Making sense of your medical expense accounts.
A medical expense account is a tax-advantaged account used to set aside funds for qualified medical expenses. There are four types of these accounts:
-Flexible Spending Accounts (FSAs)
-Health Savings Accounts (HSAs)
-Health Reimbursement Arrangements (HRAs)
-Medical Savings Accounts (MSAs)
These four accounts have different applications and eligibility requirements, combined with rules to contribute to these plans.
The FSA is a government program that protects the public from unscrupulous lending practices.
The HSA is a type of savings account where people can save money for health care expenses.
The HRA is a type of retirement account that allows employers to contribute money on behalf of employees for medical expenses.
The MSA stands for the Medicare Savings Account, allowing people with Medicare to save money on out-of-pocket costs.
These four accounts seem very different at first glance. They differ in terms of eligibility requirements, contributions, and benefits to the account holder.
The four types of accounts are similar, but they're still different:
- Flexible Spending Account. A healthcare FSA benefits are unique plans that employers offer, and they tie into pre-tax funds. They allow employees to save money for medical expenses like copays and prescriptions, which is especially helpful if you have a plan that doesn't cover certain things.
- The eligibility depends on the employer's definition. If the company has a program, you are generally eligible if your salary is not more than a certain amount.
- Taxes: Contributions are made before tax.
- You and your employer each contribute a certain amount. Your employer sets the contribution amount, but there's no set limit by the government. An insurance company provides funds to cover certain healthcare costs. Insurance pays for most of your care, but you still need to pay any deductibles or out-of-pocket expenses.
The IRS recognizes a flexible spending account that lets you set aside pre-tax income to pay for qualified medical expenses. FSAs, are called "cafeteria plans" because they give you the flexibility to choose which medical costs to spend with the money in the account.
2. Health Savings Accounts: This tax-exempt account permits you to use your employer's contributions and earnings to pay for medical expenses.
- Eligibility: It is essential to understand a few things before investing in an HSA.
- A qualified high deductible health plan covers you (HDHP).
- You don't have any other insurance covering your medical expenses.
- You must be under 65 years of age and not claimed as a dependent by another person.
- Taxes: You can make pre-tax contributions to your account. Your contributions grow tax-free until you need them. You can also make post-tax deductions and then take a deduction on your tax form. Withdrawals are tax-free for qualified purposes.
- Contributions and distributions: You have the choice to save for your future. The maximum contribution is $3,200 for an individual and $6450 for a family.
- IRS Publication 502 defines qualified medical expenses. Unqualified withdrawals are subject to taxes and a 20% penalty. The 20% penalty only applies to those under 65.
- Funds are allowed to roll over.
3. Health Reimbursement Arrangements (Accounts): An HRA is an account that the employer funds. They offer direct reimbursement for medical expenses not covered under our employer-provided plan. The HRA is a tax-advantaged account; the employer funds and employees are not taxed on employer contributions.
- Eligibility: Any employee can participate. Highly compensated employees can have limited contributions. Supposing the employer has an HRA plan.
- Taxes: You are not taxed for your contributions.
- Contributions and distributions: An employer-sponsored retirement plan is a privilege, and only employers can make contributions. Employers can use this money for all qualified expenses, including health insurance premiums and long-term insurance. Your employer will usually let you carry over your funds next year.
4. Medical Savings Accounts: This type of account is suitable for various needs. It's very similar to an HSA, but it has more flexibility.
- Eligible: To be eligible, you must be self-employed or an employee of a small business.
- Taxes: The same tax benefits are found in the HSA.
- Contributions and Distributions: You cannot start a new MSA, but you can keep an existing one and withdraw qualified distributions. Any unqualified withdrawals are subject to taxes and a 15% penalty for those under 65.
- You can rollover your MSA into an HSA.
Taking full advantage of your medical expense account can save you much money.
These are just the highlights of each type of medical expense account. Be sure to learn more about the kind of account that applies to your situation.
IRS Publication 969 covers all of the details. Your human resources department should also be able to provide further information about your unique circumstances and enable you to enjoy the maximum benefits.
Health care is a significant expense for many people, and it is expected to grow even more in the future. As a result, it is crucial to find ways to save money on medical expenses. One way to do this is by using your Health Savings Plan (HSP). There are three types of HSPs - FSA, HRA, and MSA. FSA and HRA are typically used by employers, while Individuals usually use HSA and MSAs.
I have this to say about our healthcare expenses in a parting comment. There are still many other ways to significantly save money on our healthcare if you are burdened with a high deductible that will cost you $3500 -$10,000 and more. There are ways beyond trusting these accounts to save your hard-earned money. So often, we do not even think about the costs. We hand over our cards and pay.
How many times have we used our card at the Pharmacy only to find out no one has mentioned you could have saved 80% on the drug you have been taking. Only to find out that your account funds have been depleted?
It pays to have someone on your side to watch out for you and how your dollars are being spent. 85% of all bills are incorrect.