I love choices: sweet tea or regular, vanilla or butter pecan, jeans or
chinos. And I especially love choices when it comes to my money: save
or invest, coupon or sale price, cash or credit.
When it comes to taxes, though, we don’t have a lot of choices: pay up,
or it’s 3 hots and a cot. But we do have a few options, especially
when it comes to paying for health care, and health insurance. Two new
items out of Washington (D.C., not Starbucks) may help us save money on
our taxes, right now, and in the future.
The Health Opportunity Patient Empowerment Act of 2006 (HOPE) clarifies some confusion in how Health Savings Accounts (HSA’s) are managed. Along with the Tax Relief and Health Care Act of 2006, which was enacted this past December, consumers can now confidently make effective choices.
What does that have to do with insurance? Well, most of us buy our
insurance through group plans sponsored by our employers. And a lot of
those have FSA and HRA plans in place…Okay, that’s a lot of letters;
let’s take a moment to review what they all mean:
FSA: Flexible Spending Accounts. These ubiquitous jobbers were all the
rage for a while, because they let eligible employees sock away
tax-free dollars for unreimbursed health care expenses (and some
premiums, and day care). The downside: the notorious “use it or lose
it” provision, which requires you to spend any moneys in the account.
HRA: Health Reimbursement Arrangements. These relatively new creatures
enable employers to reimburse you for medical expenses, but you usually
have to spend at least some of your own money first. The upside is,
it’s your employer’s money going into the account; the downside is that
you can’t cash it out if you leave (although some HRA's let you spend
them down post-employment).
HSA: Health Savings Accounts. These are descendents of MSA’s (Medical
Savings Accounts). Again, you put your own money in, pre-tax, but
there’s no “use it or lose it” problem; the money just keeps rollin’
over. And, your employer can make deposits to the account, too. The
downside to these is, well, I’ll have to think about that. Really, the
major drawback (if it is one) is that you have to couple it with a
special High Deductible Health Plan, which neither the HRA or FSA
IRA: Individual Retirement Account. What the heck’s an IRA doing in
this discussion? Well, in case you didn’t know it, you can use your IRA
to “seed” a new HSA, if you’re so inclined. Cool, hunh?
The first two items are geared for employer groups, while the last two
are applicable to pretty much any of us. The legislation makes it
possible for folks to transfer funds from a use-it-or-lose-it FSA to a
use-it-or-keep-it HSA. Since a lot of folks end up with FSA balances at
the end of the year, there’s usually a mad rush for various medical
expenses in December and January (the law says that FSA’s may be used
up to 75 days after the end of the year; your plan may or may not have
that provision). And folks whose employers have an HRA plan in place
get a similar good deal.
Of course, if you do transfer the funds from an FSA or HRA, you don’t
get to deduct the transfer from your taxes. But that seems a small
price to pay for greater flexibility, and ownership. And in case you’re
confused by all of this, the new guidelines include 13 examples showing
how IRS officials want employers and employees to apply the new
procedures. Such a deal!
On a personal note, I’ve recently earned the Chartered Benefits
Consultant (CBC) designation from the National Association of
Alternative Benefits Brokers. The designation reflects an in-depth
knowledge of alternative benefits, including FSA, HRA, and HSA.
Henry Stern, LUTCF, CBC is an independent insurance agent in Dayton,
OH. A licensed Continuing Education instructor for Ohio and Kentucky,
he has well over 20 years of experience in “the biz.” He blogs every
day (or so it seems) at InsureBlog.