Medical Savings Options
| Medical Savings Account (MSA) | Health Savings Account (HSA) | Health Flexible Spending Accounts (FSA) | |
|---|---|---|---|
| Nonqualified Withdrawals | Nonqualified withdrawals are taxable and a 15% penalty applies | Nonqualified withdrawals before age 65 are taxable and a 10% penalty applies Nonqualified withdrawals after age 65 are taxable but no penalty applies |
Nonqualified withdrawals are not allowed |
| Carryover of Funds | Funds accumulate to future year | Funds accumulate to future years | FSA are subject to the "use-it-or-lose-it" rule and no carryover of funds is allowed. Unused funds revert to the plan and can either be redistributed to plan participants or used to offset plan administrative costs |
| Benefit Limitations | Deductible must be between $1,950 and $2,900 for individual coverage with a maximum out-of-pocket of $3,850 (including deductible) Deductible must be between $3,850 and $5,800 for family coverage with a maximum out-of-pocket of $7,050 family-includes deductible & and out of network costs The high deductible health plan can provide for preventive care without a deductible and still qualify |
Minimum deductible of $1,100 for individual coverage with a maximum out-of-pocket of $5,600 (including the deductible) Minimum deductible of $2,200 for family coverage with a maximum out-of-pocket of $11,200 family-includes deductible but not out of network costs The high deductible health plan can provide for preventive care without a deductible and still qualify |
There are no benefit limitations for Health Flexible Spending Accounts |
| Tax Treatment Employer | Contributions made by the employer are tax deductible in the year contributed | Contributions made by the employer are tax deductible in the year contributed Employer contributions are not subject to withholding from wages for income taxes or to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Act |
Employer contributions are tax deductible to the employer and are not attributed as income to the employee |
| Tax Treatment Employee | Employee contributions are deductible on their individual tax return No interest or investment return is taxed Payments made for qualified medical expenses are not considered income |
Contributions made by the employee are made on a pretax basis - only if made through a Section 125 plan. No interest or investment return is taxed Payments made for qualified medical expenses are not considered income |
Employees may voluntarily contribute on a pretax basis N/A No interest accrues Contributions used for qualified medical expenses are not considered income |
| Tax Treatment Upon Death | Upon death, the account transfers to the spouse as an MSA (if he or she is named as the account beneficiary) If there is no spouse or the spouse is not the named beneficiary, the fair market value becomes taxable to the beneficiary in the year of death |
Upon death, the account transfers to the spouse as an HSA (if he or she is named as the account beneficiary) If there is no spouse or the spouse is not the named beneficiary, the fair market value is included in the estate |
Does not apply beyond COBRA rights |
| Federal Tax Law Testing | If the employer contributes, they must make comparable contributions to all participants Contributions are considered comparable if they are either the same amount or the same percentage of the deductible |
If the employer contributes, they must make comparable contributions to all participants Contributions are considered comparable if they are either the same amount or the same percentage of the deductible For purposes of discrimination testing, only the amounts contributed by the employer are considered |
Section 105(h) discrimination testing applies
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| Definition | Medical Savings Accounts, also known as Archer MSAs, are tax-advantaged trusts or custodial accounts created for the benefit of someone covered under a high deductible health plan (HDHP) | Health Savings Accounts are tax-advantaged trusts or custodial accounts created for the benefit of an individual covered under a high deductible health plan | Flexible spending accounts are employer established benefit plans that reimburse qualified medical expenses with pretax dollars |
| Effective Date | January 1, 1997 Sunset 12/31/05* for new contributions except by or on behalf of individuals who previously had Archer MSA contributions and employees who are employed by a participating employer (Withdrawals may continue) *Working Families Tax Relief Act of 2004 |
January 1, 2004 | January 1, 1979 |
| Portability | MSAs are portable | HSAs are portable and the account holder may carry forward unused balances | FSAs are not portable - unused contributions are lost if not used in a particular year |
| Elgibility | Only employees of small companies - (employing no more than 50 employees on average during either of the two prior calendar years) with a high deductible health plan Self-employed persons with a high deductible health plan NOT ELIGIBLEIndividuals who may be claimed as a dependent on another person's tax return |
Eligible individuals are those that are covered under a qualified high deductible health plan (defined later) and are not simultaneously covered under a non-high deductible health plan (with certain exceptions for plans providing limited types of coverage) There are no income or size restrictions on employers offering HSAs. Individuals who may be claimed as a dependent on another person's tax return are not eligible |
There are no income or size restrictions on employers offering FSAs. Sole proprietors, partners, or owners of more than 2% of the stock of a Subchapter S corporation cannot participate in the FSA |
| Medicare Restrictions | Once an individual becomes enrolled in Medicare, no future MSA contributions can be made | Once an individual becomes enrolled in Medicare, no future HSA contributions can be made | Employees eligible for or enrolled in Medicare may participate in a FSA |
| Who Can Contribute? | Either the employer or employee, but not both in the same year, can fund MSAs | Anyone can contribute to an HSA | Although employers do not typically contribute, employers and employees can both make contributions to FSAs |
| Maximum Contributions | Maximum funding is the lesser of 65% of the deductible for the individual and 75% of the deductible for family coverage, or $2,835 individual or $4,350 family | Funding was limited to the lesser of the amount of the deductible, or limits for 2008 of $2,900 for individual or $5,800 family coverage, with the amount increased annually based on CPI. In 2007, Congress removed the lower limit of the deductible. The individual contribution limit of $2900 and the limit of $5800 for family coverage are therefore the current funding limits. | None specified in the law but most plan documents place a limit to limit risk for the employer |
| Additional Contribution Allowance | There are no additional or catch-up contributions These amounts are indexed for the cost of living beginning in the future |
Individuals who are age 55 and older may contribute an additional $900 Catch up contributions increase by $100 annually until they reach $1,000 in 2009 |
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| Contribution Frequency | Contributions can be made in one or more payments any time before the federal tax-filing deadline of the individual (generally April 15 for calendar year filers) | Contributions can be made in one or more payments any time before the federal tax-filing deadline of the individual (generally April 15 for calendar year filers) The maximum annual contribution is the sum of the monthly limits. The monthly limit is 1/12 of the maximum funding level for each month the member is covered by the HDPD Although the annual contribution is determined monthly, the maximum contribution may be made on the first day of the year |
FSAs are subject to the Uniform Coverage Rule. Because the full amount of the FSA funds need to be available on the first day of the plan year even though they are contributed through normal payroll cycles, an employer can be left vulnerable to loss |
