January 21, 2006
I Feel Dizzy and Annoyed
Posted by Allison Christians

In today's W$J, a story on Bush's plan to increase the tax benefits associated with health savings accounts (HSAs).  If you're like me, you might say, ok, what the heck is that HSA again--is that the one where you can set aside as much as you want in pre-tax earnings, but if you don't use it for health care costs you lose it at the end of the year?  Oops, no, that's not an HSA, that's an FSA-a flexible spending account.  That one's been around for about 40 years, but even so only a small percentage of people eligible to use them actually do so.

Then there's the MSA (medical savings account), the  HCRA (health care reimbursement account), the DCA (dependent care account--also one of those subject-to-forfeiture plans) and don't even get me started on the variations of IRAs (individual retirement accounts) and that new-fangled college savings account, the 529.  What bugs me about all of these is the time one must invest to figure out (1) if one is eligible for one or more of these accounts (2) what the limitations are and (3) what the penalties are if one messes something up.  The case for rational ignorance seems pretty strong here.

I mean really, a corporate tax break is a corporate tax break, but when it comes to providing tax breaks as incentives for particular behaviors in individuals, it's almost as if Congress went out of its way to make it as difficult and confusing as possible, so that they could get accolades for granting tax breaks but not actually have anybody benefit from them (gee, this sounds a lot like another famous tax acronym...the AMT (alternative minimum tax)).

Why have so many different types of "accounts" and "plans" with different requirements, caps, floors, penalties?  And FORFEITURE?!  Name one corporate tax break that requires a set-aside in advance based on an estimated outlay that, if not made, results in forefeiture of the set-aside.  That one really makes me mad, and I suspect it is the reason lots of people don't use those FSAs even though arguably the tax break could more than compensate for the forefeiture in many instances.  But it's the principle of the thing! 

Incidentally, t
he HSA, created only a few years ago, like the FSA and the MSA, is an account in which you set aside some of your pre-tax earnings to use for meeting medical expenses.  Here's an article that explains some of these different accounts--now don't all go out and rush to read it, we don't want to crash their server or anything.  Unlike the FSA but like the MSA, with an HSA you don't forefeit the unused portion after a year-you can roll it over and use it forever, even into retirement.   You only get to do this if you have a high-deductible health-insurance policy that meets certain criteria.  Got one of those?  I have no idea.  And that really annoys me.

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Comments (6)

1. Posted by Marge on January 21, 2006 @ 15:22 | Permalink

Along these lines, can anyone refer a non-lawyer to advice on the perils of trying to get a legislature to just plain repeal an obsolete or poorly written law? Not trying to patch-on addenda, just get something erased from future use when it has proved unnecessary, unenforcable, or too complex to be useful? Hoping to avoid making a bad situation worse.

2. Posted by Gordon Smith on January 21, 2006 @ 19:00 | Permalink

Allison, This post captures my feelings about these tax breaks exactly. One of our colleagues came to my office yesterday and asked about saving for college for his children. We discussed Coverdell ESAs (Education Savings Accounts), which I started some time ago for my kids, but I wasn't sure of the rules governing the accounts, and we couldn't remember if they were being phased out. Dizzy and annoyed, indeed.

3. Posted by Fred Tung on January 23, 2006 @ 13:51 | Permalink

One thing I've always wondered--and I'd love for a tax person to enlighten me--why have these accounts at all? Why not just create a deduction for these types of expenditures? If you want to allow tax-free spending for medical expenses, aren't deductions a much more straightforward way to do it? Even if one could understand all the conditions and limitations on the accounts, the hassles of getting reimbursed make them unattractive.

Now maybe with education savings accounts--that are truly devices to encourage savings--the tax-free account may make sense. But these one-year use-it-or-lose-it deals just seem GOOFY to me.

I can think of 2 possible explanations for the existence of these accounts--neither of which I vouch for. One, maybe the concern is that too many people would cheat on their deductions if it was that simple to deduct medical expenses. Plausible, I suppose. My second guess is that maybe the companies that get paid to administer these ridiculous accounts just have the right people on K Street that help to get these tax breaks structured this way.

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