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Tax-Advantaged Savings Accounts

Tax-Advantaged Savings Accounts

Employers are increasingly looking to consumer-driven health plans to help soften the blow of continually rising health care costs. Some plans allow employees to use these accounts to pay for medical expenses that are not covered by insurance, while employers use others to provide employees with a fixed dollar amount with which they can purchase health care services or a health insurance policy on the open market.

Introducing consumerism into your health plan requires an evaluation of the benefits and disadvantages of HSAs, FSAs and HRAs. No one solution is right for every employer. In light of the complexities of choosing the right consumer-driven health plan, many employers continue to take a wait-and-see approach.

If your organization is considering implementing a consumer-driven health plan, contact your Compass Consulting Group representative to help you decide which plan is best for you.

 

Types of savings accounts include:

Health Saving Accounts (HSA)
A health savings account (HSA) is a savings account that is paired with a high-deductible health plan (HDHP). An HSA may be established by an individual, including the self-employed or may be employer sponsored.

To qualify for an HSA an individual:

  • Must be covered by a high-deductible health plan,
  • Does not have other health insurance coverage (with some exceptions)
  • Is not claimed as a dependent on another person’s tax return

The employer and employee can contribute to the HSA in the same year, subject to annual limits. The high-deductible health plan is designed to protect the individual against catastrophic loss, and also allows the individual to rollover unspent funds in the HSA from year to year.

Since the HSA is a tax-exempt trust owned by the individual, the employee takes the account with them upon termination or retirement.

Among the advantages of an HSA:

  • Pre-tax contributions reduce the employee’s taxable income
  • The employee chooses where to invest contributions
  • Earnings grow tax-free
  • Withdrawals for qualified medical expenses are tax-free
  • Taxable withdrawals for other expenses can be made with no penalties
  • Funds are portable and can accompany the employee to a new job
  • HSAs are not affected by a change in medical coverage or marital status

Flexible Spending Accounts
FSAs provide a means for employees to considerably reduce their income tax liability through salary reduction. Employees can contribute a portion of their own salary to an account designated to pay for health care expenses. These pretax contributions are exempt from income and payroll taxes.  Employees are required to elect a specific amount of salary deduction at the beginning of the year, and then must use every dollar in the account by the end of that year.

In 2005, the IRS announced that cafeteria plans could be amended to allow participants to access unused amounts remaining in an FSA at the end of the plan year to pay for expenses incurred during a grace period of up to two and a half months after the end of the plan year.

Health Reimbursement Accounts
A health reimbursement account (HRA) is a plan that allows employees to use employer contributions for medical expenses or to pay health insurance premiums.  Like an HSA, an HRA is usually implemented in conjunction with a high-deductible health plan. However, the employee does not own the account.

Unlike FSAs, unused HRA balances may accumulate from year to year, thus providing a personal stake for the consumer in the financial outcome of his or her health care spending decisions.