A health savings account, an HSA, was established as part of the 2003 Federal Medicare Prescription Drug, Improvement, and Modernization Act. This act is also called the Medicare Modernization Act (MMA).
A health savings account is similar to a personal savings account but is only used for health care expenses. To possess and use an HSA, an individual has to have a high deductible plan as their health insurance.
A high-deductible health plan may also be referred to as a catastrophic health care plan. HSAs allow individuals to deposit pre-tax money into an account to pay for future medical expenses for the individual or their family.
HSAs were designed to allow individuals with high-deductible health plans to pay for deductibles, copayments, and other qualified medical expenses by putting pre-tax money into the HSA.
What Are the Advantages of Utilizing an HSA?
There are many different advantages of using and contributing to HSAs, including, but not limited to:
- Funds that are deposited into an HSA are not taxed;
- Payments made with HSA funds apply toward the individual’s deductible;
- Payments made with HSA funds are not taxable on the payment;
- An individual’s employer can contribute to their HSA account while the employee retains complete control and ownership over the account and contributions;
- All of the unused assets in the HSA account will roll over to the next year indefinitely; and
- The account owner has complete control over the funds in the account and can decide how much money to set aside for healthcare expenses.
What Is a Flexible Health Spending Account?
Numerous employers offer their employees health insurance plans that include flexible health spending accounts as a benefit. A flexible health spending account, also referred to as an HSA or FSA, is a type of special account that the employee puts money into to pay for out-of-pocket healthcare costs, as noted above.
These types of accounts allow an employer or employee to put aside a portion of the employee’s paycheck into the FSA account before the income is taxed. Because the money is put aside before the income is taxed, the employee may also receive a tax benefit when participating in the plan.
What Should I Know About Flexible Health Spending Accounts?
Specific rules govern how the money in a flexible health spending account may be used. As noted above, the money in this type of account must be used for healthcare-related expenses.
Not every healthcare-related expense, however, qualifies under the rules of the account. For example, the money in these accounts can often be used to pay for prescription medications but, typically, cannot be used to pay for nonprescription over-the-counter medications.
There are different types of flexible health spending accounts. Some accounts can be designed specifically for the benefit of the individual’s child or children, their other dependents, or for specific health conditions.
Each type of account has its own rules regarding how the money can be used and what expenses qualify for coverage under the health spending account. Flexible health savings accounts may be called savings accounts, but they operate more like checking accounts.
When an individual opens an HSA, they are issued checks to draw on the account and a debit card for their health-related expenses.
How Can I Get a Flexible Health Spending Account?
For an individual to obtain a flexible health spending account, their employer has to offer it as part of an overall health insurance benefits package. An individual cannot obtain an HSA independently because it has to be part of an existing health insurance plan.
Often, an employer matches or exceeds an employee’s contribution to their account. In certain ways, this type of contribution system may be compared to a 401K plan.
For example, if an employee contributes $10 directly from their paycheck, their employer may deposit at least $10 to match the employee’s contribution. However, it is important to note that employer matching is not a requirement for an HSA.
Because of this, an employee will need to confirm with their employer or plan administration whether their employer has elected to match employee contributions.
Are there Rules for a Flexible Health Spending Account?
As noted above, some rules govern how an individual can use their flexible health spending account. There are also rules governing the specific amounts.
If an individual has a flexible health spending account as part of their health insurance benefits, their employer should provide information regarding the rules. For example, an HSA is limited in the amount of money in the account.
The maximum is usually approximately $2600-$2700 per year per employer. Other common rules regarding HSAs include, but may not be limited to:
- HSA accounts must be renewed annually or changed if the employer’s health insurance plan changes;
- An individual can spend HSA funds to pay deductibles and copayments but not for insurance premiums;
- FSA funds are okay to spend on prescription medications as well as to help cover the costs of medical equipment such as:
- Crutches;
- Supplies such as bandages; and
- Diagnostic devices, for example, blood sugar test kits; and
- Ineligible expenses include:
- Orthodontia;
- Cosmetic surgery;
- Vitamins;
- Herbal supplements;
- Prescription drugs from foreign countries; and
- Counseling sessions.
What Are Grace Periods and Carry Overs?
Individuals must use the money in their flexible health spending account within the past year. However, individuals may offer one of two options to reduce the stress of this use it or lose it option, including:
- Grace periods: An individual’s employer can offer a grace period of up to two and a half months for them to use the remaining or leftover money in their flexible health spending account; and
- Carryovers: An individual’s employer may alternatively allow them to carry over up to $500 per year into the following year.
At the end of the year or the grace period, any money left over in the HSA will be lost, and the employees will start over to build up their contributions. Because of this, it is important for an individual to carefully plan and not put aside more money than is necessary for their HSA.
It can be tricky for an individual to estimate their yearly costs. To successfully use an HSA without losing too much money at the end of a year, an individual will want to estimate as closely as they can their yearly expenses, for example:
- Copayments;
- Coinsurance;
- Drugs; and
- Other healthcare costs.
Should I Talk to a Lawyer about Flexible Health Spending Accounts?
If you have any issues, questions, or concerns related to flexible health spending accounts, it is important to consult with a lawyer. Because an HSA has specific tax implications for you as an employee, you need to understand the implications of an HSA and how they should be addressed.
A workers’ compensation lawyer can explain your plan so that you can make the most of it. Your lawyer will also advise you how the HSA may affect your taxes.
