Employers and their advisors are still trying to puzzle through the creation of health savings accounts.

Recently, the Internal Revenue Service issued guidance in an effort to address one of the more pressing issues: if, and exactly how, HSAs can co-exist with flexible spending accounts and health reimbursement arrangements.

The IRS concluded in May 2004 that they can - as long as general-purpose FSAs and HRAs that pay for medical expenses before the deductible is met are not used in that lineup.

That means that most employers who offer FSAs, including those that can be used to pay for over-the-counter drugs, still cannot provide access to HSAs as well.

This means that few of the 4.5 million to 6.8 million estimated participants in FSAs are eligible for HSAs. The IRS outlined several conditions under which employers can provide health savings accounts, along with an FSA or HRA:

* When the FSA or HRA pays only for certain benefits, such as vision, dental and preventive care.

* During a period when a participant agrees to temporarily forego HRA payments.

* If the FSA or HRA pays for medical expenses only after the deductible in a high-deductible health plan is met.

* When HRAs pay for medical expenses only after retirement.

The rigidity of the guidance will likely not do much to endear HSAs to current skeptics. Most people are confused about the differences between FSAs, HRAs and HSAs and when they can and cannot be used.

Some people advocate the use of HRAs over HSAs, in large part because of their relative inflexibility - unlike in an HSA, HRA participants cannot retain any part of the employer's contribution, and can only use that money for medical expenses.

Such views seem to be something of an about-face from the rapturous response with which benefits experts greeted the creation of the accounts.

Certainly, it appeared that health savings accounts, which allow employers to save health care dollars through high-deductible health plans and employee-paid funds, promised to usher in a radical vision of health care that would take consumer-driven health to the next level by using an employee medical account.

Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about VEBAs, pension plans and tax reduction strategies. Reach him at (516) 938-5007.

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