HOPE and Alphabet Soup

Bet you never heard of the Health Opportunity Patient Empowerment Act of 2006 (HOPE). No? Don’t feel too bad, most folks haven’t. Briefly, the Act, aka H.R. 6134, set out to clarify some confusions in how Health Savings Accounts (HSA’s) are managed.

Let’s pause a moment to review some favorite acronyms:

FSA: Flexible Spending Accounts. These ubiquitous jobbers were all the rage for a while, because they let eligible employees sock away tax-free dollars for unreimbursed health care expenses (and premiums, and day care). The downside: the notorious “use it or lose it” provision, which requires you to spend any moneys in the account.

HRA: Health Reimbursement Arrangements. These relatively new creatures enable employers to reimburse you for medical expenses, but you usually have to spend at least some of your own money first. The upside is, it’s your employer’s money going into the account; the downside is that you can’t cash it out if you leave (although some HRA's let you spend them down post-employment).

HSA: Health Savings Accounts. These are descendents of MSA’s (Medical Savings Accounts). Again, you put your own money in, pre-tax, but there’s no “use it or lose it” problem; the money just keeps rollin’ over. And, your employer can make deposits to the account, too. The downside to these is, well, I’ll have to think about that. Really, the major drawback (if it is one) is that you have to couple it with a special High Deductible Health Plan, which neither the HRA or FSA require (although it’s generally a good idea to use one if you’re going for the HRA).

IRA: Individual Retirement Account. What the heck’s an IRA doing in this discussion? Well, in case you didn’t know it, you can use your IRA to “seed” a new HSA, if you’re so inclined. Cool, hunh?

So, what’s all that got to do with HOPE? Well, in addition to using your IRA to help kick-start your HSA, you can use funds from your FSA, as well. That is, if there’s anything left in it. Since a lot of folks do end up with balances at the end of the year, there’s usually a mad rush for various medical expenses in December and January (the law says that FSA’s may be used up to 75 days after the end of the year; your plan may or may not have that provision). So your local One Hour Lens Mart may see a big spike in prescription sunglasses, for example. But what if you really don’t need to use those funds, but don’t want to lose them, either?

Well, HOPE to the rescue. Turns out, the law permits some FSA account holders a one time transfer of unused FSA assets into their HSA (offer good until Jan. 1, 2012), and those with HRA’s get the same privilege. That’s a good deal, because it means that folks can really pump up their HSA’s, cushioning the potential blow of a large claim. For those with an FSA, the deal’s good because it means that they don’t have to use their funds or risk losing them; for those with an HRA, it’s a way to make those funds portable.

Of course, if you do move the funds from an FSA or HRA, you don’t get to deduct the transfer from your taxes. But that seems a small price to pay for greater flexibility, and ownership. And in case you’re confused by all of this, the new guidelines include 13 examples showing how IRS officials want employers and employees to apply the new procedures.

Now you know.

ADDENDUM: A small, overlooked provision in President Bush's health care proposal would render much of this post moot. One part of his plan deletes the tax deductibility of medical expense FSA contributions. Ooops.