How to Make Sense of the Open Enrollment Alphabet

It’s open-enrollment season again, and at some companies, employees will need to choose whether they would like to sign up for a Health Savings Account (HSA), a Flexible Spending Account (FSA), or a Health Reimbursement Account (HRA). While it sounds like alphabet soup, it’s important to understand the differences. If you don’t, you could be leaving money on the table next year. 

Here’s a quick breakdown on the three types of accounts, along with a few tips to find out whether they’re right for you:

Health Savings Account (HSA)

Health Savings Accounts, or HSAs, must be combined with a qualified high-deductible health insurance plan. This tax-advantaged account can be used to help pay your deductible, and any funds left in your savings account earn tax-deferred interest. Your contributions to your HSA are tax deductible, and withdrawals to pay for your qualified medical expenses are tax free. But here’s the best part:  The money in your account is yours to keep – you don’t have to “use it or lose it” by the end of the year.

How it Works

• You decide how much to contribute, as long as the amount doesn’t exceed the maximum allowed by the government. (In 2017, for example, the limit is $3,400 for an individual and $6,750 for a family.)
• Depending on your plan, you may receive either checks or a debit card for your HSA account to use for qualified medical expenses, including your deductible, any co-pays or co-insurance, or qualified medical expenses that your plan does not cover.
• There are no deadlines for spending the money in your account.
• Your HSA rolls over each year, unlike an FSA, which we’ll discuss later. If you reach the age of 65 and are on Medicare, you can still use your account to pay for out-of-pocket medical expenses, but you’ll no longer be allowed to contribute money to your account.
• Once a year you may rollover the balance in your HSA account from your employer account to another, lower cost, better diversified HSA, and select and manage those investment options yourself.
• If you change jobs, you can take your HSA with you.
• You can also have an HSA if you are self-employed.

What to Check  

• Be sure to compare the coverage and the cost of your current plan with your high-deductible plan option to see which is less. (Richard Thaler of the New York Times has a great article on how to evaluate your health plans.)
• Since you can invest your HSA funds in mutual funds, stocks, or other types of investments, make sure your HSA offers low-cost funds that are reputable. Some companies require you to have a minimum balance in your account before you can invest (to ensure you’ll have the funds you need for a qualified medical expense). However, if you don’t anticipate needing the funds right away, it could be beneficial to look for an HSA that will let you invest right away, without a minimum.
• Some employers contribute to their workers’ HSA accounts, so if yours does, a high-deductible insurance plan with an HSA could make better sense than a regular insurance plan.

Flexible Spending Account (FSA)

Also known as a Flexible Spending Arrangement, Flexible Spending Accounts may be offered by an employer in lieu of, or in addition to, a health insurance policy. As with an HSA, FSAs are funded pre-tax, by payroll deduction, which can lower the employee’s taxable income for the year. Employers set the contribution limits for FSAs, while the specified limit for dependent care accounts is $5,000 per year. Unlike HSAs, however, FSA funds need to be used by the end of their run-out period, which is usually three months after the end of the year. Prior to the Affordable Care Act, employees who didn’t use the funds in their account wound up forfeiting those funds to their employers. Be sure to review your plan’s specific carry over allowance.

How It Works

• Employers fund the entire amount of an employee’s contribution at the beginning of the year, so the individual has funds to use for medical expenses. The employee then pays back the amount through payroll deductions.
• At the end of the year, you may lose any remaining funds you haven’t spent.
• As with an HSA, you may receive a debit card to pay for small medical expenses, such as co-pays, prescriptions and other fees.
• FSAs can be used to purchase certain non-prescription drugs, unlike other types of plans.
• FSAs stay with the employer. They cannot move with you to another job.
• Stand-alone FSAs (those without a major medical insurance plan) can only provide limited dental and vision benefits, and in certain cases may be used in conjunction with an HSA.

 What to Check

• If you choose to use FSA funds to pay for childcare, you could lose your child tax credit when you file your taxes. Check with your tax preparer before making your decision.
• Be sure you understand how your company’s FSA may be integrated with its HSA plan.

Health Reimbursement Account (HRA)

Many types of Health Reimbursement Accounts (also called Health Reimbursement Arrangements) exist, but we’ll focus on those that are linked with high-deductible health insurance plans. Employers may offer an HRA to employees and their families who enroll in the company’s group health insurance plan. An HRA differs from an HSA and FSA in that the employer is the only one who contributes, and, like an FSA, the employer owns the account.

How It Works

• An employer determines how much to contribute to an HRA per employee.
• The funds could be used to cover co-pays, deductibles, or insurance premiums.
• Funds are available from the first day of coverage.
• Unlike FSAs and HSAs, HRA funds do not accrue in a separate account. Employers reimburse employees after they have incurred an expense. Some HRAs are set up to pay only after an employee reaches his or her deductible. Reimbursements are tax deductible.
• Once the employer’s contribution is used up, employees must pay the balance of any expenses they incur. Depending on how the employer sets up the plan, someone who doesn’t spend the entire benefit may be able to roll the funds over to the next year.
• HRAs stay with the employer.
• Business owners are usually not eligible to participate in HRAs; however, employees (including spouses who are legitimate employees) can participate as long as they are receiving regular paychecks.

What to Check

• Since HRAs can vary by employer, talk to your human resources department to learn more details about your company’s plan.

During this open enrollment period, take the time to study all of your options. In addition to protecting your health, you may also be able to improve your tax position and take advantage of funds contributed by your employer.

Before Wayne Titus founded AMDG Financial and AMDG Tax and Accounting in 2002, he spent fifteen years at two large accounting firms, working with Fortune 50 clients. He dove into entrepreneurship to make a bigger impact on people’s lives. Titus is a fee-only fiduciary adviser, meaning he owes loyalty to his clients and places their interests ahead of his own or those of his firms. With assets of more than $150 million, AMDG Financial integrates tax, financial and investment strategies to help clients make financial and life transitions successful on purpose. The company’s credo is, “From financial wisdom, better stewardship.”

To learn more about Wayne Titus, visit www.amdgservices.com/