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What Health Reform Means for FSAs and HSAs
New limits on flexible spending accounts will make health savings accounts more attractive.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
March 31, 2010
What’s going to happen to flexible spending accounts and health savings accounts as a result of health-care reform?
The amount you can contribute to your flexible spending account will be much lower in the future. Starting in 2013, the health-care-reform law caps annual FSA contributions at $2,500 per year. In the past, there was no maximum contribution amount for medical FSAs, although many employers limited contributions to $4,000 or $5,000 per year.
Also, starting in 2011 you will no longer be able to use tax-advantaged money from an FSA, a health savings account or a health reimbursement account for over-the-counter drugs that are not prescribed by a doctor. So next year you’ll no longer be able to take an end-of-year trip to Costco to buy giant bottles of aspirin to use up FSA money before you lose it. See New Limits Coming on Flex-Account Contributions for ways to spend money in your flex plan before the contribution limit is reduced.
The health-care-reform bill made few changes to HSAs, but it did double the penalty for using the money for nonmedical expenses before age 65 -- from 10% to 20%.
The new flexible spending account limits will eventually make it much more attractive to contribute to a health savings account, if you have a choice between the two (you generally can’t contribute to both in the same year). Like an FSA, an HSA lets you set aside pretax money that you can use tax-free for medical expenses. But you won’t lose the money in an HSA if you don’t use it by the end of the year. Instead, money in the account can grow tax-deferred for future expenses, and you can keep the account even if you switch jobs.
You must have a high-deductible health-insurance policy -- either through your employer or purchased on your own -- to qualify to make contributions to an HSA. In 2010, the deductible must be at least $1,200 for self-only coverage, or $2,400 for family coverage, to qualify. You can then contribute up to $3,050 in 2010 if you have self-only coverage, or $6,150 if you have family coverage. The contributions lower your taxable income now, grow tax-deferred in the account through the years, and can be used tax-free for medical expenses -- a triple tax benefit.
Self-employed people and others who buy their own health insurance have been saving money for years by buying a high-deductible plan (raising the deductible lowers your premiums) and pairing it with an HSA. More employers are offering high-deductible plans to employees during open-enrollment period, too, and some even contribute money to an HSA to encourage employees to sign up.
Most high-deductible policies now provide some coverage for preventive care before you reach your deductible, and the new health-care-reform law will require that all policies provide certain preventive care without cost-sharing by September 2010.
You’ll still be able to buy HSA-eligible policies when the health-insurance exchanges start operating in 2014. Experts are keeping a close eye on a few regulatory issues that could affect HSAs after the exchanges are running, such as whether benefits other than preventive care must be provided before you reach a policy’s deductible. Such a mandate could conflict with HSA requirements that nothing other than preventive care be exempt from the plan deductible, says Roy Ramthun, president of HSA Consulting Services in Silver Spring, Md., who was the senior adviser to the Secretary of the U.S. Treasury for health initiatives when HSAs were first enacted into law in 2003.
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Reader Comments (9)
Posted by: Late-Life Biker at 04/01/2010 10:36:16 AM
For years we have been using a health care FSA account to our financial advantage. Some of that advantage will be lost under the changes you describe. But our benefit would actually be expanded under what you call an HSA. Our employer(s) have never offered an HSA, only a variety of FSAs (for health or childcare or commuting expenses). What is an HSA? And where can we get one?
Posted by: VICTOR at 04/01/2010 03:46:53 PM
Hi Kim, I had never heard of an FSA or HSA until reading your article. I've worked for a state government for the last 30 years. Could this be the reason why I never heard of these plans? Are they available only to private companies employees and not to government employees?
Posted by: Tom at 04/02/2010 07:56:51 AM
The advantages you list for an HSA over FSA exist now. The new legislation doesn't make any real impact over which you would choose, in my opinion. I hate that they're removing over-the-counter drugs from eligibility for FSA/HSA dollars. Victor - HSAs are, in terms of popularity and availability, relatively new. As the article mentioned, you have to have a high deductible health plan to qualify for one. In a crude sense, it could be thought of as a 401k for medical expenses, but you can withdraw the money at any time for those expenses. I'm surprised your employer doesn't have a Flexible Spending benefit.
Posted by: rdzins at 04/02/2010 08:24:13 AM
Everyone has touted hsa as a great alternative to lowering the cost, however I have not seen it, when I contribute 6,000 to the savings with my family, plus pay the premiums, it cost me around 8,000 a year for my family. The savings are never there because throughout the year it seems like something comes up and each visit to the doctor is 500 plus dollars. This does nothing to contain the costs of healthcare which have gotten to be ridiculous, and I find I am now paying 20% of my gross income to premiums and hsa accounts, how is this a benefit? Thats my gross income not what I take home, so by the time I get my paycheck it is got 40% taken right off the top, I just don't see how this can be a substainable model. This does not address the real issue of costs and what I am afraid of is that it will make them go higher.
Posted by: Bill at 04/02/2010 11:21:37 AM
Been using high deductible HSA account for years. It is the only benefit some of us can contribute to who work and save for a living.
Posted by: brad at 04/02/2010 01:42:02 PM
Under this new rule, does anyone know if a married couple can each contribute $2,500 at their respective workplace? (ie. - $5k total between them both)?
Posted by: ejohnson at 04/02/2010 06:37:58 PM
I have a $3,000 limit HSA. This is a very good resource for reducing medical expense through pre tax payments. Now this benefit is being taken away by the new gov. health plan? Also understand my employee premium will go up next year, they have been frozen for the last 4 years with the employer picking up the difference. So far I see costs going up directly related to gov. health care, when are the trillion dollar savings going to start kicking in? Anybody know?
Posted by: Nobody at 04/13/2010 10:36:35 AM
ejohnson, nowhere in the article does it say that HSAs are disappearing or being taken away. It clearly says you will still be able to get them even in 2014 after health exchanges begin operating.
Posted by: Christina at 09/01/2010 08:23:54 AM
Check with your employer before deciding on a Health Savings Account provider, as some employers will contribute a monthly amount directly into your HSA! I started out with a personal HSA account after switching to a job with no benefits (I needed just basic emergency type coverage). I signed up through ehealthinsurance and found about the option there, then switched to my employers HSA provider later. It's a great program for young professionals or people who rarely need medical services other than basic preventative care. If you're sick fairly often or have kids, you'll probably do better with the traditional plans. I love the fact that it's an investment (you earn money on the balance) but you can use it to buy contacts, prescriptions, out of pocket medical expenses, etc. All those years of insurance payments for something I never really used...