Which Type of Health Spending Account Is Most Useful?

This is a guest post by Sara Roberts.   Sara has a background in health and technical writing, and is a content contributor for Just Eyewear, an online retailer of prescription glasses and sunglasses.

The most popular form of health benefits available through employment is group insurance. The employer usually pays a percentage of the premiums for employees, which is typically a minimum of 25 percent, and their contribution is 100 percent tax deductible. Large businesses have a strong incentive to provide insurance with higher premiums and lower deductibles for both morale and easing their tax burden. Smaller businesses have the same incentives but often lack the resources to fund low deductibles.


As an alternative or addition to health insurance provided as a benefit of employment, health spending accounts are a form of tax shelter that have been around since 1979. Each type of health spending account has different rules that make it useful in different situations, including self-employment. Whether the workplace has an existing group insurance policy or not, employers will be served by learning about the plan(s) that apply to their business. A health spending account can provide the same morale and tax benefits as traditional insurance.

Flexible Spending Accounts

The original version of health spending accounts was coined the flexible spending account (FSA) in 1979. Only employees with or without existing insurance are eligible, and the account is strictly tied to continued employment. Funds are taken from pre-tax wages, so they are not subject to income tax or social security withholding. Employers may contribute, but they receive no tax advantage in doing so.

FSAs have only a practical limit in that funds cannot be rolled over from one year to the next. The best applications for FSAs are to cover minor medical expenses and to make up for high-deductible group policies. Care should be taken by employees opting in to such programs, because accounts must be used for qualified expenses covered under IRS code, excluding insurance premiums and long-term care.

Medical Savings Accounts

In 1997, the medical savings account (MSA) was established for small business employees and self-employed individuals to help in covering the high deductibles associated with cheaper premiums. They are only available to employees already covered by health insurance. This makes MSAs singularly useful in helping with high-deductible insurance policies.

The MSA has a limit based on the deductible. Employees with single coverage can contribute 65 percent of the deductible, and family policies may contribute up to 75 percent. The plus side of MSA is that they can accrue interest, functioning similarly to retirement savings accounts. They also roll over and stay with the employee until the age of 65, at which point the account funds are subject to income tax. Caution should be exercised, because withdrawal for non-qualified expenses incurs both income tax and a 15 percent penalty.

Health Reimbursement Arrangements

The Health Reimbursement Arrangement (HRA) was devised most recently, in 2002, as a tax deductible method for employers to provide health benefits. They can only be contributed to by employers, and all employees are eligible. The tax deductible contributions by employers only makes HRAs useful in two situations. They can allow employers to effectively manage employee medical spending, or they can serve as an additional insurance fund. HRAs roll over and can be used for all section 213 medical expenses without exception.

Group insurance is only one method of providing health benefits to employees, and health spending accounts may provide cost-effective solutions. Each is designed to cover a particular need and provides tax benefits to employees, employers, or both. Care should be taken to avoid loss and tax penalties.



Photo by chimothy27
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