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Comparing tax-favored HSA, HRA & FSA medical options

The enactment of the 21st Century Cares Act this week means medical researchers will get more money for their efforts to develop a variety of treatments for persistent and devastating health problems.

The new law also opens up a tax-favored medical plan option for folks who work for small companies.

VP Joe Biden_center_recognized at 21st Century Cures Act signing Dec 13 2016
Vice President Joe Biden (center) is recognized during the ceremony in which the 21st Century Cures Act was signed into law. The bill is close to Biden's heart. He lost his son Beau to brain cancer. Following that personal tragedy, President Obama tapped his veep (and friend) to lead the National Cancer Moonshot to fundamentally change the culture of the fight against cancer. The Cures Act should help achieve that goal, thanks to $1.8 billion provided by the law to go toward new cancer therapies and enhancing prevention and detection efforts nationwide. (Click image to watch the full signing ceremony.)

Cancer moonshot money: Among the diseases covered in the measure, which officially became law on Tuesday, Dec. 13, is cancer.

"We are bringing to reality the possibility of new breakthroughs to some of the greatest health-care challenges of our time," Obama said in remarks before signing the bill into law. "It is wonderful to see how well Democrats and Republicans in the closing day of this Congress came together around a common cause. And I think it indicates the power of this issue and how deeply it touches every family across America."

In addition to the cancer research funding, which led to the renaming of the bill as “Beau Biden Cancer Moonshot” in honor of the vice president’s late son, the measure also provides $1 billion for opioid abuse prevention, strengthens mental health services and access and expands health reimbursement arrangements (HRAs) to small businesses.

New small business health care option: The HRA option takes effect Jan. 1, 2017. Starting that day, small employers -- those with fewer than 50 employees -- that don't offer health coverage plans to their workers will be able to establish a health reimbursement program.

The good news for employees who purchase their own health care coverage is that the company-provided HRAs will reimburse participating employees for their medical expenses. Single employees will get up to $4,950 and families up to $10,000 a year, with the amounts adjusted annually for inflation.

The good news for the eligible companies setting up the HRAs is that the businesses now won't face Affordable Care Act, also known as Obamacare, penalties.

Plus, neither the companies nor the employees will owe taxes on the company’s premium contributions.

Many medical acronyms: HRA is just one of the tax-related medical programs that businesses and individual taxpayers must know and sort through as they evaluate health care coverage.

Joining the HRA, or Health Reimbursement Arrangement, as a popular option are HSA, or Health Savings Accounts, and FSAs, Flexible Spending Accounts.

All of these accounts are used to pay for qualified medical expenses, such as deductibles and co-pays. There are differences, however, in the kind of health plan each works with, who owns the account, who controls it and who can put money into it.

Here's a quick primer on these medical accounts.

HRA, or Health Reimbursement Arrangement
An HRA is owned/established by an employer for the benefit of workers. You are eligible for an HRA if you are enrolled in a high deductible health plan (HDHP).

 HRA contribution limits are set by the business and it contributes to the account every month, but some plans may credit the annual amount at the beginning of the plan year. Individual contributions are not allowed.

HRA money is used to pay for qualified medical expenses and the benefit is tax-free to the employee.

HSA, or Health Savings Account
An HSA is available to folks enrolled in a high deductible health plan (HDHP) and who don't have any other health care coverage.

The individual owns the HSA and makes contributions to the account, up to annual limits that are adjusted annually for inflation. People older than 55 can make an additional catch-up contribution of $1,000. Contributions can be made by both the individual and his/her employer.

HSA funds can be used to pay qualified medical expenses, as well as pay premiums for Temporary Continuation of Coverage, Long Term Care, and health insurance for retirees.

HSA money earns tax-free interest at the institution where it is established. Qualified withdrawals are also untaxed. And HSA contributions also are tax-deductible.

Unused HSA money can be carried over to the following tax year. In addition, an HSA balance is not forfeited when the account owner changes employers or health plans.

In fact, many view an HSA as an added retirement account. When you turn 65 (or enroll in or become eligible for Medicare),  you can use the money for anything without penalty. You will, however, owe income tax on the non-medical distributions just like a traditional IRA.

FSA, or Flexible Spending Account
You establish an FSA through your employer, but you alone put money into the account. You contribute to your FSA via payroll deductions that are made before taxes are calculated on your income.

You use FSA money to pay or get as reimbursement for your out-of-pocket expenditures on qualified medical expenses.

A major drawback of an FSA is that you could forfeit your contributions depending upon how your company has structured the benefit.

Some employers allow you a grace period until March 15 of the next to use the money. Others allow you to roll over up to $500 to the next tax/benefits year. But some still require FSA accounts owners to use or lose the money within one benefits year.

The excerpt below from a UnitedHealthcare HSA-FSA-HRA table offers a nice side-by-side look at these three tax-favored health care options.

HSA-FSA-HRA table_UnitedHealthcare

You can click the above image (or here) to see the full two-page table.

Check out these health care coverage options and, where you can, pick the one that works best for you, from both a tax and health standpoint.

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