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Choosing the medical insurance account that will meet you and your family’s needs can be a confusing process. In fact, the only thing that Health Savings Accounts, Health Reimbursement Accounts and Flexible Spending Accounts all have in common is that they can reduce the amount of money an account holder has to pay out of pocket. By making sense of the rules for each account and assessing each plan’s advantages and drawbacks, it becomes easier to decide which is right for you.
Health Savings Account
With a health savings account, you are the account holder. This means that even if you change jobs, change health plans, or retire, you can take the account with you. Although anyone can contribute to your HSA, employers are often the primary contributors. One of the most attractive aspects of a Health Savings Account (HSA) is that there are tax advantages. An employer will take money from your paycheck pre-tax and put it in the HSA. This means that in the long run, you have access to more money because a portion of it is not taxed. And if you do not use all the money within a year, that is okay. With an HSA, unused money rolls over to the next year’s plan. As of 2013, the contribution limit for singles is $3250; for a family it is $6450. No matter the source, all contributions go toward the annual maximum.
In order to have an HSA, you must be part of a high deductible health plan (HDHP) with your insurance. An HDHP requires that you pay a larger amount of money upfront before your health coverage can be accessed. Even though the deductible is higher than most deductibles, there are a few advantages to this:
– Higher deductibles mean lower monthly premiums. If you do not have a history of visiting the doctor a lot, you will rarely need to pay deductibles and monthly payments are relatively low.
– You can use your HSA funds to pay the deductible. Having an HSA fund solely to pay for the required high deductible may seem counterintuitive. But remember, if your employer is the main contributor, the money has not been taxed and therefore you have more money than if you did not have the HSA.
How it works:
If an employer deposits money into your HSA, they must give an equal amount to each employee, so as to not discriminate. The only exception is that it is okay if they deposit one amount into full-time employees’ accounts and another amount into part-time employees’ accounts. Meanwhile, because you are the account holder, anyone who happens to want to contribute to your HSA is allowed. The great thing about this is that this is the only medical insurance account option that can earn interest. After the account reaches a minimum balance requirement (usually $2000), you can make investments similar to IRA investments. (To learn more about HSA investing, visit this website.) After you turn 65, you can withdraw the funds without penalty. But if you withdraw for non-qualified medical expenses, the withdrawals will be subject to the income tax.
Besides paying for deductibles, HSAs cover a variety of medical expenses. These medical expenses can cover the account holder, spouse, and dependents. Qualified medical expenses usually include copays, vision and hearing care, dental care, prescription drugs, and medical equipment. Over the counter drugs are not covered by HSAs. Using your HSA for qualified medical expenses is tax free; nonqualified expenses are taxed and penalized.
Medical Reimbursement Arrangement
MRAs (also known as HRAs) is an account for employees or retirees where employers reimburse employees for their out-of-pocket expenses. Like the HSA, the HRA can cover deductibles, copayments, and qualified medical expenses. Also like the HSA, leftover money can roll to the next year’s plan. Unlike the HSA, only the employer can contribute to the account and the employer is the account holder. This means that if you change jobs or retire, the arrangement is void. And because the reimbursements are only made once transactions have occurred and have been reported, there is no option of earning interest.
How it works:
Unlike the HRA, the MRA cannot be funded through non-taxed salary deductions. Instead, employers will pay taxed salaries, and then set an annual limit of expenses that they are willing to reimburse. They will arrange a qualified plan that must be described in an HRA document. This plan will include definitions of what the funds can be used for and the procedure for getting reimbursed.
Employers find this option attractive, as the reimbursements themselves are tax deductible. Employers also know exactly what the maximum expense will be, so they are able to have a more solid plan. Employees are attracted to the MRA because deductibles are relatively low. For somebody who may need to get medical attention often, this is a great option.
Although people who are self-employed cannot have an MRA, if they can hire a spouse and prove that the spouse is legitimately working for the business, the spouse can get an HRA. The business owner can then benefit from the HRA.
Flexible Spending Account
Flexible spending accounts most distinguished attributes are both similar and different from those of HSAs. Like the HSA, money is taken from your paycheck pre-tax and put into an account. Unlike the HSA, money that is not used after the year-plan is not allowed to be used the next year. Also, you cannot take the funds with you if you change jobs or retire. Instead, unused money will go back to the employer, even though the employee is the account owner. Like the MRA, the FSA has an annual contribution limit that is designed by the employer (though it cannot exceed $2500 for each spouse) and there is no potential for earning interest. However, if you have multiple employers, you can have an FSA with up to $2500 per employer.
How it works:
FSAs are a type of cafeteria plan; you can choose which benefits will best suit you. These can range from medical benefits, to paying for an employee’s dependents medical or childcare. Like the other two medical insurance accounts, FSAs have a list of qualified medical expenses. Most commonly, the FSA covers medical and dental expenses that insurance will not cover, and it will only cover over the counter drugs if there is a prescription for it. Check out FSAstore.com (everything is qualified) and drugstore.com, where part of the site is especially for FSAs.
Employees will contribute a certain amount of pre-tax money throughout the entire year. The ability to withdraw starts as soon as you make your first contribution, though you have the ability to exceed that contribution. For example, if you decide to contribute $100 every two weeks, and after the first contribution you need $500 in medical expenses, you are able to spend that much. You will just subtract that $500 from the annual $2400 limit. And if you end up leaving your job after only contributing $300, you do not have to pay your employer back. But, on the flip side, if you have contributed the $1200 and have not used the entire amount, the employer keeps the difference. An estimated 14% of contributions end up being unused. These funds are then taxed and the employer gets the rest of the money.
FSAs are usually accessed through paper money or an FSA debit card. Employees have to submit receipts, which show complete names of products and services. This is to make sure that the employee has only paid for approved expenses. The FSA debit card will not allow you to buy anything that is not qualified, as each of the items is divided in inventory as eligible or ineligible.
Each account has pros and cons, and must be carefully considered. Take the time to sit down and assess you and your family’s upcoming medical needs and expected expenses. Doing so will help shed light on which account is best for you and your unique situation.
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