NU Online News Service, May 13, 2004, 5:45 p.m. EDT – The Internal Revenue Service has published an explanation of how the new health savings accounts will coordinate with flexible spending accounts and health reimbursement arrangements.[@@]

President Bush brought HSAs to life Dec. 8, 2003, when he signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003. One MPDIMA section lets eligible taxpayers who buy high-deductible health insurance policies exclude HSA contributions from taxable income and spend HSA cash on qualified expenses without paying income taxes on the distributions.

The authors of the HSA section wanted to ensure that taxpayers would have to use cash from their HSAs or cash from their own pockets to pay for routine medical expenses, to give taxpayers a strong financial incentive to cut back on unnecessary and inefficient use of health care services.

Taxpayers are not supposed to be able to use insurance, HRAs or FSAs to eliminate the pain of paying deductibles and other out-of-pocket expenses.

But, in the new revenue ruling, Shoshanna Tanner, an IRS associate chief counsel, writes that employers that offer narrowly focused FSAs and HRAs also can offer HSAs.

Employers can combine HSAs with:

- Limited purpose FSAs and HRAs that restrict reimbursements to certain permitted benefits such as vision, dental, or preventive care benefits.

- Suspended HRAs, or HRAs that cover employees who have elected to forgo health reimbursements for the coverage period.

- Post-deductible FSAs and HRAs that provide reimbursements only after the high-deductible HSA insurance plan’s minimum annual deductible has been satisfied.

- Retirement HRAs that provide reimbursements only after an employee retires.

Tanner also writes that employees who have an HSA and an FSA or HRA can seek reimbursement from the FSA or HRA before taking HSA distributions.

The IRS has posted the new HSA revenue ruling at http://www.ustreas.gov/press/releases/reports/rev_rul200445.pdf