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For employees and employers, deferred compensation has now come to encompass
more than just typical retirement plans. With the growing cost of health
care and insurance, Congress has expanded the number of options available to
employers and employees. Three of those options available to employers and
employees are: health reimbursement arrangements (HRAS), health savings
accounts (HSAS), and flexible spending accounts (FSAS). Here is a brief
description of each to allow both employers and employees sort through the
sea of acronyms.
An
HRA is an employer funded health benefit account for individual employees
which may be used to pay their medical expenses and health insurance
premiums. In order to receive favorable tax treatment, the HRA must be paid
for only by the employer and not provided by an employee salary reduction
election or under an employee benefit cafeteria plan. Also the plan must
reimburse the covered person for medical expenses of the person, their
spouse or dependents. This type
of plan is generally more economical, more flexible, and has additional
features that a traditional health benefit plan does not have and at the
same time provides favorable treatment for federal income tax purposes.
Under an HRA, the contributions an employer makes are generally excluded
from the employee's income and deductible by the employer. HRAs allow the
employers to have greater control over employee health care expenditures.
Distributions for qualified medical expenses from these HRA’s are not
included in the employee’s gross income.
In addition, any excess amounts at the end of the year can be carried
over to future years without being lost.
An
HSA is a savings and investment vehicle that allows you to use tax-free
money to pay medical expenses. The taxpayer must qualify for the HSA by
being a participant in a qualifying high deductible health insurance plan.
Qualified contributions to an HSA are deductible, and qualified
distributions from an HSA are excluded from income to the extent they are
used for qualified medical expenses. There are no mandatory distributions
during the participant’s lifetime. Provided you meet the eligibility
requirements, the maximum amount that you may contribute to an HSA is based
on whether you have self-only or family HDHP coverage. You may also make a
catch-up HSA contribution, assuming you meet all the eligibility
requirements and have attained age 55 before the close of the calendar year.
Flexible
Spending Accounts (FSAs), allow employees to be reimbursed for health care,
dependent care or other expenses that are excludable from gross income if
paid by an employer. Medical care includes amounts paid for the diagnosis,
cure mitigation, treatment, or prevention of disease. Medicines and drugs
are expenditures for medical care. FSAs may also reimburse employees for
out-of-pocket expenses for over-the-counter drugs as well. Contributions to
FSAs are made through payroll deductions from pretax income to designated
accounts for participating employees. One significant restriction is that
the funds from the FSA cannot be used to reimburse health care expenses if
the same expenses can be reimbursed from another source. Also funds in the
FSA have a “use-it-or-lose-it” provision; unused contributions for the
year are forfeited and returned to the employer.
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