Empowering Employees with Health Care Accounts
January 30, 2003
The federal government does not tax employer-paid health insurance premiums paid, but does tax health care paid for by individual employees. Three exceptions to this rule are medical savings accounts (MSAs), flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs). Each gives medical savings tax advantages similar to health insurance. However, legislation is needed to make them more widely available, more flexible and more portable.
MSAs combine tax free accounts with high-deductible insurance. However, there are many restrictions and the MSA program is temporary. (See Table.)
- MSAs available only to small business employees and the self-employed.
- Joint employer-employee contributions to the MSA are prohibited and the full amount needed to pay deductibles cannot be deposited to the account each year.
FSAs allow employees to set aside money tax-free for anticipated medical needs. There are different requirements for these accounts:
- Unlike MSAs, any employer may establish FSAs.
- FSAs have no insurance requirement and no funding limits, and allow joint employer-employee contributions.
- However, FSAs may be used only for medical expenses, and employees forfeit any unused funds at year's end or when they leave their job.
HRAs are similar to FSAs, with important exceptions. A recent IRS ruling affirmed that deposits to the accounts are not taxable employee benefits, and that funds may be rolled over each year.
- Unlike FSAs, only employers may contribute to HRAs.
- At an employer's discretion, workers may roll over unspent HRA balances and may have limited access to leftover balances after they leave a job.
- Like FSAs, the funds can be spent only on health care or insurance premiums and can never be withdrawn as cash.
HRAs are available to federal employees in 2003 through an American Postal Workers Union health plan.
Source: Michael F. Cannon, NCPA director of government affairs, "Three Avenues to Patient Power," Brief Analysis No. 430, January 30, 2003, National Center for Policy Analysis.
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