insurance

How health care reform changes FSAs, HSAs

Health savings accounts, or HSAs, also are getting new limits and restrictions. HSAs allow employees who have a high income or who are in good health to save part of their earnings tax-free and use the savings to pay most of their medical care out of pocket. Unlike FSAs, which are meant to supplement a typical health insurance plan, HSAs are paired with a "catastrophic" insurance policy that kicks in once the high annual deductible has been paid.

Also unlike FSAs, HSA balances roll over from year to year, allowing participants to save for health care costs and even for long-term care later. Because of the new health care reform law, HSA funds can no longer be used to buy over-the-counter drugs without a doctor's prescription. Those who withdraw HSA funds for nonmedical purposes will see their tax penalty double, from 10 percent to 20 percent of the total withdrawal, starting Jan. 1, 2011.

The Archer Medical Savings Account, the small-business version of an HSA known as an Archer MSA, will see similar restrictions, with the only difference being the Archer MSA's penalty for nonmedical withdrawals now stands at 15 percent and will go up to 20 percent. Archer MSAs also will have restrictions on buying over-the-counter drugs without a prescription starting Jan. 1, 2011.

The HSA's cafeteria plan cousin, the health reimbursement account, known as an HRA, is also affected by the new law. HRAs work similarly to HSAs, but instead of being funded by employee contributions, HRAs are funded by the employer. HRAs will get the same restrictions on over-the-counter medicine.

On the bright side, tax-free contributions to HSAs and Archer MSAs won't be affected. And with far-reaching reform set to transform health care by 2020, it might be comforting for HSA holders to know that the HSA/high deductible model isn't going anywhere.

In fact, legislators looked to the high-deductible insurance plans typically packaged with HSAs today as a template for the minimum coverage that will be available on state insurance exchanges once they're up and running in 2014.

"The floor for health insurance plans under the new law will be similar to the insurance plans that are now HSA compliant," says Collins.

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