Understanding Health Savings Optionsinsight into HSA, HRA and FSA accounts
During the past few years, the federal government has made changes to tax laws that have made the types of funding and reimbursement arrangements found in consumer directed health care concepts possible. The most common of these arrangements are a health savings account, known as an HSA, and a Health Reimbursement Arrangement, referred to as an HRA.
Another useful arrangement that has been around for many years is called a Flexible Spending Account, or FSA. HSAs and HRAs are simply ways to fund medical expenses that encourage members or plan participants to share the financial responsibility associated with purchasing and paying for health care. FSAs are a way to avoid paying taxes on health care and other allowable expenses. Each of these plan types operate differently and have different requirements.
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A Health Savings Account, or HSA, is also a tax exempt account that allows the employee to set aside pre-taxed dollars for future medical, retirement, or long-term care premium expenses. The HSA funds are held in an IRA like account for the exclusive use of the participant so they are fully portable. Money can be deposited into this account by the employee or the employer. When the employee terminates, they take their unused HSA funds with them. The employee can invest these funds as they wish within a broad range of choices and then use them for qualified expenses. The unused HSA funds can roll over from year to year.
An HSA must be set up in conjunction with a specific type of high deductible health plan, referred to as an HDHP. The HDHP must have a deductible of at least $1,350 with an out-of-pocket limit not greater than $6,750 in 2019 (out-of-pocket limit $6,650 in 2018). For family coverage, it must have an annual deductible of at least $2,700 and an out-of-pocket limit not greater than $13,500 in 2019 (out-of-pocket limit of $13,300 in 20181). Deductibles are not required for preventive care and out of pocket maximums must be higher for out-of-network care. Deductibles and out-of-pocket maximums are adjusted each year by in the US Treasury’s HSA Information.
In 2019 employees participating in qualfied HDHP plans may contribute up to the maximum of $3,500 ($3,450 in 2018) if they have single coverage and up to $7,000 ($6,900 in 2018) for family coverage. These maximum contributions are a combination of any employee or plan sponsor contribution amounts.
HSAs do not require employer involvement. They can be funded entirely by the employee or by a combination of employer and employee dollars. HSAs contributions may be made by employees on a pre-taxed basis through a section 125 plan or may be made directly by eligible individuals and deducted by gross income. Earnings and amounts held in an HSA accrue tax free. One of the primary differences between and HSA and an FSA is that unused HSA funds are allowed to roll over tax free at year end whereas unused FSA funds are generally forfeited if not used by year end or in some cases, within 75 days following the end of the plan year.
Regulations are subject to change at any time. Please refer to the US Treasury’s website for additional information regarding Health Savings Account rules.
A Health Reimbursement Arrangement, or HRA, is an employer funded account that reimburses employees for qualified medical expenses typically combined with a high deductible health plan. An HRA can be used with any medical plan that must be established and funded solely with employer dollars. At the employer’s discretion, an HRA may allow employees to rollover unused funds from year to year, or allow terminated employees to spend their unused balances. The main difference between an HRA and an HSA is that HRA funds are provided only by an employer for an employee and do not follow an employee to a new employer. An HRA is COBRA eligible. Employer contributions to HRAs are not subject to income, FICA, Medicare, or FUTA taxes.
A Flexible Spending Account, or FSA, is a type of cafeteria plan. This allows employees to set aside a predetermined amount of money they estimate they will need for out of pocket expenses throughout the year, not covered by their health benefit plan. This money is deducted from their income before it is taxed thereby reducing the employee’s overall taxable earnings and lowering the amount of income taxes.
The list of qualified expenses under an FSA is extensive but generally covers most health care related experiences not covered by their insurance including their insurance premiums, office visit co-pays, non-covered medications, and other medical equipment and supplies. When an employee’s taxable income is reduced, the employer’s obligation for Medicare and FICA taxes is also reduced and the savings can be significant.
- How much should I contribute to my HSA? Figure out how much you should contribute to your HSA account by using the HSA Contribution Worksheet.
- How much should I contribute to my FSA? J.P. Farley has designed a Flexible Spending Account Worksheet to help you determine how much money you should contribute to your account for the plan year.
- Can I have a HSA and FSA? If you participate in a health savings account and wish to also participate in a flexible spending account or health reimbursement account, you must make sure your employer is offering a “limited purpose” arrangement plan.