Health insurance doesn’t mean free medical care. You may have had the misfortune of learning that the hard way, or you might be a nerd who reads health insurance documents in your spare time.
I’m in the latter group, so I don’t mind reading thousands of pages of acronym-filled insurance jargon. Thankfully, you don’t have to.
If you want to make a good health insurance decision, you should choose the plan that offers the savings program you like best.
This article offers a basic primer on health savings programs in the United States.
Basic Understanding of Health Savings Programs
In the American healthcare landscape, programs like health savings accounts and health reimbursement arrangements play a crucial role in helping you cover healthcare costs. These health savings programs are tax-advantaged plans that allow you to cover health-related expenses not covered by your insurance. The health-related expenses could include:
Medical Deductibles and Co-Insurance Costs
As I mentioned before, health insurance doesn’t mean free medical care. You are 100 percent responsible for your own healthcare up to the point when you’ve paid your deductible in healthcare costs. But even after that point, you still have to cover “co-insurance.” Your insurer will pay part of your healthcare costs, but not all of them.
Given that, health savings programs will help you cover your portion of your medical bills.
Copayments and Prescription Drug Costs
Copayments and prescription drugs aren’t typically covered in full by insurance. So you can use a health savings programs to cover your out-of-pocket costs.
Uncovered or Elective Medical Costs
Some insurers don’t cover dental care, chiropractic visits, or vision care. But you can use the tax-free money in your medical savings program to pay for these services.
Not everybody will have access to all the health savings programs we outline in this article, but your employer will provide information about your options.
If you’re self-employed, you can choose a high-deductible health insurance plan with a health savings account option (outlined below), or you can forgo a tax-advantaged medical savings program altogether.
Health Savings Accounts
Do You Qualify for a Health Savings Account?
You must be on a high-deductible health plan to open or save in a health savings account. In 2017, “high deductible” means a $1,300 deductible for an individual or $2,600 for a family. Your maximum out-of-pocket expenses will be $6,550 for an individual, or $13,100 for a family.
If you purchased an insurance plan through HealthCare.gov, the title of your insurance plan would include the words “HSA eligible.” Most employer-sponsored plans that are HSA-eligible also promote that in their literature.
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What are Health Savings Accounts?
Health savings accounts have four tax advantages. What are those tax advantages?
- There's no income tax on money that you put into an HSA.
- You don't pay income tax paid on money that you use to reimburse yourself for qualified medical expenses.
- There also isn't any income tax on any growth of investments in an HSA.
- Income placed into HSA isn’t subject to social security or Medicare taxes (15.3 percent savings for self-employed people).
Looking for other advantages of this account?
- You can think of it as an IRA. When you turn 65, you no longer need to use the money for medical expenses.
- You can carry over the account balance from year to year.
- If you keep careful track of your receipts, you can reimburse yourself whenever you like.
- You can invest the funds inside of an HSA.
- Many early retirement advocates call the HSA the “ultimate retirement account.”
I’m Eligible. So Where Do I Open an HSA?
If you have an employer-sponsored HSA, they may set you up with an HSA provider. This is ideal because it allows you to directly deposit part of your check into a savings account.
For people who want to open their own account, financial advisor Matthew Becker recommends Alliant Credit Union for their low fees and investing options. You can compare plans at HSArates.com.
Health Reimbursement Arrangements
What is a Health Reimbursement Arrangement?
A health reimbursement arrangement is a tax-advantaged employer health plan that allows employers to contribute funds to employees’ health-related expenses. Health reimbursement arrangements aren’t medical savings programs in the traditional sense. Employees can’t save for medical expenses through an HRA.
Rather, they can receive reimbursement for some medical expenses. Your employer will set money into an account for you, but the money isn’t yours until you request reimbursement. The good news is that most employers are liberal with “qualified” expenses.
You might even receive reimbursement for paying your own health insurance premium.
Some employers will require employees to complete health tasks (like getting a physical or a flu shot) before they’ll contribute funds to the HRA.
Do You Qualify for a Health Reimbursement Arrangement?
Your employer will let you know if you qualify for a health reimbursement arrangement. This plan is particularly popular for certain kinds of companies. For example, if you work for a small business or your company is geographically diverse, your employer may choose an HRA to make compliance easier.
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I’m Eligible. So Where Do I Open an HRA?
If you’re eligible for an HRA, your employer will open the account for you. Be sure to connect your checking account to the HRA, though. You’ll want to transfer funds from the HRA to your checking account as soon as possible. While HRAs have some protections for employees, you’ll lose access to the funds soon after your job ends.
Flexible Spending Accounts
What is a Flexible Spending Account?
A flexible spending account is a medical savings account that allows you to cover out-of-pocket medical expenses with pre-tax dollars.
You can fund up to $2,600 per year in a flexible spending account, but you need to be careful with overfunding it.
With limited exceptions, you have to spend the money in the FSA within a year.
People with FSAs often stock up on contact lenses, diabetes test strips, or other common out-of-pocket expenses towards the end of the year. This happens because they overfunded their FSA and they don’t want to lose the money.
Do You Qualify for a Flexible Spending Account?
Your employer will let you know if you qualify for a flexible spending account. But keep in mind that if you purchased health insurance through the marketplace, you won’t qualify for an FSA.
I’m Eligible. So How Do I Open an FSA?
Your employer will allow you to direct-deposit a portion of your income into an FSA and will also give you directions on how to access the funds. If you quit your job, you can keep the funds in your FSA until the end of the year.