NCPA - National Center for Policy Analysis

Using Flexible Spending Accounts to Fund MSAs

April 3, 2000

Medical Savings Accounts (MSAs) are usually associated with insurance policies that have large deductibles. All the expenses below the deductible are paid from the MSA or directly out of pocket. However, most Americans have health plans with low deductibles, although they still have out-of-pocket expenses for copayments, or coinsurance of 20 percent or more. And virtually every health plan has gaps in coverage.

Is there a way to combine the benefits of MSAs with the needs of people in ordinary health plans? One possible mechanism is Flexible Spending Accounts (FSAs). FSAs allow workers to divert some of their pretax wages into accounts to pay for direct health care expenses or their share of insurance premiums for employer-sponsored plans.

According to William M. Mercer, Inc., a benefits consulting firm, 56 percent of employers offered FSAs in 1998, but only 19 percent of employees took advantage of them. Thus, many employees spend a lot more than they have to for employer-provided health insurance.

One reason workers don't take advantage of FSAs is that any unspent money left in the account at the end of the year is forfeited to their employers. Since it is often extremely hard to predict one's out-of-pocket expenses for the year, most workers have decided not to risk forfeiting their money.

Bills have been introduced in Congress that would allow workers to rollover their unspent FSA funds into an MSA, retirement account or Education Savings Accounts, and such provisions are being considered by the conference committee for the Patients' Bill of Rights legislation.

The FSA rollover provision will be a major step forward in creating a new health care system that is both cost-effective and accountable to patients.

Source: Greg Scandlen (senior fellow, NCPA), "MSAs for Everyone, Part II," Brief Analysis No. 319, March 31, 2000, National Center for Policy Analysis.

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