Covering the new copay
Commentary: Consumers are beginning to see some direct effects of the Affordable Care Act. Many have shopped the exchanges and see that they need to confirm health care coverage as part of filing their federal income tax returns, and a growing number continue to see the structure of medical benefits offered by employers shifting to high-deductible health plans.
These changes are ultimately driving the question for consumers: How will I afford the initial deductible amount associated with these new types of health insurance plans? Let’s focus on the decision between a flexible spending account and a health savings account to supplement this deductible. Here are some of the fundamental differences between FSAs and HSAs:
Payroll deduction –
An employer has the option to offer an FSA as part of a cafeteria plan, in which employees can choose from a variety of benefits, and/or allow employees to make HSA contributions.
Contribution limits –
If payroll deductions are used, both accounts generally require employees to elect how much they will contribute in that year as part of an open enrollment process. We will assume the employee is eligible to contribute for the full year.
The contribution limit for FSAs in 2015 is $2,550. The HSA limit for an employee with individual HDHP coverage in 2015 is $3,350 and $6,650 if electing family coverage. HSAs also permit an additional $1,000 for individuals age 55 or older. A spouse who is also age 55 or older may contribute an additional $1,000 into his or her own HSA each year under a family plan.
Employer contributions –
Employers may, but are not required to, contribute to either an FSA or HSA for their employees. Any amount contributed by the employer reduces the eligible amount an employee may contribute for a given year.
Using an IRA to fund –
The HSA has one distinct advantage over an FSA when it comes to funding. An employee may complete a one-time direct rollover of IRA assets to contribute to an HSA – it’s called a qualified HSA funding distribution. The assets transferred may be equal to or less than the HSA contribution limit for that year and are considered part of the aggregate total for contributions made in that year.
Taking money out –
Employees may use FSA dollars only for qualified medical expenses and must follow the process defined by the cafeteria plan to be reimbursed. The reimbursements must also be applied to qualified medical expenses for that year.
The HSA, meanwhile, has more flexible options. With an HSA, the employee controls when the assets are used. Many of these accounts provide check writing and/or debit card options to pay expenses directly. These distributions do not require approval by the employer or financial organization as to where the assets are held. The consumer will need to provide receipts to confirm distributions were taken for qualified medical expenses as they will be reported on their income tax filings.
Use it or lose it –
Until 2013, the FSA was always a use-or-lose-it type of account — if an employee did not use all of the FSA dollars they contributed by the end of the year, the dollars were lost. In 2013, the IRS released Notice 2013-71, which allowed an employee to roll $500 of the FSA to the following year. However, this rollover is only permitted if the employer has amended the cafeteria plan, which they are not required to do.
HSA contributions can continue to accumulate year after year with no special requirements. Any unused contributions remain available to the employee for future medical expenses. In fact, if an employee had an expense from a prior year they had not paid or had paid out of pocket, they may take a distribution to either pay the expense directly or reimburse themselves. The key is to always be able to document the expense the distribution applies to.
Taking this a step further, HSAs can accumulate substantial balances that can be used beyond retirement. Qualified expenses expand to include payment of certain Medicare coverage premiums, other long-term care coverage, and more.
This article is simply an introduction to the many facets available to employees trying to save and invest in their future health care needs using health savings accounts. The key is consumers can make the transition to high-deductible health plans and be successful when provided some key education and support from the financial services marketplace.
Steve Christenson is executive vice president of Ascensus, where he oversees retirement-based products and services.