What Health Reform Means for FSAs and HSAs

New limits on flexible spending accounts will make health savings accounts more attractive.

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.

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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.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.