Workscape Institute

For those of us using a health saving or flexible spending account to offset out of pocket medical costs, the passage of the new health care reform law might make you think twice about which plans to choose from your companies menu of options during upcoming annual enrollments.

Follow up:

Flexible Spending Accounts – Have they Reached their Expiration Date?

Flexible Spending Accounts (FSAs) allow employees to save tax-free dollars to pay for those medical expenses not covered by insurance. Many use the account to pay for over the counter purchases such as medical supplies, cold and cough medicine, and pain relievers.

Over the Counter is Off the Table: It seems to be an annual rite of passage for folks to head to the pharmacy in December to stock up on items that can be saved for later in an attempt to use up the remaining funds in their FSAs. The popular saying “Use It or Lose It” strikes fear into the hearts of FSA holders. That saying will have particular resonance this coming AE as plan participants will lose the perk of over the counter medical supplies and drugs starting 1/1/2011, and will have to make better, more informed decisions on what to contribute to their accounts.

Contribution Caps: Another key consideration with FSAs is that up until now employers were free to determine the maximum allowed contributions to an FSA, usually around $5000. As of 1/1/2013 FSAs will have annual limits of $2,500 per year, adjusted annually for inflation. Historical enrollment data has shown that employee contributions tend to be around $1,500, so this new cap on its own is not expected to have a drastic impact of FSA participation.

Health Savings Accounts – An Appealing Alternative

The new FSA limits will make it much more attractive to contribute to a health savings account (HSA). Employees who anticipate expenses above $2,500 may be more likely now to consider moving to an HSA plan to pay for those expenses with pre-tax dollars.

Like an FSA, an HSA allows you to deposit money pretax that you can later use for medical expenses. HSAs also are limited as to the qualified expenses the funds can be used for, so just like the FSA you can no longer stock up on a lifetime supply of Aspirin. But unlike an FSA, contributions to an HSA do not expire at the end of the year. The money can continue to grow, year over year, tax-deferred for future expenses. Also, the account is yours, so it can literally follow you from company to company. With tax rates going up, the HSA is the perfect tax-protected vehicle to accumulate assets.

There is one little snag with the HSA, to contribute you must be enrolled in a High Deductable Health Plan….(To be continued)