The average annual healthcare expense per insured individual ranges from roughly $3,800 for 19- to 34-year-olds to about $13,000 for retirees (ages 65+). 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 one 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.2
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
- Have Medicare, or,
- Have any other health coverage, aside from certain exceptions as outlined by the IRS.2
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. HSAs cover many medical procedures and are sometimes accessible via debit cards.
In order to qualify for an HSA, you must have an HDHP (high deductible health plan). This doesn't work for everyone, particularly those with high healthcare costs.
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.
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.
Unlike HSAs, you are not able to contribute to your own HRA account. Also, 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
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. The funds in your HSA 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.3
Give me a call regarding your options as an employee, self-employed worker or individual. 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.
Christi Shell, CWS®, AAMS®, BFA® is Managing Director of Wealth Management at Shell Capital since 2011 and has over 30 years of personal finance experience. Christi started her career after high school joining First Tennessee Bank in 1991, where she worked her way up to manager while also earning a B.S. in Organizational Management from Tusculum University. Christi later became manager of Regions Bank until she joined Shell Capital. Christi earned certifications of Certified Wealth Strategist®, Accredited Asset Management Specialist®, Certified ETF Advisor®, and Behavioral Financial Advisor™. She completed the prestigious Wealth Management Theory & Practice program at Yale University. Christi holds a Series 65 Investment Advisor license and helps clients with overall wealth management and financial planning.