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Tax-advantaged health-care spending accounts areproliferating--and that means more opportunities to save on taxesas well as more ways to help pay for health costs. Here's alook at how each one stacks up.
- Health SavingsAccounts (HSAs): With an HSA, an employer or employee--orboth--can make tax-free contributions to the account if theemployee is covered by a qualified high-deductible health plan.Employer contributions are tax deductible, excludable from grossincome, and are not subject to employment taxes. Employees can usetax-free withdrawals to pay for most medical expenses not coveredby the high-deductible plan. It's possible for employees tomake after-tax contributions and take a deduction on their taxreturns, or pretax contributions if the employer has a Section 125plan. In the latter case, employees reduce their salary by theamount of the contribution, and the employer makes the contributionon their behalf. HSA amounts are fully vested and can be retainedwhen an employee leaves employment.
- Health ReimbursementArrangements (HRAs): HRAs are more beneficial for employersthan are HSAs. They can be used to pay any qualified medicalexpenses, including health-care premiums. HRAs are typically notfunded--they are bookkeeping accounts that are credited withamounts by the employer. No employer assets are actually set aside.Reimbursements to employees come from employer assets--it's atthat point that the employer pays for the expense and is entitledto a deduction.
Only employers can contribute to the accounts, and thesecontributions are not taxable to the employee. Employers can designan HRA so that when employees leave the company, they forfeitwhatever remains in the account. "This means employers havemore control and flexibility with an HRA compared to anHSA,' says Joe Walshe, principal at accounting firmPricewaterhouseCoopers' HR Services in Washington,DC.
- Flexible SpendingAccounts (FSAs): Employees contribute pretax funds to an FSAto help pay for expenses not covered by insurance. If fundsaren't spent within a year, employees forfeit whatever remains.Employers pay no employment taxes on the contributions, nor areemployees required to pay federal, Social Security or state taxeson contributions.
- Medical SavingsAccounts (MSAs): An MSA is a tax-exempt account with afinancial institution in which accountholders can save moneyexclusively for future qualified medical expenses. Set up as ademonstration project under a 1996 law, MSAs were extended byCongress through 2005. MSA amounts can be rolled over to HSAs. Keepin mind that MSAs are a pilot program, so it's likely that theywill disappear after 2005.
You'll want to consider the tax benefits of each of theseplans and take advantage of the ones that best fit yourbusiness' needs.
