Medical Expense Accounts & Their Legal Implications
Health insurance usually will not cover all of your medical costs. A consumer may choose to place some savings in other types of accounts to cover these additional expenses. Medical expense accounts offer certain tax advantages. There are four main types of these accounts: flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs), and medical savings accounts (MSAs). Establishing each type of account requires meeting certain criteria, and each comes with its own rules and benefits.
Flexible Spending Arrangements
If your employer offers a flexible spending arrangement as a benefit, you likely can use this type of account. Some employers also offer limited flexible spending arrangements as companion accounts. These allow you to save money for expenses related to dental and vision treatment. Money goes directly from your paycheck into an FSA without deductions for taxes. You can choose how much of your salary to contribute to the FSA. If you have substantial medical expenses that are not covered by your insurance in the course of a year, you should set aside a more substantial amount. There is no IRS limit on contributions, but the FSA will set a limit. This may be defined as either an amount of money or a percentage of your salary.
Putting money into an FSA results in tax savings at the time of contributions and at the time of withdrawals, assuming that you withdraw funds for covered medical expenses. Your employer will evenly divide the amount that you want to contribute in a year among your paychecks.
Typically, an employee will access the funds in an FSA by requesting reimbursement after they have already made payments out of their own pocket. Sometimes an employer will issue a card funded by money in the account, though, which the employee can use to pay for medical expenses directly. Certain types of expenses related to health care cannot be covered by an FSA. These include nursing care, expenses that are covered under a health insurance policy, and premiums for your health insurance. However, an FSA can cover copayments and deductibles for a health insurance policy.
Health Reimbursement Arrangements
Your employer also may offer a health reimbursement arrangement, which provides reimbursement for certain types of medical costs that its health plan does not cover. As with an FSA, most employees will be eligible if an employer offers this option. An employee can even use both types of accounts if their employer offers both of them. Also similar to an FSA, contributions and withdrawals carry no tax burden for the employee.
The key difference from an FSA is that an HRA consists of funds contributed by your employer rather than amounts withheld from your paycheck. The employer retains control over the contributions and the rate at which they are made. Funds in the account may roll over from one year to the next if the employer permits.
An employee can pay expenses covered by the HRA out of their pocket and then seek reimbursement from HRA funds. They can also use the debit card or credit card option if their employer provides it, similar to an FSA. Your employer can determine whether an HRA will cover all of the medical expenses that the IRS permits, or whether qualifying expenses will be limited. Unlike an FSA, this type of account can be used to cover nursing home care and premiums for your health insurance.
Health Savings Accounts
These accounts are different from the previous two types of accounts because they are not necessarily tied to an employer. A health savings account is an option for a consumer who has a high-deductible health insurance plan, according to the IRS definition. The threshold requirements for this type of plan depend on whether it is an individual or family plan. You may be able to start an HSA through your health insurance company, or you can start a separate HSA at another financial institution. Contributions are tax-deductible, withdrawals are tax-free (for qualifying expenses), and the money in the fund will not be taxed as it grows. If you use money for expenses that do not qualify, you will pay tax on that amount, as well as a penalty if you are under 65.
A consumer retains control over how much they will contribute to their HSA, within limits provided by the government. The limits vary depending on whether the plan is for an individual, a family, or a person over age 55. If you have an HSA connected to your job, you can arrange for automatic contributions from your paycheck. An HSA is similar to an HRA in that funds in the account can roll over from one year to the next. You can no longer contribute to an HSA once you turn 65 and enroll in Medicare, but you can continue using the money in the fund.
A distinctive aspect of HSAs is that you can invest them in stocks and other securities to grow them further. This can make them more appealing to aging consumers than some types of IRAs and 401(k)s. Consumers who are considering investing funds in an HSA should aim for a plan that does not charge high fees or require a minimum amount to invest.
Medical Savings Accounts
These types of accounts have become partly obsolete, since HSAs were designed to replace them. However, sometimes people on Medicare will use Medicare MSAs because they can no longer contribute to an HSA. If you have a high-deductible Medicare Advantage Plan (Part C), you may be eligible for a Medicare MSA. It addresses the issue of paying substantial costs out of pocket under Part C, which is a consequence of not paying premiums.
You cannot make contributions to a Medicare MSA on your own. Instead, your health insurance will make contributions to the MSA at the start of each year. (Contributions may be prorated if you join partway through a year.) These funds will pay for qualified expenses that normally would be part of your deductible. However, it may not completely obviate the need to pay costs out of pocket because the funds in an MSA are usually lower than the deductible. An MSA may also cover dental and vision expenses, although it will not cover prescription drug costs under Medicare Part D.
Standard (Archer) MSAs may still be available to certain small businesses and self-employed people, but the ability to open these types of accounts has been greatly restricted since HSAs were introduced.
