Thursday, November 7, 2013

Save Taxes When Paying Health Care Costs

There are four types of tax-advantaged accounts that can be used to pay for unreimbursed medical expenses: (1) Health Care Flexible Spending Accounts (FSAs), (2) Health Reimbursement Accounts (HRAs), (3) Health Savings Accounts (HSAs), and (4) Archer Medical Savings Accounts (MSAs). 
Comparison of the four types of accounts 
FSAs. These are employer-established arrangements that are usually funded through salary reduction agreements. The employee's contribution isn't subject to either income or employment taxes. Under the ACA, beginning in 2013, FSA contributions are limited to $2,500 per employee. 
HRAs. These are employer-established arrangements that are funded only through employer contributions. HRA contributions are not subject to either income or employment taxes and health care benefits used for medical care are tax exempt. 
HRAs are group health plans that typically consist of a promise by an employer to reimburse medical expenses for a year up to a certain amount, with unused amounts available to reimburse medical expenses in future years. That causes a problem under Sec. 2711 of the Public Health Service Act (PHSA), as added by the ACA, which generally prohibits plans and issuers from imposing lifetime or annual limits on the dollar value of essential health benefits. IRS has ruled that HRAs are permitted when they are integrated with other employer-provided coverage, and are not permitted when they are stand-alone accounts. 
HSAs. These are tax-exempt accounts that can be established (and to which contributions can be made) only when the account owner has a qualifying high deductible health insurance plan (HDHP). For example, for 2013 as well as 2014, the plan must have a deductible of at least $1,250 for self-only coverage and $2,500 for family coverage.
For 2013, annual out-of-pocket expenses (deductibles, co-pays, and other amounts, but not premiums) can't exceed $6,250 for self-only coverage or $12,500 for family coverage (for 2014, $6,350 and $12,700 respectively). The plan holder may have no other major medical health insurance policy. Contributions made by employers are exempt from income and employment taxes, and account owners may deduct contributions they make. Withdrawals for medical expenses are not taxed. Unused balances may be carried over from year to year. Contributions for 2013 are limited to $3,250 for self-only coverage and $6,450 for family coverage (for 2014, $3,300 and $6,550 respectively). An additional contribution of $1,000 is allowed to people age 55 and older.
MSAs. These accounts, also known as Archer MSAs, are earlier versions of HSAs and are in limited use under current law. MSAs can be established generally only when account owners have qualifying high deductible insurance and no other coverage. Contributions made by employers are exempt from income and employment taxes, and contributions by account owners (which are allowed only if the employer doesn't contribute) are deductible. Withdrawals are not taxed if used for medical expenses. Unused balances may be carried over from year to year without limit.
The principal difference between HSAs and MSAs is that MSA eligibility is limited to people who are self-employed or employed by a small employer (50 or fewer employees, on average). In addition, the MSA minimum deductible levels are higher and the contribution limits are lower. Generally, no MSAs can be created after Dec. 31, 2007, although MSAs existing at that time are grandfathered. 

National statistics
40% of all civilian workers in 2012 had access to a health care FSA. When viewed by firm size, 53% of civilian workers in firms with 100 or more workers had access to an FSA. In establishments with fewer than 100 employees, 20% of the workers had access to a health care FSA.
HSAs are only available to employees who have HDHPs. In 2012, 26% of firms offering health benefits offered an HSA-qualified HDHP (up from 18% in 2011 and 12% in 2010). Workers in larger firms were more likely to have access to an HDHP than those in smaller firms.
Although employers are not required to restrict HRA benefits to employees with HDHPs, most employers chose to do so. Of employers offering health benefits, there was no discernible upward or downward trend in the percent who offered an HDHP and an HRA in recent years; the percentage was 4% in 2010, 7% in 2011, and 5% in 2012.
The CRS report says that almost no data is available on usage of MSAs, as very few new MSAs are being created, and the number of them always has been limited.

No comments:

Post a Comment