PHILADELPHIA PA – HRA. FSA. HSA. Those acronyms may seem like so much alphabet soup, but members of the Philadelphia-based Pennsylvania Institute of Certified Public Accountants says they could spell savings when paying for health care.
HRAs, FSAs, and HSAs are three of the most popular health care funding options currently on the market, with each offering different alternatives and benefits. It to Sorting through the pros and cons of the various programs may seem imposing, but experts say taking time to learn about each option could pay off. You might even be able to reduce your taxable income, which should be everyone’s goal.
What is an HRA?
Health reimbursement arrangements, also called health reimbursement accounts (HRAs), allow participants and their dependents to receive reimbursement for out-of-pocket health expenses. These accounts are owned and funded by your employer, which helps you save on the cost of health care.
When you incur approved health expenses, you submit a reimbursement claim to your employer to receive compensation. Reimbursements can be tax-free if they are for qualified health expenses. Common expenses usually include medical, dental, and vision expenses; co-payments; deductibles; over-the-counter medications; prescription drugs; and other medical supplies.
The amount contributed to your HRA is determined by your employer, but the Internal Revenue Service (IRS) sets the guidelines and procedures. HRAs often accompany high-deductible health plans, but they can be paired with any type of health plan or used alone.
What is an FSA?
A Flexible Spending Account (FSA) allows you to elect to have money taken from your paycheck before taxes (you determine the amount) and put into a special account. You can then use that money to pay for qualified medical expenses over the course of the year.
FSAs, however, are “use it or lose it” accounts — you must use the money in the year in which it is saved, or you will lose it at the end of the year. FSAs are frequently set up to be used for medical expenses, but they can also be set up to cover childcare, and dependent care, or other expenses. Check specifics of your plan to make sure expenses are “covered,” meaning they are approved by the IRS as a qualified expense that can be paid for with tax-free dollars.
Remember, tax-free is good!
What is an HSA?
To qualify for a Health Savings Account (HSA) you must be a member of a high-deductible health plan that requires you to pay a certain amount of money up front before your plan coverage kicks in.
One benefit of an HSA is that you can use this money into the future; you won’t lose it at year-end as you would with surplus funds in an FSA. Money may be taken from your paycheck before taxes or you can open up an individual HSA account and contribute money on your own.
However it is funded, removing funds from your pretax income will reduce your taxable income as long as you use the money for qualified medical expenses. Your employer or a family member can also contribute to your HSA. You can make contributions to your HSA for a given tax year until the deadline for filing your income tax returns for that year … which is April 17 (2012; Tuesday) this year.
Funds in an HSA can be invested in a manner similar to investments in an Individual Retirement Account (IRA). Investment earnings are tax-sheltered until the money is withdrawn. All HSA contributions belong to the participant immediately, regardless of whether you or your employer deposited the money.
Although these plans may seem similar initially, each one provides different benefits. A certified public accountant can analyze your situation and determine which option is best. If your goal is to reduce your tax liability, and it should be, a CPA can help. Take advantage of opportunities to take care of your family and protect your money.
If you have questions about personal financial planning, contact a financial adviser.
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