Medical-savings options should be part of good financial planning May 15,2005 Jack Karns Special to the Sun Journal Current estimates indicate that more than 44 million Americans do not have health care coverage. And, the cost of health care has risen much faster than the rate of inflation, increasing 88 percent since 1992.
Health Savings Accounts (HSAs) were introduced by the Medicare Prescription Drug Improvement and Modernization Act of 2003 as an effort to promote a shift from traditional health insurance and managed care plans to accounts directed and managed by the consumer.
Given that HSAs are now a matter of law, consumers should have a minimum working knowledge of how they operate, as compared to other self-directed health care accounts available under the Internal Revenue Code.
HSAs arThursday, November 04, 2004 9:38:15 PMe the individual is covered by a High Deductible Health Insurance plan. These Accounts became available in 2004, but were preceded by three other health accounts: Flexible Spending Accounts (FSAs), Health Reimbursement Arrangements (HRAs) and Archer Medical Savings Accounts, which expired in 2003.
Of these earlier plans, the FSA is by far the most popular. It is available to employees as a voluntary salary reduction agreement with an employer. The employee designates a specific dollar amount to be withdrawn from salary, diverted into the account, and which can be used to pay for qualified medical expenses.
Reimbursements from the FSA are excluded from the employee's gross income and are not subject to employment taxes. This permits an employee to pay for medical expenses not covered by insurance using tax-free funds.
FSAs are subject to a "use it or lose it" concept, which provides that any unused funds at the end of the year be forfeited to the employer.
A common and very practical use of FSA funds occurs when a consumer knows a qualifying expenditure, such as the purchase of eyeglasses, will be required during the year and will not be covered by insurance. The FSA allows money to be set-aside and then spent tax-free to cover the cost of the glasses.
Another personal health care account alternative available to employees is the Employer-funded Health Reimbursement Account (HRAs). HRAs are similar to FSAs in that they use an account balance.
However, unlike FSAs, HRAs are not diverted wages and must be funded and kept solely by employers. Since all contributions are made by employers, there is no "use or lose it" provision and employees can store credit in an HRA account to carryover to subsequent years.
As long as the employee is reimbursed for "qualified medical expenses" from the HRA, the distributions are not included in the employee's gross annual income.
However, an HRA is not portable. The employer is not permitted to refund any part of the fund balance to the employee nor can the employee transfer an account credit to a subsequent employer.
To be eligible to make contributions to an HSA, an owner must be covered under a High Deductible Health Insurance plan, have no other health plan coverage (with limited exceptions), not yet be enrolled in Medicare and not be eligible to be claimed as an exemption on another taxpayer's annual tax return.
A high deductible health plan is one with an annual deductible of not less than $1,000 for self-only coverage, and not less than $2,000 for family coverage. The maximum out-of-pocket deductible amounts for HSAs are $5,000 for individuals and $10,000 for family coverage, and the HSA owner is responsible for paying the entire family deductible before coverage begins.
The new HSAs are created in much the same way an IRA is established by opening an account with a qualified trustee or custodian, with no prior permission or authorization from the Internal Revenue Service required.
Unlike HRAs and other similar employer-provided health plans, there is no requirement that employers participate in creating or making contributions to an HSA. This means that the HSA is available to the self-employed and is owned by the individual establishing the account.
Ignoring eligibility requirements for a moment, deciding whether an HSA, HRA or FSA is best suited to meet your health care needs is not any easy task.
But in the end, a basic understanding of available medical savings accounts is essential to good personal financial planning.
Jack Karns is a professor of business law in the department of finance in the college of business at East Carolina University.