How Each Can Help You Save for Healthcare Costs…
Let’s face it, healthcare is expensive. Good thing for us, there are several types of accounts to ease the blow to our pocketbooks.
Let’s take a look at two types of healthcare savings options, Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs), which are offered by or funded by employers and explore how each can help save on healthcare expenses.
What is an FSA?
A Flexible Spending Account (FSA) is an employer offered tax-exempt account. Funds are deducted pre-tax from your paycheck, letting you save some of your hard-earned money for healthcare.
You can use your FSA funds to pay for eligible medical, dental and vision expenses that aren’t covered by your healthcare plan. Thousands of medical costs, from products to procedures, are covered under FSAs.
Using your FSA account for healthcare related costs will help you save money. Additionally, if you re-enroll, some FSAs offer up to a $500 carryover option or a grace period to use the money by mid-March of the following year. Employers can offer one of these options, but not both, though it is not mandatory.
Flexible Spending Accounts offer several advantages, here are a few of the benefits.
- You don’t need a high deductible health insurance plan. Flexible Spending Accounts are offered by employers. If you don’t have a high deductible health insurance plan, but your employer offers an FSA, review your budget to see if utilizing an FSA is a good option.
- Your money is available from day one. The entire amount contributed to your FSA is available at the beginning of the benefit year (or shortly after the first contribution is made). Say you add $2,000 to your FSA for the year. You’ll likely contribute roughly $80 per paycheck. The entire $2,000 is available to use at any time even though you only make small contributions during the year. Here’s another cool feature of FSAs, if you leave a position before the year is over, the money in your FSA doesn’t have to be paid back.
- Set it up and don’t worry. FSA accounts are usually set up during open enrollment periods. Once the paperwork is complete, contributions are made automatically making saving for healthcare easy.
Be sure to re-enroll each year as most FSA’s don’t renew automatically.
Take advantage of the tax breaks. Since FSA contributions are made with pre-tax dollars, you keep more of your money!
Be sure to use your entire contribution each year, as FSA’s are a “use it or lose it” option. Some FSA’s have a grace period (some as long as March 15th of the following year), and some allow you to carry over up to $500 a year, but not all. Review your specific plan carefully so you don’t lose your money.
Purchase thousands of health-related items with pre-tax dollars. Thousands of items are available for purchase with your FSA account, you can review the IRS FSA eligible list here.
FSAs are simple to use. Many FSAs offer debit cards, and others require reimbursement forms to be filled out. Either way, using pre-tax dollars to help pay for health care makes a little paperwork worth it.
What is an HRA?
An HRA is an employer-funded health benefit plan that allows employees to pay for out-of-pocket medical expenses and individual health insurance premiums.
Section 105(h) of the Internal Revenue Code (IRC) allows employers to contribute tax-free funds to HRAs. These accounts help employees pay for certain healthcare expenses that are not covered by any other source such as co-payments, co-insurance, deductible, dental, vision, chiropractic care and more (be sure to check your HRA documents for specifics).
While HRAs are not health insurance, they can be used alongside your plan to help offset your individual costs.
Health Reimbursement Accounts offer some great benefits as well, here’s a few to consider.
- Employers can make unlimited contributions. While some health care spending accounts have strict contribution limits, HRAs do not. Though only employers can contribute to HRAs, knowing they have no preset limits is nice. Of note, a new type of HRA, the Qualified Small Employer HRA (QSEHRA) does have contribution limits, up to $5,050 for individuals and $10,250 for families. Be sure to know exactly what type of HRA your employer offers.
- Self-care is encouraged through health spending. Because HRA funds don’t roll over and you stand to lose them if you leave the company, are fired, laid off or retire, some argue that HRAs promote self-care. Since HRA funds cannot be rolled over or kept indefinitely, it’s a good idea to use the benefit. The hope is you’ll schedule those appointments you’ve been putting off and seek the care you need rather than saving the money.
- Fewer restrictions for eligibility. Many healthcare saving options such as Healthcare Flexible Spending Accounts (HFSA) and Healthcare Savings Accounts (HSA) have several eligibility requirements. HRAs do not have as many restrictions and should be considered if you find yourself ineligible for the other options.
- HRAs work with many types of insurance plans. Another reason HRAs make sense for many is that they can be used with more types of insurance plans. The Affordable Care Act (ACA) allows HRAs to be offered as long as they are integrated with a group health plan, which opens up more ways for employers to offer this benefit.
FSAs and HRAs both offer many benefits and can help you set aside money to use for the inevitable health care costs we all face.
Take some time to compare and contrast your specific plans to decide what type of healthcare savings account makes the most sense for you.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.