The average annual healthcare expense per individual rises from roughly $2,000 for 19-year-olds to about $11,000 for retirees (age 65+), according to healthsystemtracker.org. As Americans pay more for medical care, they often seek ways to save for emergencies. Health savings accounts (HSAs) and health reimbursement accounts (HRAs) can help.
What are these accounts and who has access to them? We explore the pros and cons of each option to help you determine which you may have access to and the best one for your individual needs.
What Is a Health Savings Account?
An HSA can be used to save for future medical costs. They tend to have multiple tax benefits including:
- Pre-tax income is deducted from your paycheck, lowering your total taxable income.
- Your HSA balance grows tax-free.
- The IRS won’t tax money you withdraw to pay for medical expenses.1
How Do I Qualify for an HSA?
To open an HSA, you must have a high deductible health plan (HDHP). Due to the high out-of-pocket costs and lower monthly premiums, these plans are typically utilized by young, relatively healthy people. In addition, you can not:
- Be claimed as a dependent on the previous year’s tax return.
- Be enrolled in Medicare.
- Have any other health coverage, aside from certain exceptions as outlined by the IRS.1
HSA Pros
- HSAs include numerous tax benefits.
- At the end of the year, you can roll any remaining amount over into the next year and continue accumulating until retirement.
- They are also “portable.” If you leave your job or stop working altogether, you won’t lose what you accumulated.
- HSAs cover many medical procedures and are sometimes accessible via debit cards.
HSA Cons
- In order to qualify for an HSA, you must have a HDHP (high deductible health plan). This doesn’t work for everyone, particularly those with high healthcare costs.
- There is a maximum limit on the total of the annual deductible and out-of-pocket medical expenses that you must pay for any covered expenses. Out-of-pocket expenses include copayments but not premiums.1 Excess contribution happens when the contributions to your HSA for the year are greater than the maximum limits allowed.
- Excess contributions are not deductible and must be reported as “other income” on your taxes.1
What Is a Health Reimbursement Account?
Whereas individuals or employees can fund their own HSAs, only an employer can fund an HRA. When employers offer HRAs, most people benefit from taking advantage of them. With an HSA, you can withdraw funds to pay for approved services and procedures. If you have an HRA, you have to pay the expenses upfront and your employer reimburses you for the cost.
Your employer determines how much to contribute on an annual basis, and it’s important to remember that you can’t add your own money to the account.
There are three different types of HRA accounts to consider. They are:
- Qualified Small Employer HRA (QSEHRA)
This is available to companies that have less than 50 employees and is limited to $5,450 for single employees and $11,050 for employees including their families in their plan. - Individual Coverage HRA (ICHRA)
There is more room for flexibility in an ICHRA than a QSEHRA and unlike a QSEHRA there is no minimum number of employees and the employer can offer a group health insurance policy as well. The one caveat is that “only employees covered by their own individual health insurance policy may participate in the Individual Coverage HRA.”² - Group Coverage HRA (GCHRA)
This is only available to employers that offer group health insurance plans and it is only available for employees that are covered by the group policy. There is no contribution requirement and employers can give employees varying allowances based on their jobs.
HRA Pros
- Employers fund HRAs, meaning it doesn’t cost you anything to participate. Like HSAs, these plans have expansive coverage for numerous procedures, and there aren’t any prerequisites on what health insurance you can use it with.
- The contributions your employer makes are excluded from your gross income.
- Any unused amounts can be accumulated and carried forward for reimbursements in later years.1
- There is no limit to how much your employer can contribute to your HRA.
HRA Cons
- Unlike HSAs, you are not able to contribute to your own HRA account.
- Your employer sets the contribution amount and eligibility rules.
- If you lose your job, you can’t transfer the funds in your HRA account, nor can you roll the amount over at the end of the year.
HSA vs. HRA
Both HSAs and HRAs have pros and cons. It falls back on where you are employed and how frequently you require healthcare to determine which may be best for you. Your financial advisor can help you determine your eligibility for a non-employer HSA. However, HRAs are only available under a current employer that offers this benefit. Both employees and employers can fund HSAs, and it might help self-employed workers with HDHPs save on taxes.
You can only withdraw funded amounts in an HSA, but you can withdraw funds from an HRA, even if it’s not funded yet. A benefit of an HSA is that the funds stay with you even if you change jobs. Additionally, they roll over year after year. After age 65, you may use HSA funds for non-medical reasons, but these non-medical withdrawals may be taxed. With an HSA, you do have the option to make an early withdrawal, but you may be subject to a penalty. HRAs, on the other hand, do not allow for early withdrawals or for non-medical withdrawals.
Reach out to us at Montage Wealth Management or (585) 419-2270 to talk to a financial advisor regarding your options as an employee, self-employed worker, or individual. A professional can help you weigh the pros and cons and determine whether you can save money on your yearly medical expenses by enrolling in either of these plan types.
