What are Medical Savings Accounts [MSAs], Health Reimbursement Accounts or Health Reimbursement Arrangements [HRAs], and Flexible Spending Accounts [FSAs]?
1. Medical Savings Accounts (MSAs) were established before HSAs and are also known as Archer MSAs. They were made available in 1996 to self-employed individuals and employees of smaller businesses. If you have an MSA, you may transfer your funds to your HSA. You may choose to keep both an MSA and an HSA.
If you contribute to your MSA, your HSA maximum annual contribution limit will be reduced by the amount of contributions to your MSA each year. At age 65, you may spend your MSA or HSA monies on whatever you choose, penalty free, but you will have to pay tax on non-qualified distributions.
2. Health Reimbursement Accounts or Health Reimbursement Arrangements (HRAs) are wholly employer-owned accounts and are generally administered by the employer on a "pay-as-you-go" basis. Bookkeeping entries or accounts are established and maintained by employers on behalf of each covered employee for the purpose of paying for unreimbursed medical expenses. Often employers will allow you to roll over the money remaining in your HRA at the end of the year to your HRA for the next year.
However, if you leave your employer, your account generally cannot be taken with you and you may not have future access to the remaining balance. With the Tax Relief and Health Care Act of 2006, employers may transfer HRA balances to open HSAs. Individuals may not execute a transfer on their own.
3. Flexible Spending Accounts (FSAs) are usually funded by you through voluntary pre-tax payroll deductions. No federal income tax, FICA (Social Security and Medicare) tax and in most states, state income tax deductions, are taken from these contributions. FSAs are established to pay for specific health care expenses that are not reimbursed by a group health plan such as eyeglasses, dental work, deductibles and co-payments. Your expenses and the expenses of your spouse, dependent children, and any other qualified tax dependent can be paid for using your flexible spending account.
Employers may offer FSAs as part of a cafeteria plan and have complete flexibility to offer various combinations of benefits in designing their plan. Based on previous IRS regulations, contributions remaining at the end of the plan year were forfeited under the IRS "use it or lose it" rule.
Even though the IRS has extended the allowable period to beyond the end of the plan year, the "use it or lose it" rule remains an integral component of any FSA. Employers must amend their plans to include the time extension beyond the end of the plan year now permitted by the IRS. The extension is not automatic. At the end of the extension period, unused funds are still forfeited.
Some employers may even contribute to the FSA, but this is not an IRS requirement. So that requests for reimbursement can be paid, employers must receive verification of the medical claims. You do not have to be covered under the employer/sponsor's health care plan, or any other health care plan to participate in an FSA.
Self-employed persons are not eligible for an FSA. Caution: Health care FSAs also are referred to as "tax free spending accounts," "medical reimbursement accounts (MRAs)," and even "health care spending accounts (HCSAs or HSAs)". Don't be confused by the inconsistent terminology.