Understanding your health savings account options can improve your health and reduce your health spending.
Whether funded by your employer or by your hard work, there are three primary accounts and arrangements that can reduce overall healthcare spending of discretionary income.
The first: Health Reimbursement Arrangement (HRA) is the only account that is funded by your employer.
Funds from this account are used to reimburse employees for eligible medical expenses. The advantage is that they’re not subject to employment or income taxes and can be tax-deductible for the employer. In this way, employers are incentivized to provide health care benefits.
HRAs are also excluded from an employee’s gross income by the IRS. This increases your total discretionary income and means that the benefit that HRAs are offering will not be counted as taxable income.
Fit as a fiddle and not facing any medical expenses? In some limited cases, your HRA can be used to pay health insurance premiums or cover the expenses of family members who qualify as dependents on your taxes. (Although, your dependents may need to be covered by their own insurance plan before they’re qualified to use HRA funds.)
Why is it so important to utilize your HRA? Unused amounts may be rolled over into the subsequent years, but the employer owns the account. This means you don’t get to decide what happens to the unused funds – your employer does.
HSA and FSA are Employee Funded
Unlike the HRA, with a Health savings account (HSA), you own the funds from your account.
Allocated funds to your HSA are made from payroll deductions that you can adjust throughout the year to fit a fluctuating budget. With a maximum of $3550 annually, you can front load your contribution for immediate access or divide it throughout the year for a gradual savings. (In this case, you can’t use it until you fund it, unlike an FSA. More on that later.) Though the contributions to your HSA aren’t subject to typical income taxes, these pre-tax contributions to your HSA are allowed to accrue interest.
HSA contributions can also be used to cover family expenses.
The caveat to all of these perks is that you can only use an HSA if you have a high deductible insurance plan. Defined by the IRS as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family, high deductible health plans (HDHP) typically have lower premiums. A smart investment strategy could be taking the savings from the lower premium and investing it into an HSA. The likelihood of having to use your HSA funds in the event of a medical event is pretty solid with a HDHP because the insurance holds you financially responsible until your deductible is met.
One detail about the HSA is that after age 65, HSA withdrawals get taxed in a way similar to Traditional IRA withdrawals. “If you still have an HSA balance after the age of 65, you can take withdrawals out of your HSA for non-medical expenses penalty free. Taxes may still be applicable to your withdrawal amounts, similar to Traditional IRA withdrawals, but you would avoid the 20% penalty from the IRS.” (Glotfelty, 2020)
Like the HSA, an Flexible Savings Account (FSA) is an employee-funded account used to pay for certain medical expenses.
However unlike the funds from your HSA, the funds in your FSA can’t be carried over to the following year and don’t accrue interest. With this account if you don’t use the funds in a year, you lose them.
But you get to determine how much is allocated to your FSA, up to the maximum contribution is $2,750 annually. At the plan start date, the funds in your FSA are immediately available. The advantage here is that your payroll deductions are equally spread throughout the year but you can draw from the FSA right away. With this account, you also don’t accrue any interest.
There are a few options to access the funds in your FSA. You could be reimbursed by the FSA provider after you provide receipts or you’ll be provided an FSA debit card to be used at the point of purchase. You’ll still need a receipt to prove your spending is an eligible expense, per the IRS guidelines, but the latter option is convenient.
Speaking of convenience, the FSA can also be used with most types of insurance plans -unlike the HSA that requires a high deductible health plan.
HSA, HRA, and FSA all help to ensure that you’re financially covered during medical events.
While you may be restricted by the limitations of what your employer offers, it’s important to understand your options and what best suits your needs.
Ask yourself the right questions can help you utilize the other health insurance benefits: HRA, HSA, FSA.
Consult with your human resources department and your CPA to determine what is the best route for you.
And remember to check the eligibility of your expenses. For a comprehensive list of accepted by the IRS: click here.
Improve your financial resiliency by increasing your financial literacy. Learning what financial tools are at your disposal and how to use them can prepare you to tackle unexpected medical expenses like a pandemic or an accident.
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