Medical savings accounts are a tax-advantaged way to save and pay for medical expenses that are not covered by typical health insurance plans.
The four types of accounts are:
● Flexible Spending Accounts (FSA)
● Health Savings Accounts (HSA)
● Health Reimbursement Accounts (HRA)
● Medical Savings Accounts (MSA)
All four accounts have different requirements for eligibility and rules governing how contributions are made. The benefits each gives to an account holder also differs. They’re similar, yet different:
1. Flexible Spending Account
An FSA is provided through your employers to allow an employee to set aside pre-tax dollars to pay for medical expenses not covered by the company’s insurance plan.
● Eligibility: Any employee, in general, is eligible. It’s a matter of whether the employer chooses to offer the program. There are exceptions if the employee is highly compensated.
● Taxes: Contributions are pre-tax.
● Contributions and distributions: Contributions are made in equal amounts over the course of the year. Your employer will set a limit on the limit to contributions. Plan accordingly because you will lose any dollars that you don’t spend by year’s end. There is usually a short grace period into the following year as well.
2. Health Savings Account
This is a tax-exempt account, like a Roth IRA. It permits you to use your employer’s contributions and earnings to pay for medical expenses.
● Eligibility: There are numerous requirements to set up an HSA. First, you must be covered by a qualified high deductible health plan (HDHP). You also cannot be covered by any other insurance plan that plays medical expenses. You must be under 65 years of age and not claimed as a dependent by someone else.
● Taxes: You can make pre-tax or post-tax contributions to your account. Your contributions will grow tax-free until you need them. Withdrawals are tax-free for qualified purposes. It’s a potentially lucrative account if you qualify.
● Contributions and distributions: You and/or your employer make contributions. As of this writing, the maximum contribution is $3,450 for an individual and $6,900 for a family (HSA holders 55 and older can save an extra $1,000). IRS Publication 502 defines which medical expenses qualify to be paid for by the plan. Unqualified withdrawals are subject to taxes and a 20% penalty. The 20% penalty applies to people under age 65.
● Funds are allowed to roll over to subsequent years.
3. Health Reimbursement Accounts
An HRA is funded by your employer. Employees are reimbursed for medical expenses not covered under the employer-provided health plan.
● Eligibility: Any employee can participate if the employer offers the plan. Highly compensated employees are more limited in the benefits they can receive.
● Taxes: Your employer’s contributions are not taxed.
● Contributions and distributions: Only employers make contributions. The funds may be used to reimburse employees for qualified expenses. These include health insurance premiums and long-term care insurance.
4. Medical Savings Accounts
This type of account is obsolete for the most part. It is mechanically similar to the HSA but considered more flexible.
● Eligibility: The MSA was created for the self-employed and very small businesses.
● Taxes: The same tax benefits are found in the HSA.
● Contributions and Distributions: You can no longer start a new MSA or contribute more to one that already exists. It is permissible, however, to maintain an existing MSA and take qualified distributions.
● An MSA can be rolled over into an HSA. Probably not a bad idea so you can continue contributing!
Take advantage of any available medical expense account. These type of accounts can save you a lot of money on your medical insurance premiums. Be sure to learn the details of each account type and how it applies to your particular situation.
To find out more about the details, be sure to review IRS Publication 969. Your HR department should be able to provide further details as well. This will enable you to enjoy the most benefits and maximum savings.