Compliance Article
09/14/2007
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As health care costs continue to rise, individuals face ever more difficult decisions regarding health insurance and health care expenses. Health Savings Accounts (HSAs) are just one of a number of tax-advantaged ways to help pay for health care expenses. The Health Opportunity Patient Empowerment (HOPE) Act of 2006 allows eligible individuals to roll over certain health Flexible Spending Arrangement (FSA) and Health Reimbursement Arrangement (HRA) assets to an HSA. What is a health FSA? What is an HRA? How do they differ from HSAs? We present this general overview.
Note: Wolters Kluwer Financial Services provides consulting and recordkeeping services, training, and forms, for HSA custodians and trustees. Information provided on health FSAs and HRAs is for general information purposes only. Wolters Kluwer Financial Services does not provide consulting or recordkeeping services, training, or forms, for health FSAs or HRAs.
Health Savings Accounts
An HSA is a tax-deferred custodial or trust account established with a financial organization to pay or reimburse qualified medical expenses an individual and his/her spouse and eligible dependents incur. Eligibility is dependent on enrollment in a high-deductible health plan (HDHP), among other criteria.
Health Flexible Spending Arrangements
A Health FSA is a salary-reduction agreement with an individual’s employer, which allows employees to be reimbursed for qualified medical expenses. Employees do not pay employment or federal income taxes on salary reduction contributions. Employers may contribute to employees’ accounts.
Health Reimbursement Arrangements
An HRA is an employer-funded arrangement that reimburses employees for qualified medical expenses incurred. An employer adopts an unfunded account for each employee and later reimburses each employee for valid medical expenses. Employees cannot contribute to an HRA.
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General Compliance Requirements of HSAs, FSAs, and HRAs | |||
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HSA |
FSA |
HRA |
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Who is eligible?
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Individuals covered under an HDHP under Internal Revenue Code Section 223; individual cannot be claimed as a dependent or enrolled in Medicare, cannot have non-HDHP insurance coverage, with some exceptions |
Any employee, subject to a written employer-designed plan, which may have some exclusions
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Same as an FSA, and eligibility may work in conjunction with high deductible health coverage |
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Is a trust document needed?
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Yes, many providers use IRS model document 5305-C and operate as custodian or trustee |
ERISA plans require a written document and Form 5500 series reporting; some exceptions apply |
ERISA plans require a written document and Form 5500 series reporting; some exceptions apply |
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Is funding allowed via salary reduction under a cafeteria plan? |
Yes
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Yes
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No. An HRA may be coupled with other insurance but the HRA itself cannot be part of a cafeteria plan |
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Can unused amounts be carried over to the next year?
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Yes
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No, however plans may allow a grace period up to 2½ months the following year to submit claims |
Yes
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What medical expenses are eligible for reimbursement or payment?
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IRS Code Section 213(d) medical expenses after the HSA has been established; nonprescription drugs as described in IRS Revenue Ruling 2003-102; COBRA coverage; long-term care insurance; health coverage while drawing unemployment compensation; if older than age 65, premiums for Medicare Part A or B, Medicare HMO, and the employee share of premiums for employer-sponsored health insurance |
IRS Code Section 213(d) medical expenses incurred during coverage period; nonprescription drugs as described in IRS Revenue Ruling 2003-102; cannot reimburse insurance premiums or long-term care services
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IRS Code Section 213(d) medical expenses incurred while coverage is in effect; premiums for eligible health insurance, long-term care insurance subject to employer plan design limitations
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Are distributions for non-medical expenses allowed? |
Yes, but distributions will be taxable and subject to 10% penalty tax; penalty tax exceptions for death, disability, and age 65 |
No
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No
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Are earnings taxable?
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No, if used to pay for or reimburse eligible medical expenses |
N/A |
N/A |
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Do IRC Section 125 nondiscrimination rules apply?
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Yes, if offered under a cafeteria plan
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Yes, if offered under a cafeteria plan
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Generally no, but could apply to an HDHP offered under a cafeteria plan
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Is expense documentation required? |
Yes, individual must retain records
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Yes
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Yes
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Can these accounts receive contributions from the other types? |
Can only receive rollover or transfer contributions from other HSAs or Archer MSAs; also, rollover contributions from FSAs or HRAs under limited circumstances
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No
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No
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Can account owner spend unused amounts at termination of employment? |
Yes
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Generally, no except if used for COBRA insurance or during plan’s grace period, if plan allows |
Yes
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HDHP: Health insurance plan that meets minimum deductible and maximum out-of-pocket expense limits as determined by the IRS ERISA: Employee Retirement Income Security Act; ERISA is a federal law that sets minimum standards for pension plans in private industry COBRA: Consolidated Omnibus Budget Reconciliation Act; COBRA provides certain former employees, retirees, spouses, former spouses, and dependent children the right to temporary continuation of health coverage at group rates | |||
Conclusion
Every individual, with assistance from an employer or on his/her own, insured or uninsured, faces the problem of paying for ever-increasing health care expenses. Congress’s recent efforts allow some interaction between a number of popular health-care payment options, the general compliance requirements of which are presented here.
