There are a number of options available in
today's marketplace aimed at defraying some of the cost of health and
medical related expenses. Such choices include health reimbursement
accounts (HRAs), Archer medical savings accounts (MSAs), flexible spending
accounts (FSAs) and newly created Health Savings Accounts (HSAs). Below are
brief descriptions of the attributes and benefits of each type of plan to
assist in determining which plan is most beneficial for your particular
needs.
Health Reimbursement Accounts
HRAs are employer funded plans that allows
employees to pay for medical expenses, health insurance premiums and
long-term care, though the employer may establish additional limitations.
The employer determines the amount of the annual contribution, but as a
general rule, contributions are set below the annual deductible of the
accompanying health plan. Any size employer may offer this type of plan.
Reimbursements from an HRA are excluded from
the employee's gross income. The unused portion of the account rolls over
from year to year, though an employer may restrict the amount of the
carryover. However, HRA funds are generally not portable unless the
employer permits (subject to COBRA provisions). Since these plans are
relatively new, there are few current participants. However, qualified HRAs
cannot be linked to a deferred compensation arrangement or salary reduction
plan. Thus, an HRA cannot be used in conjunction with a cafeteria plan in
such a way that the HRA is funded through salary reductions.
Reimbursements from HRAs must be
substantiated. The IRS has authorized the use of debit and credit cards for
reimbursement purposes. The employee will use the card at authorized
service providers for eligible expenses. Presumably, this mechanism will
aid in meeting the substantiation requirements.
Flexible Spending Accounts
In stark contrast to HRAs are FSAs, which also
are used to reimburse medical expenses, but not health insurance premiums or
long-term care. Reimbursements are also excludable from an employee’s gross
income. Unlike HRAs, FSAs may be offered as part of a cafeteria plan option
allowing for contributions to be made on a salary reduction basis, which is
the usual route. Employees may also make contributions to an FSA if it is a
stand-alone plan.
Under these arrangements, the employee, not
the employer, will determine the amount to be contributed to the plan,
though employers will often impose a limit. The employee can alter this
amount on an annual basis. However, any unused contribution cannot be
rolled over but instead will be lost if not used by the end of the year. As
with HRAs, contributions are not subject to either income or employment
taxes such as FICA, Social Security and Medicare.
Like HRAs, any size employer can establish
FSAs and participants may include former employees. Generally, FSAs are not
portable, although COBRA extensions may apply in certain situations. In
addition, FSAs and HRAs do not have a qualifying health insurance
requirement. According to a 1999 Department of Labor Survey, 23 million
private-sector workers had access to an FSA account for that year.
Health Savings Accounts
Recently enacted legislation will largely
replace Archer MSA with HSAs. HSAs, approved as part of the Medicare Act
of 2003, which was passed in December, are allowed starting in 2004.
Both Archer MSAs and HSAs plans are aimed at providing tax benefits for
individuals with high-deductible health plans. And, both plans would allow
a contribution limit of up to $2,600 for individuals and $5,150 for families
for 2004.
However, the definition of a high-deductible
health plan is less restrictive for HSAs than for MSAs. These accounts
present an opportunity to benefit more workers. For HSAs, a high-deductible
plan is one in which the deductible for individuals is $1,000 or $2,000 for
a family. MSAs require $1,700 and $2,600, respectively. Further, MSAs may
only be offered to employees of firms with 50 or fewer employees or to the
self-employed. HSAs have no such restriction. After December 31, 2003, new
MSAs cannot be established unless Congress grants an extension and so HSAs
appear to be a clear replacement alternative.
HSAs offer a number of significant tax
benefits. Contributions by employees are deductible in determining adjusted
gross income, in other words, they are "above-the-line" deductions that may
be taken by all taxpayers. Alternately, a contribution by an employer is
made on a pre-tax salary reduction basis on behalf of the employee and will
also generate a deduction for the employer. Thus, the contribution is
tax-free to the employee and tax-deductible to the employer. Employers may
offer HSAs either as a stand-alone benefit or through a cafeteria plan.
Distributions from HSAs are also made on a
tax-free basis, provided the distribution relates to a qualified medical
expense. Expenses generally include costs incurred to diagnose, cure, treat
or prevent disease, as well as premiums for long-term care, COBRA and health
insurance for those 65 or older or unemployed. Expenses that are not
qualified will be treated as taxable income to the recipient and may result
in the imposition of a 10 percent excise tax.
Finally, and most significantly, contributions
to HSAs grow tax-free and roll over from year to year, allowing a
significant build-up as employees’ age. In addition, HSAs are portable.
Thus, younger employees may build-up large amounts in HSAs and carry those
funds with them as they move across jobs throughout their careers. With the
rising costs of health care, HSAs likely will be a valuable recruiting
tool. For older workers, namely those in the 55 and older category, the
contribution limit is raised by $500 in 2004 and will increase $100 annually
thereafter to $1,000 in 2009. Catch-up contributions will allow increased
saving in crucial pre-retirement years.
More choices
These plans are in addition to any number of
current retirement plan options available, including IRAs, Roth IRAs, 401(k)
plans, among others. Also, the Bush Administration recently proposed
creating three new types of retirement plans last spring. While those plans
were not embraced in Congress, the administration has since indicated that
it will likely again propose the plans in 2004.
