Benefits of Health Savings Accounts

There are IRS-approved health savings and reimbursement accounts available to assist both the business owner as well as the employees for 2017. The Health Savings Accounts (HSA) and the Health Reimbursement Accounts (HRA) are designed to provide a pre-tax benefit for the payment of medical expenses. These two types of accounts are intended to provide medical expense reimbursement driven by consumer initiative. Healthcare consumers will benefit economically by the prudent use of their HSA or HRA accounts.

This approach by the federal government is an attempt to curtail healthcare utilization and its associated costs. In our opinion, both the HSA and HRA are a national effort to create saving plans and cover first dollar coverage for health expenses by utilizing higher deductible, less expensive health insurance plans.

The following will differentiate the uses and benefits of both an HSA and an HRA. An HSA is a tax-exempt trust or custodial account that will be set up with a U.S. financial institution which allows you to pay or be reimbursed for certain medical expenses. The HSA must be used in conjunction with a high-deductible health plan (HDHP), which will be discussed later. The HSA can be established using a qualified trustee or an account custodian that is different than the HDHP. Contributions must be made in cash via the employee, employer or through a cafeteria plan.

I. Benefits of an HSA

What are the benefits of an HSA?

You can claim a tax deduction for personal contributions to your HSA even if you do not itemize your deductions on your annual 1040 tax
Contributions made by your employer, even through a Section 125 cafeteria plan, are excluded from your gross
The contributions remain in your account from year to year until you use
Distributions may be tax-free if you pay qualified medical

An HSA is “portable” – it stays with the individual owner if he/she changes employment or leaves the
For people over 65, you can pay the health insurance premiums for Medicare Part A or B, or the employee’s share of employer-sponsored health Premiums for Medicare secondary policies are not qualifying expenses.

How does an individual qualify for RSA?

You must have an
You are not entitled to Medicare
You cannot be claimed as a dependent on any other person’s 2017 tax
You must have no other health insurance coverage except what is permitted, which are the following insurances:

o Accident

o Disability

Dental Care
Vision Care

o Long-term Care

o Benefits Related to Workers Compensation Law

o Specific Disease or Illness

o A Fixed Amount per Day of Hospitalization

II. High-Deductible Health Plan (HDHP), A HDHP has:

A higher annual deductible than traditional health
A minimum limit annual deductible and “out-of-pocket” medical expenses that you must pay for covered expenses.

The following table shows the minimum and maximum “out-of-pocket” medical expenses for HDHPs for 2017:

The amount you, your employer or a cafeteria plan can contribute each year to your RSA depends upon the HDHP you have, your age and type of insurance For 2017, for self-only, you can contribute up to the amount of the HDHP plan deductible to a maximum of $3,400 ($4,400 if you are age 55 or older). Family coverage is up to the deductible amount of the HDHP also, but to a maximum of $6,750 ($7,750 if age 55 or older).

In light of the aforementioned information, it appears that individual practitioners and business owners would most likely use an RSA. The HDHP associated with an RSA should cost less than traditional healthcare insurance. If an individual remains healthy, the RSA could potentially grow tax-free and become a great asset later in life.

Distributions from an RSA are tax-free withdrawals when used to pay or reimburse qualified medical expenses incurred after the RSA has been established. To establish an RSA for 2018, contributions can be made until April 15, 2019.

III. Health Reimbursement Account (HRA)

A Health Reimbursement Account (HRA) is significantly different from an HSA in that it is solely paid for by the employer. An HRA is not related to a salary reduction election in a Section 125 Cafeteria Plan.

Benefits of an HRA:

Reimbursement is provided for the employee’s (but does not include partners in a partnership, LLC members or S-Corp. shareholders) approved medical care expenses incurred by the employee, employee’s spouse, and
Reimbursement is provided up to a predetermined
Maximum dollar contribution is not necessarily tied to a
An employee’s unused portion of their contribution at the end of a coverage period can be carried forward to increase future reimbursement coverage periods for the same
Employee contributions are not portable and stay with the employer when the employee
Health reimbursement amounts are generally excluded from the employee’s
Employees do not have the right to receive cash in lieu of reimbursement
When an HRA is provided in a Section 125 cafeteria plan, the “use-it-or-lose-it” rule does not

An HRA is a benefit employers may (but are not required to) use to “link” healthcare benefits to a higher deductible health plan. When employees exceed the HRA balance, they may be paying for 100% of their medical expenses until they have satisfied their deductible.

In summary, the purchase of an HSA is not solely a tax-driven decision. The individual must consider personal or family health issues, the possibility of changing to an HDHP and not being able to change back to more traditional levels of deductibles, as well as the overall possible savings in healthcare costs. For an employer to implement an HRA, the decision rests on costs, the overall plan and the effects it would have on attracting new employees and keeping present employees. In both the HSA and the HRA, we think the federal government is encouraging savings for the employee and employer. Ineither situation, participants of HRAs and owners of HSAs may have better utilization and coverage for their “first dollar” healthcare expenses.