Carryover Balances in Personal Health Accounts
June 27, 2002
A ruling yesterday by the Internal Revenue Service and the U.S. Treasury Department "Will kick-start the move towards patient-directed health care," says NCPA Senior Fellow Greg Scandlen.
The IRS ruled that unused money in section 105: Personal Health Accounts -- essentially health care reimbursement accounts -- can be carried over from year to year. Employers make contributions to the tax-free accounts, which employees can use to pay out-of-pocket or uncovered medical expenses, such as for eyeglasses. Previously, it was thought that any unused money in the accounts at year's end was forfeited -- a "use or lose it" rule. Scandlen says that caused employees to go on a spending spree at year's end, resulting in unnecessary spending.
- Furthermore, the accounts can be used by employees to purchase individual health insurance.
- Unlike Medical Savings Accounts (MSAs), there is no restriction on what type of health plan the accounts can be used with.
- Former employees, including retirees, can have continued access to unused reimbursements.
- There is no cap on the amount employers can contribute to the account.
The main roadblock preventing many employers from establishing this type of health account was the uncertainty of the IRS's position. "Now that the IRS has ruled in favor of patient power, there should be a flood of new enrollments in 2003," said Scandlen.
Source: Greg Scandlen (NCPA senior fellow in Health Policy), June 25, 2002.
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