What Happens to Health Savings Accounts and Flexible Spending Accounts Under the Affordable Care Act?
by Kevin Hagen
November 07, 2013
When the health insurance requirement under the Affordable Care Act takes effect in 2014, you can still use health savings accounts and flexible spending accounts. These accounts are used to pay out-of-pocket health costs such as copayments, prescription medications, and others. The money you put into these accounts is not subject to federal income tax.
According to HealthCare.gov a flexible spending account (FSA) is only available with health insurance plans provided by your employer. You can put up to $2,500 in an FSA each year and you generally must use the funds in the account within the year. Any amount left in the account at the end of the year would be lost. You could not use your flexible spending account to pay the premiums for your health care insurance.
Health savings accounts (HSAs) are used with high-deductible plans, and as explained by Frazier & Deeter, CPAs and Advisors, this combination is popular among employers as a way to control health care costs. The high-deductible plans cover major costs related to serious illnesses or accidents. And the HSAs provide a way for employees to pay for smaller, routine health care costs.
HSAs have several tax advantages. According to the IRS, employees can claim a tax deduction for the contributions they make to an HSA even if they don't itemize deductions, and contributions by the employer are not taxable to the employee. Interest and earnings can accumulate tax-free in the HSA account. Distributions are tax-free if used to pay qualified medical expenses. The balance in the HSA account can be carried forward from year to year, and an HSA is portable, so an employee can keep it even after changing employers or leaving work.
The future of HSAs under the Affordable Care Act will depend on whether the associated high-deductible plan meets the requirements of the new law. One of these requirements, as explained by Merrill Matthews in Forbes, is that the minimum actuarial value of a plan must be at least 60% (the bronze level). This minimum actuarial value represents the minimum amount of insurance coverage the plan provides. Some federally qualified HSAs with the highest deductible meet this requirement, due to a 2% flexibility allowed. Then, as Matthews points out, the future of HSAs will depend on whether health insurers offer them at a reasonable cost.
John C. Goodman, in an article on The Independent Institute website, brings up some additional factors that could affect the future of HSAs. The new law reduces the allowable deductible for group plans with less than 100 employees to $2,000 for individuals and $4,000 for families starting in 2014. This is significantly lower than the deductibles currently offered under some high-deductible plans.
Also, the tax penalty for using money from an HSA to pay for non-medical expenses increases from 10 to 20 percent, in addition to ordinary taxes on the withdrawal. And, health plans must provide the essential benefits that must be included in all health care plans according to the Affordable Care Act. If an HSA does not provide all the required benefits, it may not be considered an eligible plan.