Health Savings Accounts (HSA)
A Health Savings Account (HSA) is a tax-advantaged savings account designed to help individuals save for medical expenses. Here’s a breakdown of how it works:
- Eligibility: To open an HSA, you must be covered by a high-deductible health plan (HDHP), have no other health coverage, and not be enrolled in Medicare or claimed as a dependent on someone else’s tax return.
- Contributions: You can contribute pre-tax dollars to your HSA, reducing your taxable income. The funds can be contributed by you, your employer, or both, up to annual limits set by the IRS.
- Tax Benefits: Contributions are tax-deductible, and the money grows tax-free. Withdrawals used for qualified medical expenses are also tax-free.
- Qualified Expenses: HSAs can be used to pay for a wide range of medical expenses, including doctor visits, prescription medications, and certain over-the-counter items. The IRS provides a list of qualified expenses.
- Portability: The account is owned by you, so it’s portable and remains with you even if you change jobs or health plans.
Flexible Spending Accounts (FSA)
A Flexible Spending Account (FSA) is a tax-advantaged account offered by employers that allows employees to set aside pre-tax dollars to cover eligible out-of-pocket healthcare and dependent care expenses. Here’s a closer look at how FSAs work:
- Eligibility: FSAs are typically offered as part of an employee benefits package, so you need to be employed by a company that provides this option. You enroll in the FSA during your employer’s open enrollment period.
- Contributions: You can elect to contribute a portion of your salary to the FSA before taxes are deducted. The amount you contribute is deducted from your paycheck throughout the year.
- Tax Benefits: Contributions are made with pre-tax dollars, which lowers your taxable income. Withdrawals for qualified expenses are also tax-free.
- Qualified Expenses: FSAs can be used for a range of expenses, including medical, dental, and vision care expenses that are not covered by insurance, as well as certain dependent care expenses. The IRS provides a list of qualified expenses.
- Access to Funds: Generally, the full annual contribution amount is available at the start of the plan year, even if you haven’t yet contributed that amount through payroll deductions.
Health Reimbursement Accounts (HRA)
A Health Reimbursement Account (HRA) is an employer-funded account that helps employees pay for out-of-pocket healthcare expenses. Here’s a detailed description of how HRAs work:
- Funding: HRAs are funded entirely by the employer, meaning employees do not contribute their own money. The employer determines the amount of money allocated to the HRA and can adjust it annually.
- Tax Benefits: Contributions made by the employer are tax-deductible for the company, and reimbursements to employees are tax-free, as long as they are used for qualified medical expenses.
- Qualified Expenses: HRAs can be used to cover a wide range of medical expenses, such as doctor visits, prescription medications, and certain over-the-counter items. The specific expenses covered are outlined in the plan documents provided by the employer.
- Reimbursement Process: Employees typically pay for their medical expenses out of pocket and then submit a claim to the HRA administrator for reimbursement. Claims usually require documentation, such as receipts or bills, to validate the expense.
- Portability: Unlike Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), HRAs are not portable. If you leave your job or your employment ends, you usually forfeit any remaining funds in the HRA, although some plans may offer continuation options in certain circumstances.
- Rollover: HRAs may offer different rollover options depending on the employer’s plan. Some plans allow unused funds to carry over to the next year, while others may not. The specifics are defined by the employer.
- Integration with Other Benefits: HRAs can be integrated with other health benefits, such as high-deductible health plans, and can be used to help offset the cost of deductibles and co-pays.
- Employer Control: The employer has control over the design and administration of the HRA, including the amount of funding, eligible expenses, and whether unused funds carry over or expire.