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3: Analyze Your Circumstances

Tax-Advantaged Health Accounts

You may have one of the following accounts if you have private or employer-based health care. Tax incentives make these accounts attractive by saving you money, but you need to check if the funds you put in roll over from year to year. Using automatic payroll deductions to establish the account is a great way to build medical savings.

  • Description
    • You contribute pretax money from your paycheck into a fund to pay certain out-of-pocket health care costs.
    • Your employer contracts with an account administrator for the savings account and disbursements.
  • Pros
    • Pretax dollars pay for qualified health care costs.
    • Funds are immediately available – no need to wait for contributions to equal expenses.
    • FSA administrator often issues debit card for paying at the time of service, making record keeping easier.
  • Cons
    • Reimbursement claims must have proof of expense and a statement that it has not been covered by your plan.
    • Annual contribution limits.
    • Expenses must meet qualification standards.
    • Although employers may opt to let employees roll over up to $500 to a new plan year, many plans are “use it or lose it” so that you must use the money within a year (12 month period).
    • Not eligible with a marketplace plan.
    • Can’t be moved from one employer to another.
    • Enrollment only during open-enrollment period, at beginning of new job or with qualifying event.
  • Description
    • An employer-funded group health plan from which employees are reimbursed tax-free for qualified medical expenses up to a fixed dollar amount per year.
    • The employer funds and owns the account.
  • Pros
    • Can roll over unused amounts, if allowed by employer.
    • Reimburses employee for expenses tax-free.
  • Cons
    • Sometimes cannot be used to reimburse for health insurance premiums.
    • Only employer may contribute.
    • Can’t be moved from one employer to another.
    • Employer can limit what and who is eligible for reimbursement.
  • Description
    • You set aside money on a pretax basis to pay for qualified medical expenses.
    • Some health insurance companies offer HSAs for high-deductible plans (the plan must be HAS-qualified). You can also open an HSA through some banks, credit unions and other financial institutions.
  • Pros
    • Pretax dollars pay for qualified health care costs.
    • May earn interest, which is not taxable.
    • May be able to combine with a marketplace plan.
    • Unspent funds roll over.
    • Others may contribute to the account, including your employer.
    • You own it and take it with you to another job.
    • Can offset the cost of high-deductible health plans.
    • Often debit card is issued to pay at time of service, making record keeping easier.
  • Cons
    • Annual contribution limits.
    • Expenses must meet qualification standards.
    • Only available if you are in an HSA-qualified high-deductible plan.
    • When you start receiving Social Security benefits or enroll in Medicare, you no longer can contribute to an HSA.
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Check Your Knowledge: Using Tax-Advantaged Accounts for Health Care

If you use an employer-based or private health insurance plan, you may be able to use a flexible spending account, health reimbursement account or health savings account to save money. Match each type of account being used to the description.

Health Reimbursement Account (HRA)


Flexible Spending Account (FSA)


Health Savings Account (HSA)
Incorrect. Try Again.
Correct
Xavier contributes money to an account with each paycheck. When he goes to the doctor, he uses a debit card for his copay. If Xavier does not use all of his contributions to the account during a specified 12-month period, he will “lose” the money.
Flexible Spending Account (FSA)
Incorrect. Try Again.
Correct
Maria’s employer contributes money to an account so that costs for her dependent son’s prescriptions are reimbursed tax-free. Her employer allows that any funds she does not use during the year can be carried over to the next year; but she cannot take the funds with her if she leaves her job.
Health Reimbursement Account (HRA)
Incorrect. Try Again.
Correct
Mark has an HSA-qualified, high-deductible health plan (HDHP), so he contributes to an account he opened at his credit union to help offset some costs. Mark turns 65 next year and will join Medicare, so he will no longer be able to contribute to the account.
Health Savings Account (HSA)
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