Tax-Free Medical Savings Accounts Supplement Insurance to Cover Gaps
You have health insurance, thank goodness. But what about all those out-of-pocket costs that can add up to thousands before you meet your deductible? That’s where medical savings accounts like an FSA, HRA or HSA can really help. You can save (or even invest) money tax-free that you can then use to pay for those gaps that insurance doesn’t cover. So what are the differences in the three types of plans?
FSA – Flexible Spending Account
Employers set up FSAs, and employees can contribute pre-tax dollars to them, up to $2,750 a year. These plans can come with a special debit card employees (and spouses and dependents) can use to pay for qualifying expenses. And qualifying medical, dental and vision expenses can include things insurance doesn’t cover at all, like supplements or vaccines for travel.
Employers can roll over up to $550 in an FSA from one year to the next. When it comes to the rest of the funds in the account, though, employees have to use it or lose it. The amounts employees contribute aren’t deductible on your tax return, since they’re taken from your paycheck before taxes.
HRA – Health Reimbursement Account
HRAs are similar to FSAs, but employers both set up AND pay into HRAs. Employers have lots of different types of HRAs to choose from, but they generally go hand-in-hand with a high-deductible health plan (HDHP). Employees can use the funds to pay for co-pays and prescriptions, and cover the gaps until their deductible is met. Important to know: the employer gets to decide what expenses are covered.
Employers get the tax benefit here as well, and there’s no limit to how much money they can contribute. They also decide how much to rollover from year to year (up to 100 percent).
HSA – Health Savings Account
HSAs are more of a tax-free personal savings account – you own it and you put the money into it. In order to start an HSA, you have to have an HDHP with a minimum deductible of $1,400 ($2,800 for families). You can invest up to $3,550 a year ($7,100 for families), and if you’re 55 or over, you can chip in an extra $1,000 a year to catch up with an eye toward retirement.
The money in an HSA is yours forever, and you can spend as little or as much as you need. But if you make a withdrawal for an unqualified medical expense, you’ll have to pay income tax on the amount you take out, plus a 20-percent penalty. Only approved banks can set up an HSA for you. Check with your bank to see if they are eligible, or can recommend one that can help you.
Links
Business News Daily has an article with more information on the three types of medical savings accounts.
You can check out this list of FSA administrators, most of whom can set up HSA plans as well.
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