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What are the Four Account Options to Save Money on Medical Expenses?

By on March 15, 2014 in Money

What are the Four Account Options to Save Money on Medical Expenses?HSAs, HRAs, MSAs, FSAs… the number of account options available to you to save taxes on medical expenses looks like quite the confusing array of alphabet soup.

It’s important to learn about the differences so you can make better choices when it comes to open enrollment with your benefits department. There’s no need to turn down an opportunity to lower your taxable income.

Four Different Account Options for Saving Money on Medical Expenses

Distinguishing between the four options can be difficult, so let’s break it down.

Here are the factors we want to look at:

  • Is a High Deductible Health Plan (HDHP) required to utilize the account?
  • Are employees allowed to contribute via pre-tax deductions?
  • Are employers allowed to contribute on the employee’s behalf?
  • Is the account portable? That is, can the employee leave the employer and take the account and/or the funds with them to their next job?
  • What is the annual contribution limit?
  • Do unused contributions roll over to the next year?

Health Savings Account

HSAs are the super account of the four different options. They require an HDHP, but have the largest contribution limit, allow both employer and employee contributions, you can take the money with you when you leave your employer, and your contributions roll over to the next plan year rather than expiring.

  • High Deductible Health Plan (HDHP) Required?: Yes
  • Employee Contributions Allowed?: Yes
  • Employer Contributions Allowed?: Yes
  • Portable?: Yes
  • Annual Contribution Limit: $3,250 for individuals, $6,450 for family coverage
  • Contributions roll over?: Yes

Flexible Spending Account

FSAs are another popular option, but they come with some serious issues that can catch you off guard. The biggest problem is, as of this writing, your unused contributions are forfeited at the end of the plan year. This is also known as use-it or lose-it. Congress is currently considering getting rid of this stipulation, but as of right now it remains in place.

FSAs are typically employee-only funded, the funds are not portable, and the contribution limit is set at $2,500 per person.

  • High Deductible Health Plan (HDHP) Required?: No
  • Employee Contributions Allowed?: Yes
  • Employer Contributions Allowed?: Not typically
  • Portable?: No; you lose access to funds when your employment ends
  • Annual Contribution Limit: $2,500 per eligible employee
  • Contributions roll over?: No; unused contributions are forfeited at the end of the plan year (some plans allow a short grace period at the beginning of the next year so you can use all of your remaining funds up).

Archer Medical Savings Account

Archer MSAs are the little guy’s HSA. MSAs came first, and have been surpassed by HSAs. However, some people still use MSAs. They are used only for self-employed individuals that maintain their own HDHP or by small business employers with less than 50 employees.

  • High Deductible Health Plan (HDHP) Required?: Yes
  • Employee Contributions Allowed?: Yes
  • Employer Contributions Allowed?: Yes
  • Portable?: Yes
  • Annual Contribution Limit: 65% of single coverage deductible or 75% of family coverage deductible
  • Contributions roll over?: Yes

Health Reimbursement Arrangement

HRAs are in the same arena as the other accounts, but operate completely differently. Instead of being funded through employee contribution of pre-tax income these accounts are only used for reimbursement of eligible healthcare expenses.

That is, no funds are dispersed to the employee until after an expense has been incurred. Those funds are reimbursed directly from the business rather than depositing them into the employee’s account after the reimbursement request.

Additionally, the employer sets the contribution limit. The employer owns the account and you have general creditor status on that portion of the assets of the business. (In short, if the business goes bankrupt you should expect little back.)

Since there is no true account “balance” under your control it depends on your employer’s policy as to whether or not you can take the funds with you with you leave. The odds are against them giving you the money since this is a reimbursement arrangement rather than a savings account.

HRAs are used to help employers save money on costs while still providing a benefit to the employee. Many plans let you roll your “balance” forward to the next year. If they allow you to be reimbursed $100 per month up to $1,200 per year, and you only need to be reimbursed $600 that year, you would have $600 available to you in the coming year as you continue to accrue at your normal rate.

  • High Deductible Health Plan (HDHP) Required?: No
  • Employee Contributions Allowed?: No
  • Employer Contributions Allowed?: Yes, but differently
  • Portable?: Employer dependent
  • Annual Contribution Limit: Employer sets
  • Contributions roll over?: Employer dependent

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