There are three standard tax-advantaged savings accounts that employees can use to pay for qualified medical expenses. These accounts include health savings accounts (HSAs), flexible spending’s accounts (FSAs), and health reimbursement accounts (HRAs).
Employers can offer any of these accounts, which makes it difficult to know which option is the best for your company. It is also important for employees to understand their options and how they differ, that way they can make the best decision for themselves.
Here are the differences between HSAs, FSAs, and HRAs:
HSAs help individuals pay for certain medical expenses. It is a savings account that earns interest and is the only long-term savings and retirement accounts that are triple tax advantaged. This means that the funds added into an individual’s account are pre-tax or tax-deductible, the interest earned on an HSA account is not taxed, and the money taken out of an HSA account to pay for eligible health expenses is not taxed. HSA funds also roll over each year, so there is no chance of forfeiture of funds.
What makes an individual eligible to have an HSA account?
- An individual must be covered by a qualifying high-deductible health plan (HDHP)
- An individual must have no other health insurance, although there are some exceptions
- An individual cannot have Medicare
- An individual cannot be dependent on someone else’s income tax return
What is a high-deductible health plan (HDHP)?
An HDHP has a higher deductible than a typical health plan. This requires participants to pay more of their own money up front before their health plan pays the rest. If you are an individual who is generally healthy and does not need ongoing medical treatments, HDHP may save you money because it has lower monthly costs than traditional plans.
FSA is an account in an employee’s name that they put money into, to pay for certain medical expenses. Individuals fund an FSA with pretax dollars which means they do not have to pay federal (and usually state) income tax on the money.
When health insurance does not cover health care costs, individuals can use their FSA to pay for certain out-of-pocket expenses. FSAs are beneficial to employees with out-of-pocket medical, dental, vision, hearing or dependent care expenses that are beyond an insurance plan. While the FSA will not lower the actual costs of your healthcare expenses, it does lower your tax income which helps you save money on taxes.
Participants should carefully consider how much money is put into an FSA because if there are unused FSA funds at the end of the year, or at the end of employment with the company sponsoring the FSA, the employee forfeits those funds.
Who can have an FSA?
Employees can only access health care FSA if their employer offers it. Employers can offer both FSA and HSA if they offer both traditional and qualifying high deductible health plans. It is important to note that FSA is not available if you are self-employed.
HRAs are employer-funded plans that reimburse or pay back employees for qualified medical expenses. HRAs are not accounts, they are an agreement between an employee and their employer. Employees must make a payment and then have it reimbursed by their employer after.
Employers who are looking for ways to enhance their benefits options beyond what their health plan offers may want to consider an HRA. It is important to keep in mind that an employee’s HRA does not follow them once they leave the company.
Choosing between these three tax-free savings accounts can be a difficult choice for employees to make. It can also be difficult for employers to choose which ones to supply their employees, so it is important to be aware of all the options. If you have any questions regarding HSAs, FSAs, or HRAs contact us at email@example.com.