Do you have a special tax-advantaged savings account for health care expenses? There are several types of them to which the federal government permits employees and employers to contribute: Flexible Spending Accounts (FSA), Health Savings Accounts (HSA), Medical Savings Accounts (MSA), and Health Reimbursement Arrangements (HRA).
HSAs are required to be offered in conjunction with High Deductible Heath Insurance Plans (HDHP); they can be funded by either/both, employer/employee contributions. For 2013, if you have self-only HDHP coverage, you can contribute pre-tax up to $3,300. If you have family HDHP coverage you can contribute up to $6,550. Contributions accumulate in an account at interest and the interest is not taxed. This double tax preference (pre-tax contributions and non-taxed growth or interest) allows participants to pay some qualifying health care expenses in a tax preferred manner. As we all know, with high deductible and high co-insurance amounts, and health insurance just not normally covering as much as it used to, accumulating funds for qualifying expenses is a great way to plan for unplanned expenses. Funds from HSAs can be used not only in the current year, but also in future years. Lastly, when the funds are used for qualified expenses (see IRS document 969 and 502), the funds are not taxed; however , if they are not used for those expenses, there are taxes and possibly penalties, so be careful.
FSAs seem to be more common with large employers, and they are funded by pre-tax contributions from the employee’s paycheck. One drawback or common complaint of FSA’s is that the funds must be used in the current year (“use it, or lose it”). This makes it difficult to plan if you don’t know what expenses are in store for you in the future! At one time, the benefit plan from my previous employer provided an FSA, and it was nice when we knew exactly how much our two children’s orthodontia costs were going to be; our FSA really helped us plan and afford orthodontia costs.
Good news–after a considerable amount of lobbying from the health insurance industry, Notice 2013-71 has been introduced to remedy the “Use-it-or-Lose-it” regulation, allowing up to $500 of unused balances to be paid or reimbursed to participants as long as their plans do not incorporate the “grace period” rule.
Choosing to provide the rollover option will be left up to the plan sponsor (the employer), so if you have an FSA, check with your employer for more information. Also, be sure to connect with your tax advisor and group health benefits provider for questions about any information provided here. This is just an overview of information to make you more aware, and it is not to be relied upon for tax, financial or other information. Some of this information came from Victoria McCoy, RHU at Crown Benefits in Columbus, Ohio. For more information, also check out Use-Or-Lose New Carryover Rule.