It’s that time of year when we’re frequently asked if we’d like to enroll in a healthcare spending account for the next year. If you haven’t enrolled in one previously, they can be a little confusing. And sometimes that’s all we need to avoid something that may save us a little money. Today’s post is written to provide a quick review of some of these options.
The US federal and state tax codes allow some income to be set aside for certain expenses before federal and/or state taxes are levied upon it. These include expenses such as healthcare, college savings investment earnings, commuter rail passes, and retirement savings. In some cases, such as with a Flexible Spending Account (FSA), Health Savings Account (HSA), or Health Reimbursement Arrangement (HRA), the pretax funds must be set aside in an account managed by a third-party administrator. The administrator is responsible for reviewing the reimbursement requests submitted by the participants to ensure the requested expenses fall within eligibility guidelines.
Flexible Spending Accounts (FSAs) are government approved accounts in which pre-tax income can be placed. The funds in the FSA may only be used for medical expenses expressly approved by the FSAs guidelines. The guidelines set the maximum allowable annual contribution and the services or products for which these funds may be used. FSAs do not earn interest. Also, the yearly amount contributed to the FSA must be estimated prior to the start of the year and cannot be changed. The plan administrator will then spread payroll deductions evenly throughout the year in order to fund the account to the specified amount. Withdrawals are accomplished through a reimbursement-for-expenses process. The account holder pays for medical expenses as they would normally throughout the year. The receipts for these expenses are then given to the FSA manager who reviews the charge against the list of allowable items. Once approved, the manager then extracts the funds from the account and reimburses the account holder. A word of caution here: only so much of the funds left over at the end of the year in an FSA are allowed to roll-over into the next years account. Funds in excess of the allowable roll-over amount (as set by the IRS) are forfeited to the employer. Anyone wishing to use an FSA should do their due diligence in estimating the amount of eligible healthcare deductions they are confident they will incur during the next year.
NOTE: With the FSA, the government gets to keep any funds left in the account after all yearly expenses are submitted and reimbursed. So, plan carefully when determining how much will go into the account.
Health Savings Accounts (HSAs) are government approved, interest bearing, savings accounts in which employee pre-tax income can be placed. Some employers offer these plans to help pay for high-deductible insurance expenses. Otherwise, these plans may be set up with private institutions such as banks or insurance companies. The funds in the HSA may only be used for medical expenses expressly approved by the HSAs guidelines. The guidelines cover how much may be contributed annually and the services or products for which these funds may be used. The contribution amount withheld from the employees pay may be modified throughout the year to meet the expected need. The receipts for these expenses are then given to the HSA manager who reviews the charge against the list of allowable items. Once approved, the manager then extracts the funds from the account and reimburses the account holder. Funds left in the account at the end of the year are rolled-over for use in the next year.
Health Reimbursement Arrangements (HRAs) are employer funded plans which an employer may offer to employees to help pay for qualifying medical expenses, sometimes including insurance premiums for plans not offered through the employer. For some types of HRAs, the employee must be enrolled in a qualifying healthcare plan before they can receive any payments through the HRA.
This is a fairly brief overview, but hopefully provides a good starting point for further discussion.
For more information regarding healthcare plans, see the article at https://www.irs.gov/government-entities/federal-state-local-governments/where-can-i-learn-more-about-health-savings-accounts-hsa-and-health-reimbursement-arrangements-hra
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