a deduction on your tax return), but the employee must be a participant in a high-deductible health plan (HDHP). The details of an HDHP are outside the scope of this blog. Your employer can also contribute to your HSA/MSA. It is NOT a “use it or lose it” plan, so you can roll over any unused balances to future years. For 2011 the maximum contribution is $3,050 for singles and $6,150 for families with an additional $1,000 for those age 55 or over. These accounts are portable so they stay with you if you change employers or leave the work force. HSAs/MSAs have thus have been likened to IRAs, although one where withdrawals are tax-free when used for qualified medical expenses. Some savvy employees have even used an HSA/MSA as a means of planning for medical expenses in retirement! If withdrawals are used for non-qualified expenses, the withdrawal is taxed as ordinary income and subject to a 20% penalty if you are under 65.
Health Reimbursement Arrangements (HRA) – OK, now these are a different breed. Unlike the above accounts, these are funded only by the employer, not the employee. The employer can decide from year-to-year how much, if any, money they will contribute and there is no limit on the amount they can contribute. Contributions are not included in your income and any reimbursements for qualified medical expenses are tax-free. You do not have to be covered under any other health care plan to participate in an HRA. They can even co-exist with an FSA plan. So, as you can see, these types of plan offer the most flexibility to the employer (sorry, self-employed persons are not eligible for HRAs) and are a great benefit to the employee.
Well, hopefully you’re still awake and have a better understanding of the various medical savings accounts that are available. Here’s a useful chart from Savoy Associates that summarizes these as well.
