If you cover the cost of health care for yourself or your employees through health savings accounts (HSAs) or cafeteria plan accounts, you may want to reassess your options as the provisions of the Patient Protection and Affordable Care Act of 2010 (ACA) (also known as “Obamacare”) go into effect. While these tax-advantaged accounts will remain available, they are subject to new limitations and requirements.
HSAs are savings accounts that must be paired with a qualified high-deductible health plan (HDHP). HSAs allow individuals to save money tax-free, and allow the employers of account holders to make tax-free contributions to workers’ accounts. Provided the funds are used to pay for out-of-pocket health care expenses, the money deposited in an HSA is never subject to Federal income tax. HSA contributions may be invested in a manner similar to retirement accounts, and investment earnings and interest can accrue tax-free. These accounts can be especially attractive for higher income individuals because any funds not spent in a given year can be carried over indefinitely and may even be withdrawn penalty-free in retirement for non-qualified expenses.
For 2013, the contribution limits for HSAs are $3,250 for individuals and $6,450 for a family, with an additional $1,000 “catch-up” contribution permitted after age 55. Deductibles must be no less than $1,250 for individuals and $2,500 for families. Out-of-pocket expenses are capped at $6,250 for individuals and $12,500 for families.
Section 125 cafeteria plans allow employees to choose from a list of tax-favored benefit options — which may include health flexible spending accounts (FSAs) or health reimbursement arrangements (HRAs). These health accounts are generally used to cover medical expenses not met under the employer-sponsored health plan (such as insurance co-pays, eyewear, dental work, and prescriptions).
HRAs (which are often paired with HDHPs) are accounts funded solely by the employer that can be used by the employee to pay for qualified heath care expenses. Most HRAs permit unused amounts to be “rolled over” to subsequent years, but note that the employee loses access to the funds upon separation from the employer.
Health FSAs allow employees to contribute a portion of their salary on a pre-tax basis to a savings account to pay for qualified medical expenses. Employers may also contribute to their employees’ FSAs — however, under the “Use It Or Lose It” Rule, FSA funds not used by the end of the year are forfeited by the employee.
The ACA modified the definitions of qualified medical expenses (for FSAs, HSAs, and HRAs) to bring them in-line with the definition used for the medical expenses tax deduction, an itemized deduction which excludes tax-free reimbursements for over-the-counter drugs not prescribed by a physician. The annual cap for employee contributions to health FSAs is now set at $2,500 (indexed for inflation) although employers can continue to contribute additional funds.
The U.S. Department of Labor (DOL) recently issued new guidance on how the ACA affects HRAs, mainly related to the interaction of HRAs and Section 2711 of the Public Health Services Act (PHSA) which prohibits annual or lifetime benefit limits on group insurance. Under the new guidance, the DOL clarified that an HRA must be “integrated” with a group health plan, such that the combined benefit meets the requirements of the PHSA. On the other hand, a “standalone” HRA (which is offered apart from group health insurance) would not comply with the prohibition on benefit limits under the PHSA.
HSAs will continue to be available under the ACA, but are also subject to some new limits and restrictions. In addition to the new ban on using tax-free HSA funds to pay for over-the-counter drugs without a doctor’s prescription, the tax penalty for withdrawals of HSA funds for non-medical purposes doubled from 10% to 20% starting in 2011. However, under the ACA, a wide range of preventive services will no longer be subject to the deductible in new HSA plans. Additionally, starting in 2014, all health plans must offer certain “essential health benefits.”
While there has been some uncertainty about whether high-deductible plans would continue to be offered under the ACA when the legislation was first passed in 2010, it now appears that HSAs will continue to be widely available going forward. Lawmakers have used the cost-sharing limits for the HDHPs typically packaged with HSAs as the basis for setting the minimum threshold of qualified coverage for the insurance options that will be offered on state insurance exchanges starting in 2014.
Thus, most HDHPs coupled with HSAs should meet the requirements of the so-called “Bronze” Plan. The Bronze Plan offers the lowest level of coverage, but also has the lowest premiums — out of the 4 tiers of plans categorized by actuarial value (platinum, gold, silver, and bronze) that will be available on the new exchanges.
Under a Bronze Plan, insurance must cover 60% of the yearly amount the average policyholder spends on health care. In 2014, the limits on out-of-pocket amounts for bronze plans will be $6,350 for individuals and $12,700 for families.
An analysis by HealthPocket.com in February 2013 found that 36% of health insurance plans sold nationally had higher out-of-pocket limits than permitted under a Bronze Plan, particularly plans sold in certain states (including Florida, Washington, and Oregon). Researchers stated that “while the average out-of-pocket cost nationwide falls within ACA guidelines, this still leaves thousands of health insurance plans that need to improve their out-of-pocket costs for 2014.”