There are a group of medical related savings plans, which are collectively referred to as medical reimbursement arrangements, or MRAs. MRAs are typically offered by employers as part of cafeteria plans, which enable you to select certain benefits.
They aren’t health insurance, but generally work in conjunction with such plans. Though one of the plans may be used to actually purchase health insurance, they mostly work to pay for the expenses that health insurance plans don’t cover. This can include copayments, deductibles, and certain medical expenses that are not covered by health insurance at all.
There are three basic variations of MRAs, including HSAs, FSAs and HRAs. Here are the specifics of all three programs, and when they might work best.
HSAs: Health Savings Accounts
What is an HSA?
This plan is something like an IRA for medical costs. It is used in conjunction with a high deductible health insurance plan, which is defined as a health insurance plan with a minimum annual deductible of $1,300 (maximum out-of-pocket of $6,550) for an individual, and a minimum deductible of $2,600 (maximum out-of-pocket of $13,100) for a family (all figures are for 2017).
Your contributions to an HSA are deductible for income tax purposes. You can also invest the money in an HRA so that it will grow. It can be invested in stocks, bonds, mutual funds, exchange traded funds (ETFs) and fixed income investments. The investment earnings grow tax-free. In addition, withdrawals from an HSA that are used to pay for medical expenses can be withdrawn tax free as well. Any money not withdrawn can be held in the plan to continue to grow.
Note: Any funds withdrawn from an HSA for non-medical expenses are subject not only to ordinary income tax, but also to a 20 percent IRS penalty.
What does an HSA do?
The funds in an HSA can be used to pay for medical costs not covered by your health insurance. This can include co-payments, deductibles, or even certain uncovered expenses. When you open an HSA account, you are typically provided with either a debit card or a checkbook that enables you to access the account.
HSA plan contribution limits for 2017 are $3,400 for an individual and $6,750 for a family. There is also a “catch-up” contribution of an extra $1,000 if you are age 55 or older. In addition, some employers pay some or all of the HRA contribution as an employee benefit. Contributions not used up in one year can be carried forward for use in future years.
What is an HSA good for?
An HSA is an excellent plan if you have significant medical costs but do not itemize deductions on your income tax return. This is especially important given that medical costs are only deductible to the degree that they exceed 10 percent of your adjusted gross income (AGI).
If you are reasonably healthy throughout your working life, you can carry a large HSA balance into retirement. At that point it can be used to cover the out-of-pocket medical costs that often increase with as you age.
Where can you find an HSA?
They are typically available through employers, but you can also set one up as an individual. Many banks offer HSA programs for their customers, so if your employer doesn’t offer the benefit, you can create one there.
FSAs: Flexible Spending Accounts
What is an FSA?
These are plans that are used for the payment of medical, dental, and vision-related expenses. Much like an HSA, contributions that you make to the plan are tax-deductible. However the FSA has a catch: any contributions made to the plan that have not been spent by the end of the year are forfeited.
Some employers do have options that will help you to avoid complete forfeiture of unused funds. Some will allow you to carry over up to $500 of unused funds into the following year, while others will extend use of the funds for up to two and a half months into the new year. Employers will generally offer one or the other, but not both. And many employers offer no such option at all.
The FSA has certain similarities to an HSA. For example, contributions may be provided either by you or your employer. And when you open an FSA account, you’re also typically provided with either a debit card, a checkbook, or both, so that you can access the funds in the account.
What Does an FSA do?
Much like an HSA, an FSA can be used to pay the expenses that are not covered by your health insurance plan. This includes copayments, deductibles, prescriptions, and vision and dental services. It can also be used to pay for certain treatments and therapies that may not be covered by your health insurance, including birth control, pregnancy tests, insulin, crutches, chiropractic treatment and smoking cessation programs.
For 2017, an employee can contribute up to $2,600 to an FSA which would be tax-deductible. The employer can also fund this contribution, or it can be provided by a combination of both the employer and the employee. An employee match is permitted, but it is limited to $500.
What is an FSA good for?
Because you forfeit any unused funds in the account, an FSA is best used by someone who has ongoing and predictable medical expenses. In that situation, you will most likely use all of the funds in the account. But if you are healthy, and have very few medical expenses, the potential for forfeiture is high, and you may want to forgo having the account.
If you are a regular user of medical services, an FSA offers similar tax benefits to an HSA. Your contributions to the plan are tax-deductible, and it will enable you to effectively deduct medical expenses that you may not be able to claim through itemized deductions.
Where can you find an FSA?
FSAs are employer-sponsored, and typically are an option as part of a cafeteria plan.
HRAs: Health Reimbursement Arrangements (or Accounts)
What is an HRA?
This is a plan in which an employer reimburses an employee for both health insurance premiums and out-of-pocket medical costs. “Reimbursement” refers to only expenses that are actually incurred by the employee. This makes it different from both the HSA and the FSA, which pre-fund expected medical costs.
Qualified medical expenses refers to any medical expenses that are permitted under IRS Section 213 of the Internal Revenue Code. This can include premiums paid for long-term care, and travel expenses incurred in connection with medical treatment. However, an individual employer may further reduce the list of allowable expenses.
Depending upon the type of HRA, unused funds may or may not be rolled over from one year to the next. However, employers may also allow employees to use their HRA funds even into retirement.
What Does an HRA do?
Effectively, an HRA gives both the employer and the employee more control over how money allocated for medical expenses is used. For example, more of the account can be used to pay for a low deductible health insurance premium. Alternatively, money can be allocated to a high deductible plan, with more of the funds allocated to out-of-pocket expenses.
The money in the account is not invested, and therefore it is not rollover from one year to the next. There are no limits to how much an employer may contribute to the plan, and it is owned entirely by the employer, not the employee.
What is an HRA good for?
HRAs are good for employees who want more control over how their medical dollars are spent. And naturally if the employer is paying the cost of the HRA, it can be more advantageous than contributory health insurance premiums and direct payment for out-of-pocket expenses.
Where can you find an HRA?
Like the other plans described in this article, HRAs are typically provided by employers. However, there is also the small business HRA that is available to the self-employed, though the specific terms are somewhat different from employer-sponsored plans.
If your employer offers either an HSA, FSA or HRA, you should carefully consider the many benefits the provide, particularly if the employer is paying part or all of the cost.