Health Care Expense Reimbursement Accounts (Section 125 Plans) Flexible Spending Accounts (FSA) and Medical Savings Accounts (MSA) FSAs and MSAs are trust accounts established by an employer that permits the employee to defer pretax earnings into a specifically designated account from which the employee may withdraw funds to pay out of pocket medical expenses (MSA) or qualified child-care expenses (FSA) with pretax dollars. Any money left in the account not used by year end is forfeited to the company, known as the use it or lose it rule.

Contributions to these accounts may be made either by the employee, by the employer, or both. If made by an employee, contributions are deductible from income. If made by the employer, contributions are excluded from the employee’s income. Distributions are tax free if they are used exclusively to pay qualified medical expenses not paid for by insurance, including the costs of hospital stays, doctor visits, dental care and prescription drugs. However, distributions for other reasons are taxable and may be subject to a penalty.

Health Savings Account (HSA) Health Savings Accounts became available January 1, 2004. A Health Savings Account is a trust established for the purpose of paying the qualified medical expenses with pretax dollars. HSAs are available to any employer OR individual who has a high deductible health insurance policy. The IRS defines a high deductible policy as $1,150/year for singles and $2,300/year for families. Annual contributions into an HSA cannot exceed the amount of the deductible or $3,000 for singles and $5,950 for families, whichever is less.

While HSAs are similar to MSAs, they are superior in many ways. An individual may establish the account (FSAs and MSA are established by the employer) and most insurance companies, banks, and brokerage firms can act as trustee. In an HSA, funds not used for current health care expenses are not forfeited, but are retained in the account (even when changing jobs). Unused contributions continue to grow on a tax deferred basis and may be placed in various investments.

The definition of “qualified health care expense” is much more liberal in an HSA than an MSA. It includes such expenses as over the counter medication, vitamins, contact lens solution, weight loss/gain supplements and almost anything else that may be considered health related.

Limited policies have a very narrow range of coverage and typically have low premium requirements. The common limited policies include: Prescription Coverage Vision Care Specific Disease (Dread Disease) Hospital Confinement

Prescription Drugs This coverage is usually offered as an optional coverage on a health insurance policy. Typically an insured with prescription drug coverage will present an insurance card to the pharmacy and pay a small amount (co-payment). The pharmacy will submit a bill for the balance to the insurer.

Vision Care Vision coverage is not readily available in the individual market, but quite common as part of a group benefit package. A typical policy will cover the cost of an annual eye exam and eyeglasses or contacts every two years.

Specific Disease (Dread Disease) These policies are commonly sold via correspondence (television, newspaper or direct mail). Specific disease policies are written to cover a single “dread disease”, like cancer. This type of policy will cover only that specific disease, but will pay in addition to any other coverage for cancer that may be in force (Medical expense or Medicare). The benefit payable is a stated amount on a daily, weekly or monthly basis and is not related to expenses incurred or to wages lost while the insured is being treated for the named disease.

Hospital Confinement Much like a specific disease policy, the benefit of a hospital confinement policy is a stated amount, maybe $250/day, while the insured is hospitalized. However, the benefit is paid regardless of the cause of hospitalization and is in addition to any other coverage in force.