You'll Spend Thousands on Healthcare This Year. Can an HSA or HRA Help?

The reactions we get when we tell folks what the average American spends on healthcare vary widely. It ranges from complete shock to total confusion. Let's look at the averages: for 19-34-year-olds, the average annual healthcare expense per insured individual is roughly $3,800; it bumps up to about $13,000 for retirees (ages 65+). Health savings accounts (HSAs) and health reimbursement arrangements (HRAs) can help Americans save for medical expenses and emergencies¹ 

We will explore these accounts and who has access to them. Furthermore, we will analyze the pros and cons of each option, along with who can access them, to help you determine what's best for your needs.

What Is a Health Savings Account?

Per the IRS, "an HSA is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur." In other words, it's an account operated to save for future medical costs.

How Do I Qualify for an HSA?

The following requirements determine your eligibility and qualification for an HSA. 

• You are covered under a High Deductible Health Plan (HDHP) on the first day of the month.
• You cannot be claimed as a dependent on someone else's tax return.
• You are not enrolled in Medicare

1. You have no other health coverage besides certain exceptions outlined by the IRS.²

HSA Pros

HSAs have numerous tax and non-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 
• Contributions remain in the account until you spend them, i.e., there is no "use it or lose it" policy.
• It's portable, meaning the account stays with you even if you change jobs or retire.

HSAs cover many medical procedures and are sometimes accessible via debit cards.

HSA Cons

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 Arrangement?

Whereas individuals or employees can fund their own HSAs, only an employer can fund an HRA. With an HSA, you can withdraw funds to pay for approved services and procedures. Conversely, If you have an HRA, you must pay the expenses upfront, then your employer reimburses you.

Your employer determines how much to contribute annually, and it's important to remember that you can't add your own money to the account.

HRA Pros

Employers fund HRAs, meaning it doesn't cost you anything to participate. A few other positive features:

• You can exclude contributions made by the employer from gross income.
• The reimbursements may be tax-free if you use the money to pay for qualified medical expenses.
• Like HSAs, the funds can roll over from year to year, i.e., no "use it or lose it" feature exists.
• HRA reimbursements can be made to:
  • Current and former employees
  • Spouses and dependents.
  • Specific individuals you claim as a dependent.
  • Children under the age of 27
  • Spouses and dependents of deceased employees

These plans have ample coverage for numerous procedures, and there aren't any prerequisites on what health insurance you can use it with.

HRA Cons

Unlike HSAs, you cannot contribute to your 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

Overman Capital 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, which 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 can make an early withdrawal, but you may be subject to a penalty. HRAs, on the other hand, do not allow for early withdrawals or non-medical withdrawals.³ 

Whatever your situation, getting health savings advice from financial professionals, like Overman Capital Management, can help you save wisely while weighing the pros and cons of your choices. If HSAs or HRAs are part of your health savings plans, it’s critical you get the most value out the account. Overman Capital is here to help. Connect with us online, give us a call at (252) 635-6666, or stop by the office in historic downtown New Bern, NC, to learn more.