If you have a full time job, it’s that time of the year. Time for the Holidays and time for Annual Benefit Enrollments. When signing up for your healthcare plan, your employer may offer you several choices.
Deductibles
You can go for a low deductible plan or a high deductible plan. Low deductible plans typically have co-pays for different medical services. These co-pays can vary from plan to plan but they can be as low as $10. Low Deductible plans may be best suited to those who have frequent doctors visits or 3 or more times per year. High deductible plans are often cheaper and offer access to HSA’s, of Health Savings Accounts. The downside to a high deducible plan is the high deductible. For 2021 and 2022, your minimum deductible is $1,400 ($2800 for family). That means you need to spend at least $1,400 in medical expenses before your health insurance kicks in.
HRA – Health Reimbursement Arrangement
The HRA is a group health insurance plan funded by the employer. It is not your account and you can’t withdraw money from this account. If your employer offers an HRA, you can get reimbursed for qualified medical expenses (and sometimes insurance premiums) by submitting a request for reimbursement with the HR department. The reimbursement is tax-free for the employee. As of 2021, the IRS reimbursement limit is $5,300 for self or $10,700 for families. HRA’s don’t have as many qualified medical expenses as FSA’s or HSA’s.
FSA – Flexible Spending Arrangement
The FSA is often to referred to as a Flexible Spending Account. It is a Healthcare account that allows you to pay for out-of-pocket medical expenses with tax-free dollars. This includes copay’s, deductibles, medical devices, certain drugs, and more. Every employer who offers an FSA will also have a limit on how much pre-tax dollars you can contribute. If there is any money leftover by the end of the year, you can either (1) carry over up to $500 or (2) spend the money on qualified medical expenses by March 15th of the next year.
HSA – Health Savings Account
The HSA is a triple-tax advantaged Health Savings Account. Any money you contribute is tax-free. Your invested money grows tax-free. Any distribution spent on qualified medical expenses is tax-free. HSA’s are only available to those who have high deductible health insurance plans. If your employer offers a high deductible plan, but does not offer an HSA, you can always open an HSA here with Betterment. For 2022, the IRS has increased the contribution limit by $50 to $3650 per year for self and they increased the family contribution limit by $100 to $7300 per year. This contribution limit includes both the employee and employer contributions.
Unlike an FSA, HSA’s are often tied with employer healthcare programs. Participate in a 5K, your employer will contribute $200. Get your Flue Shot, get another $300. Take your Covid Vaccine. Get $500. Some employers will contribute up to $3000 to your HSA if you try to maximize your health rewards.
HSA’s are not just savings accounts. They are also investment accounts. You can invest your monthly contributions tax-free for tax-free growth and tax-free distributions. Your money carries over every year with no limit. You can keep your HSA forever if you want to. When you are 65 years old, you can use your HSA as a Traditional IRA and spend the money on whatever you want.
Conclusion
HRA’s are quickly phasing out as they are bring replaced by FSA’ s and HSA’s. The FSA is a capped tax-free savings account with a catch – use it or lose it. For those who know they will spend at least a certain amount in the year, an FSA may be for you. For those with high deductible plans and generally healthy lifestyles, an HSA is the best investment account you can have access to. As I discuss in my Full Throttle Strategy for growing your net worth, an HSA is the number one account where you should focus on maximizing your contributions. For most people, maximizing your HSA should take priority over contributing to a Roth IRA, 401k, or Traditional IRA.
