Health Savings Accounts Are Not The Same As Health Reimbursement Arrangements

Health Savings Accounts and Health Reimbursement Arrangements are both called "consumer-driven health care

," but what does that really mean? Both types of plans are typically combined with high-deductible health insurance plans, so routine claims are usually paid for with consumer-controlled accounts instead of by an insurance company.

A Health Savings Account (HSA) can only be combined with certain high-deductible health insurance plans that may or may not have the lowest premiums available. Typically, these plans have lower rates than standard, full-coverage insurance, but you may be able to find other high-deductible plans with lower premiums. Health Reimbursement Arrangements (HRAs) are also most often used in conjunction with a high-deductible health insurance plan, which is also known as a high-deductible health plan (HDHP).

How Are Consumer-driven Health Care Plans Funded?

Both you and your employer may fund HSA Health Plans. You are allowed to deposit up to $3,050 into an individual HSA or $6,150 into a family HSA. If you are between 55 and 65, you may contribute and additional $1,000 per year. Whatever you contribute to your HSA up to April 15 in the next year will be treated as an "above the line" tax deduction for the current tax year. Above the line deductions allow you to get federal income tax deductions even when you choose not to itemize and take the standard deduction.

Your employer may also deposit into your HSA and the contribution will be "excluded" from your income so it's not subject to either FICA or income tax. Both types of contributions reduce your federal income tax and almost all states have joined the federal government by allowing you to take state income tax deductions for what you contribute to your HSA.

In contrast, HRA plans are solely employer-funded. On an annual basis, your employer may set aside pre-tax dollars for you to use for healthcare. An HRA may not be funded by salary reduction and HRA plans can only provide benefits for medical expenses that can be substantiated. Your employer's contributions are 100-percent tax deductible for the employer and those deposits are tax-free for you. Who Owns Your HSA or HRA Funds?

Your HSA is yours to keep whether you lose your job, change jobs or retire. You decide what financial institution will administer your HSA, how to invest the balance and when to make withdrawals. The government decides which healthcare expenses are qualified to be paid for from your HSA, but the law is very flexible. You can pay for acupuncture, contact lenses solution, dental care, wigs if you lose your hair during chemotherapy, etc. One thing you may no longer pay for from your HSA is over-the-counter medicine like aspirin, but insulin and prescribed medications are still legitimate HSA expenses.

Your HSA funds will roll over year-after-year and continue to grow tax-free, but your employer has full discretion over how HRA funds are handled at the end of the plan year. Your employer could decide to allow you to keep all unused funds, just a portion of unused funds or take back any funds not used during a plan year.

In contrast to an HSA, if you lose your job or change jobs, your HRA funds remain with your former employer. Your employer also has total discretion in choosing which expenses HRA funds may be used for and could severely restrict which services you may use your HRA for or offer you comprehensive coverage.

Depending on how your employer sets up your HRA, the expenses that you may be reimbursed for could include the insurance plan's co-pays, co-insurance and deductible. You could also be reimbursed for dental care, prescriptions, vision expenses or other out-of-pocket health-related expenses.

What Happens To HSA Funds When You Turn 65?

If you withdraw from your HSA before you are 65 to pay for non-qualified expenses, you'll face a 20-percent penalty and the withdrawal will no longer be tax-free. After you are 65, you may continue to use your HSA tax-free for medical expenses, long-term care premiums, Medicare or Medicare Advantage plan premiums (but not Medigap premiums), and Prescription Drug plan premiums.

You are not required to begin withdrawing HSA funds at any particular age as you are with an IRA. After 65, you may withdraw the funds and spend them for whatever you choose without any penalty, but withdrawals for non-qualified healthcare will be taxable.

by: Wiley Long

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