IRS to rule on consumer-directed plans

The AMA hopes the government decision will encourage employers to embrace this health insurance option.

By Amy Snow Landa, amednews staff. June 3, 2002.

Washington -- The Internal Revenue Service is expected to announce a long-awaited ruling this summer that could boost employers' interest in shifting to consumer-directed health benefits for their employees.

The ruling is intended to clear up confusion about the tax status of employer-funded health spending accounts -- a key feature of most consumer-directed health plans.

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With health insurance costs climbing steeply, more businesses are beginning to explore this insurance option, which gives workers greater responsibility for their health care spending and may prove to be a cost-saving alternative to managed care plans.

The AMA, which strongly supports the movement toward consumer-directed health benefits, is "very much interested" in the IRS ruling, said Donald J. Palmisano, MD, the Association's secretary-treasurer.

The business community, physician groups and other supporters of the trend are hoping that the ruling will not cut off new forms of health insurance that have already begun to emerge in the marketplace.

A growing number of companies already offer their employees consumer-directed health benefits that combine a high-deductible health plan with an employer-funded account that workers use to pay for out-of-pocket medical expenses.

However, some employers continue to hesitate because of lingering uncertainty over the tax implications. Employers are less likely to be interested if it means giving up the favorable tax treatment they receive for traditional health insurance.

"There is some queasiness out in the market about it," said Greg Scandlen, senior fellow at the Dallas-based National Center for Policy Analysis and a consumer-directed health plan proponent.

A need for clarity

One question that the IRS ruling is expected to answer is whether employer-funded health spending accounts are allowed to roll over from year to year on a tax-free basis.

The IRS has maintained a "no ruling" position on the practice since the mid-1980s, leaving employers in regulatory limbo.

"The AMA certainly hopes that the IRS ruling will allow these accounts to be rolled over," said Dr. Palmisano.

This feature, which allows workers to build up their accounts to pay for future medical expenses, is considered a key incentive for employees to enroll in consumer-directed health benefits and make choices that restrain their current health spending.

Despite the absence of clear tax policy, some employers have already begun allowing workers to carry over the unspent funds in their spending accounts.

"If the revenue ruling says you can't roll this over, then there's no incentive for the employee to be prudent during the year because that money disappears," Dr. Palmisano said.

Answers are on the way

As employer interest in consumer-directed health benefits has escalated, the IRS has come under increasing pressure from the business community to end the uncertainty. Behind the scenes, Bush administration officials have also been pushing the IRS to issue its ruling.

The drumbeat has apparently been heard. The agency is hustling to get the ruling out very shortly, said W. Thomas Reeder, associate benefits tax counsel at the Treasury Dept.

"It is a very high priority for us," said Reeder. "We're aware that employers are making decisions about plan designs now, and they want to know" what they can do.

Employer groups and insurers with a vested interest in the development of consumer-directed health benefits said they are optimistic. Based on recent meetings with IRS officials, most proponents said they consider it unlikely that the agency will decide that employer-funded health spending accounts cannot be rolled over on a tax-free basis.

The Treasury Dept.'s Reeder also said he "would be surprised if we end up where no rollover is permitted."

But there are more ways in which the IRS could set limits on the accounts. The ruling is expected to address whether employees, once they leave a company, may use the unspent funds in their accounts to pay for future health insurance premiums under COBRA. The IRS could also decide to place a cap on the amount that employees are allowed to accumulate in their health spending accounts.