O.K., I’m pro high deductible health plans across the board.
But if you’re looking for tax savings with these plans, should you go with a Health Savings Account (HSA) or Health Reimbursement Arrangement (HRA).
…wait, unglaze your eyes! (Save the glazing for donuts!) This stuff is confusing.
A Health Reimbursement Arrangement (HRA) allows a company to reimburse employees with pre-tax dollars for personal money they spend on qualified medical expenses.
- The amount of pre-tax dollars can be virtually unlimited (as far as I know).
- Excess funds can accumulate from year to year (or not) — it is COMPLICATED to carry funds over from one year to the next.
- The business has to maintain records of medical expenses, and must make sure they are qualified expenses.
- Money can be used to pay for health insurance premiums of personally purchased health insurance.
- Does not have to be combined with a High Deductible Health Plan (HDHP)
- Contributions are from employers only.
A Health Savings Account (HSA) is sort of like an IRA for qualified health expenditures. All money that goes in is in pre-tax dollars. Money can earn interest tax free, and if you use the money for qualified medical expenses.
- The amount that can be contributed from year-to-year is set by the IRS. HSA contribution limits for 2009.
- Must be combined with a HDHP.
- Employer does not have to track where the funds are spent — if the employee uses it to purchase a big screen t.v. that is their business.
- Employees and Employers can both contribute.
Which is best…well, like so much in the realm of our byzantine tax code…it depends…and what I say now probably won’t be true a year from now.
When an HSA is probably best:
- HSA’s are probably better for small businesses with two or more non-family employees.
- An HSA might be better for a free agent if they have income that swings wildly from year to year.
- For individuals who are employed but their employer doesn’t provide health insurance. You won’t get tax deductions on your premium (unless perhaps they make up for more than 7.5% of your income, but you will at least get tax savings on out of pocket expenses.)
When is an HRA better.
- If you’re a small business that is fairly stable, and the only people you’re looking to insure are family–you might as well deduct EVERYTHING. Remember, you’ll have to account for every expense as well!
- You’re a small business that can’t offer your employees health insurance (sometimes its better not to offer your employees health insurance–for them and you). You can set it up so that the HRA helps them pay for their premiums and deductibles. Its an administrative pain.
- If you’re business is accounting and taxes anyway…no seriously, our accountant has an HRA along with the HDHP he offers his employees. Its nice to offer his employees more money… recording every little expense is HIS business. Also, he used to work for the IRS. If he goofs his former collegues at the IRS are more likely to show mercy.
And there you have it, another scintillating post on becoming insured in a world that every day seems to resemble the one in Brazil (the movie, not the country).