(picture source: midlandsb.com)

Could there be anything more confusing than medical benefits? Mention tax-advantaged health plans accounts and watch eyes glaze over. Even so, it’s an important topic for us to understand, because these plans may save us money.   I’m going to hit four different types of accounts, Health Savings Accounts (HSAs), Medical Savings Accounts (MSAs), Flexible Spending Arrangements (FSAs), and Health Reimbursement Arrangements (HRAs). You’re already yawning, but bear with me. I’m not going to give you an exhaustive description of each type. I do, however, want to give you enough information to look into the plans further if you think they might be beneficial to you.

All financial information I give is general.  It may or may not be a good recommendation for you. It is always a good idea to discuss any ideas with your personal financial advisor or tax preparer. You can also read in more detail in IRS Publication 969.

That being said, let’s get this Money Monday started.

Health Savings Accounts

HSAs are tax-exempt trust or custodial accounts you can set up yourself to pay or reimburse certain medical expenses you incur. A trust or custodial account is simply one in which you own the funds but they are held and managed by someone else. In the case of an HSA, that someone else is usually a bank, a health insurance provider, or anyone already approved by the IRS to be a trustee for an IRA. “Tax-exempt” means the account can earn investment income and you are not taxed on it. It is similar to an IRA, but set up to cover medical expenses.   You don’t have to use the balance each year; it can grow tax-deferred and it can move with you if you change jobs or stop working. It is available to employees and self-employed individuals.

To be eligible to contribute to an HSA, you have to be covered under what IRS calls a high deductible health plan (HDHP). This means that whether you have an individual or a family insurance plan, that plan must meet certain allowable minimums and maximum for deductibles and out-of-pocket expenses.

If you qualify, you can contribute up to $3,250 if you have a self-only HDHP, depending upon several factors including the number of months you qualify. If you are over 55 and not enrolled in Medicare, you can increase that contribution by $1,000. (If you are enrolled in Medicare, you cannot contribute to an HSA. See MSAs later.) If you have a family HDHP you can contribute up to $6,450. You can claim a deduction for your contributions, even if you don’t itemize deductions on your income tax return, and the deduction is not subject to the 7 ½% – 10% of AGI hurdle you have to clear when you itemize medical expenses.

Medical Savings Accounts

Old MSAs were basically the predecessors to HSAs. If you do not have one now, they are not available to open.

Medicare MSAs

Medicare has created a Medicare MSA option for Medicare participants. The Medicare MSA plans are offered by private companies and combine a HDHP with a medical savings account as a Medicare Advantage Plan. Medicare deposits money into your medical savings account. Medicare MSA participants can use their savings account to pay for health care and then will have coverage through a HDHP once they meet their deductible. Depending upon your plan, Medicare-covered costs may be covered in full once you hit your deductible. If you don’t have many out-of-pocket costs, the money in your MSA continues to build tax free and is yours.

The limitations to this type of plan are basically eligibility and availability. Once you are eligible for Medicare A and B, you are eligible for one of these MSAs, but they may not be available in your area. You can check with your state or www.cms.gov and www.medicare.gov to find services provided in your state.

Flexible Spending Arrangements

You may be more familiar with the term “Cafeteria Plan.” These are plans provided by an employer to employees. An FSA is one option under such a plan. The employee makes a voluntary salary reduction up to $2,500, and that money is available to the employee to cover qualifying medical expenses not covered by the employee’s medical insurance. The salary deferral is not included in your gross income, meaning it is not subject to income or employment taxes. Depending upon your income tax bracket, that could represent a total federal and state tax savings of more than $1,200! You can withdraw funds to cover qualified medical expenses even if you haven’t contributed the funds to the account. On the down side, these are use-it-or-lose-it plans. If you don’t use the funds by the end of the calendar year they are generally forfeited.

FSAs are not available to self-employed individuals.

Health Reimbursement Arrangements

An HRA may only be funded by an employer. These contributions are excluded from the employee’s gross income. The employee submits receipts for qualifying medical expenses incurred to receive tax-free reimbursement by the employer. Any unused amounts can be carried forward to future years. Employers contribute at their discretion and the amounts are not limited by tax code. The funds do not belong to the employee and can only be used to reimburse medical expenses.
Again, for more detail and to gain a better understanding of health benefit accounts, please speak with your financial advisor or tax preparer.  I hope this has given you some information to discuss.

Thanks for visiting!