Health Care Flexible Spending Account Offers Alternative to Health Savings Account

An important decision that federal employees have to make during the federal benefits open season is whether they want to enroll – or reenroll – in a health care flexible spending account (HCFSA) for the next plan year. This column discusses the HCFSA — and compares the HCFSA to the Health Savings Account (HSA) and the Health Reimbursement Arrangement (HRA).  The HSA and HRA were discussed in a previous column. 

What Is an HCFSA and Who Is Eligible to Have an HCFSA?

 A health care flexible spending account (HCFSA) allows an employee to be reimbursed for out-of-pocket medical, dental or vision expenses. Employees who work for an Executive Branch agency or an agency that has adopted the Federal Flexible Benefits Plan (“FedFlex”) can elect to participate in the federal flexible spending account program, called “FSAFEDS”.

Employees who participate in the FSAFEDS program save money through the reduction  of their gross salary to pay for their out of-pocket health care-related expenses. The HCFSA can be thought as a savings account that pays in a tax-beneficial way for health care-related expenses typically not paid for, or covered by a Federal Employees Health Benefits (FEHB) program health insurance plan, by a dental and/or vision insurance plan offered through the Federal Employees Dental and Vision Insurance Program (FEDVIP), or by other health, dental or vision insurance coverage that the employee may be enrolled in, either themselves or through another family member such as a spouse.

The money contributed to an employee’s HCFSA is set aside before federal and in most states, state and local income taxes, and Social Security (FICA) and Medicare Part A (hospital insurance) payroll taxes are deducted, resulting in overall tax savings ranging from 30 to 50 percent. The average tax savings for an employee earning $50,000 who contributes $2,000 to a HCFSA is approximately $600. That means the employee gets $2,000 worth of health care purchasing power plus saving about $600 in overall taxes.

An employee must be eligible to enroll in though not necessarily enrolled in the FEHB program in order to enroll in an HCFSA. The HCFSA reimburses qualified health care expenses not covered or reimbursed by a FEHB program plan, a FEDVIP plan, or any other insurance program that an employee may be enrolled in (including TriCare) or a spouse’s private company-sponsored health insurance plan. The eligible expenses of the employee, the employee’s spouse, and the eligible tax dependents (including children) may be reimbursed through the HCFSA. Employees can contribute to their HCFSA for the year 2019 from a minimum of a $100 to a maximum of $2,700 (increased from $2,650 during 2018). Spouses of employees who are also federal employees can also contribute a maximum of $2,750 to the HCFSA during 2019.

Qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expense deduction on an individual’s tax return. These expenses are explained and presented in IRS Publication 502 (Medical and Dental Expenses), which can be downloaded from www.irs.gov.  Also, non-prescription medicines other than insulin are not considered qualified medical expenses for HCFSA reimbursement purposes.

A medicine or drug will be a qualified medical expense for HCFSA reimbursement purposes only if the medicine or drug:

1. Requires a prescription;
2. is available without a prescription (an over-the-counter medicine or drug) and the individual get a prescription for it; or
3. is insulin. Any insurance premium (health, dental, vision or long-term care) may not be reimbursed from an HCFSA.

The FSAFEDS program on its Web site provides a list showing which medical, dental and vision expenses are eligible for reimbursement from a HCFSA. The list may be found at www.fsafeds.com/support/faq/hcfsa.

Eligible employees can enroll in FSAFEDS each year during the federal benefits open season. Enrollment is made on the FSAFEDS website at www.FSAFEDS.com.  Elections made during this “open season” will be effective Jan. 1, 2019. Eligible expenses for reimbursement must be incurred between Jan. 1, 2019 and Dec. 31, 2019. Effective with the 2015 plan year, HCFSA owners are able to carry over up to $500 of unspent funds into the next plan year.  Note that if an HCFSA owner wants to carryover up to $500 of unused HCFSA funds to 2019 but does not want any additional HCFSA funds to be withheld from his or her salary during 2019, he or she must still reenroll in FSAFEDS for 2019 during the 2018 HCFSA open season. Any unused HCFSA funds as of Dec. 31, 2018 exceeding $500 will be forfeited.  When an employee leaves Federal service, he or she is no longer has access to his or her HCFSA, and unused HCFSA funds are forfeited.

Annuitants are not permitted to have an HCFSA. But employees who plan to retire during 2019 should still consider enrolling in the HCFSA in order to pay for any health care related expenses incurred up until the day they retire and not covered by their insurance plans. The retired employees can be reimbursed for these out-of-pocket expenses from their HCFSA after they retire.

Current enrollees in FSAFEDS are reminded to enroll each year to continue participation in FSAFEDS for the next plan year. Enrollment in the HCFSA does NOT carry forward from year to year.

Those employees who are enroll in a High Deductible Health Plan (HDHP) associated with an HSA are not eligible to enroll in an HCFSA. But these employees may instead enroll in a “limited expense” flexible spending account or a “LEX HCFSA”. A LEX HCFSA reimburses employees for eligible dental and vision expenses not covered or reimbursed by the FEHB and FEDVIP programs or other insurance programs. For 2019, the maximum contribution to a LEX HCFSA is $2,700 with a minimum contribution of $100. Similar to the HCFSA, for 2019 there is a spending deadline of Dec. 31, 2019 with a maximum $500 carryover permitted to the 2020 plan year, assuming the LEX HCFSA owner reenrolls during next year’s open season.

With a LEX HCFSA, an enrolled employee can request reimbursement from the LEX HCFA for qualifying dental and vision expenses incurred by the employee and by the employee’s spouse and tax dependents (including adult children through the end of the calendar year they become age 24). If the employee is enrolled in an HSA, then the employee can request reimbursement for medical expenses from his or her HSA.

               For further information about the HCFSA, the LEXFSA and the DCFSA, employees should go to www.FSAFEDS.com or call 1-877-372-3337; TTY 1-800-952-0450.

Health Savings Account (HSA) and Health Reimbursement Arrangement (HRA)

The HSA and HRA were discussed in a previous MFR column. An HSA is a tax-advantaged medical savings account available to Federal employees and annuitants who are enrolled in a high deductible health plan (HDHP) offered through the FEHB program. The funds contributed to a HSA are not subject to Federal or state income tax at the time of deposit. Unlike an HCFSA: (1) HSA deposits earn interest or dividends; (2) Unused HSA funds rollover and accumulate year to year; (3) An HSA is owned by the individual and stays with the individual throughout his or her life; and (4) Tax-free HSA withdrawals can be made after the HSA owner retires from or leaves Federal service.

A HDHP features higher annual deductibles (for 2019, a minimum of $1,350 for self only and $2,700 for self plus one or self and family coverage) compared to other traditional health plans. The maximum annual out-of-pocket spending amounts (based on IRS rules) for HDHPs participating in the FEHB program in 2019 are $6,750 for self only enrollment and $13,750 for self and family enrollment. Depending on the HDHP an enrollee chooses, the enrollee may have the choice of using in-network and out-of-network providers. Using in-network providers will likely save money. With the exception of preventive care, an enrollee must meet the annual deductible before the plan pays benefits. Preventive care services are generally paid as “first dollar coverage”, or after a small deductible or copayment.

When an employee enrolls in a HDHP, the health plan determines if the enrollee is eligible for a HSA or for a HRA. Those employees who are enrolled in or are covered by a non-HDHP plan, or who are enrolled in Medicare, are not eligible to participate in a HSA.

Each month, the plan automatically credits a portion of the health plan premium into HDHP enrollee’s HSA or HRA, based on the enrollee’s eligibility as of the first day of the month. An enrollee can pay their deductible with funds from their HSA or HRA. If an employee has a HSA, the employee can also choose to pay their deductible amount out-of-pocket, thereby allowing their HSA to grow. A HSA owner can contribute additional amounts to their HSA up to the annual limit. For 2019, the annual HSA contribution amount (this includes the automatic FEHB HDHP “pass-through-contribution”) is $3,500 for self only coverage and $7,000 for self and family coverage. HSA owners age 55 and older during 2015 may contribute an additional $1,000 in “catch-up” contributions.

The following table summarizes HSA limits for 2019:

HSA participants do not have to obtain advance approval from their HSA custodian/trustee or their medical insurer to withdraw funds from their HSA, and the funds withdrawn from the HSA are not subject to income taxation if they are made to pay qualified medical expenses. These withdrawals include reimbursements for medical services and items covered by the health plan but subject to cost sharing such as a deductible and coinsurance or co-payments, as well as many other expenses not covered under medical plans, such as dental, vision and chiropractic care; durable medical equipment such as eyeglasses and hearing aids; and transportation expenses related to medical care. Through December 31, 2010, non-prescription over-the-counter medications were also eligible. Beginning January 1, 2011, the Patient Protection and Affordable Care Act, also known as Health Care Reform, stipulates HSA funds can no longer be used to buy over-the-counter drugs without a doctor’s prescription. HSA withdrawals can be made to pay long term care insurance premiums.

There are several ways that funds in an HSA can be withdrawn. Some HSAs include a debit card, some supply checks for account owner use, and some allow for a reimbursement process similar to medical insurance. Most HSAs have more than one withdrawal options, and the options available vary from HSA to HSA. Checks and debits do not have to be made payable to the provider. Funds can be withdrawn for any reason, but withdrawals that are not for documented qualified medical expenses are subject to income taxes and a 20 percent penalty. The 20 percent tax penalty is waived for individuals who have reached the age of 65 or have become disabled at the time of the withdrawal. In that case, only income tax is paid on the withdrawal, and in effect the account has grown tax deferred (similar to an IRA). Prior to January 1, 2011, when new rules governing HSAs in the Patient Protection and Affordable Care Act went into effect, the penalty for non-qualified withdrawals was 10 percent.

Account holders are required to retain documentation of their reimbursed medical expenses. Failure to retain and provide documentation could cause the IRS in an audit to rule withdrawals were not made to pay for qualified medical expenses and subject the withdrawals to taxes and additional penalties.

There is no deadline for reimbursements of qualified medical expenses. High-income individuals can take advantage of this by paying for medical costs out of pocket, retaining receipts and allowing their accounts to grow tax-free. Withdrawals from the HSA for reimbursement can be made years later, up to the value of the receipts. This means that unlike a HCFSA, a HSA owner retains ownership of and can use their HSA if they were to leave federal service or after they retire from federal service. For example, a federal annuitant who has a HSA could make withdrawals to pay monthly Medicare Part B premiums or to pay long term care insurance premiums.

When a HSA account owner dies, the funds in their HSA are transferred to the beneficiary named for the account. If the beneficiary is a surviving spouse, the transfer is tax-free.

Health Reimbursement Account

If an employee enrolls in a HDHP and is not eligible for an HSA, the employee will be given a Health Reimbursement Account (HRA). The HDHP will credit a portion of the health plan premium to the employee’s HRA; these are called HRA “credits” The amount of HRA credits for either a self only enrollment or a self and family enrollment will be the same as the amounts that will be deposited in HSAs in the same plan. A HRA owner can use funds in their account, for example, to pay the HDHP deductible and other qualified medical expenses that do not count toward the deductible. Withdrawals from a HRA account can be used to pay Medicare Part B premiums.

Features of an HRA include:

1. Tax-free withdrawals to pay or to reimburse for qualified medical, dental or vision expenses;
2. carryover of unused credits without limit from year to year;
3. credits in an HRA do not earn interest;
4. credits in an HRA are forfeited if the HRA owner switches health plans, or if the HRA owner leaves federal employment other than to retire; and
5. the HRA is administered by the health plan

Medical benefits paid by HRAs that meet certain requirements are not taxable to the employees. The basic requirement is that the account must be funded solely by the employer, and only substantiated medical expenses can be reimbursed.

Comparison Chart for HSA, HRA and HCFSA

A comparison chart for the HSA, HRA and HCFSA is presented below.