Introduction
As we step into 2024, it’s crucial to understand the nuances of Health Savings Accounts (HSA), Flexible Spending Accounts (FSA), and Health Reimbursement Accounts (HRA). These accounts are pivotal in managing healthcare expenses, yet they often come with complex rules that can be baffling. Let’s demystify these options, focusing on rollovers, maximum limits, and the confusing case of unused funds.
About FSA, HSA and HRA
Flexible Spending Accounts, Health Savings Accounts and Health Reimbursement Accounts are three types of health benefit accounts that offer unique advantages for managing healthcare costs. These accounts are designed to provide financial benefits and flexibility in different ways. Each of these accounts has its specific advantages, catering to different needs and situations. The choice between an FSA, HSA, and HRA depends on individual circumstances, including the type of health insurance plan, financial goals and healthcare spending habits.
Why FSA?
FSAs are particularly beneficial for those with predictable medical expenses. Contributions are made pre-tax, reducing taxable income. This can result in significant tax savings, especially for those in higher tax brackets. The funds can be used for a wide range of medical expenses, including prescriptions, deductibles and copayments.
FSA: What Happens to Your Unused Balance?
FSAs are employer-established, meaning if you don’t use your funds, they will go to the employer, which would be used to offset the administration costs incurred during the plan year; employers can also lower salary reductions in the next FSA year.
A common concern for FSA holders is the “use-it-or-lose-it” policy. In 2023, if you haven’t used all your FSA funds, don’t panic. Employers may offer a grace period of 2.5 months into the next year or allow a rollover of up to $610 of unused funds. This flexibility ensures that your hard-earned money isn’t wasted.
HSA in 2024: Maximizing Your Healthcare Savings
HSAs are another fantastic tool, especially due to their rollover capability if you have a high deductible account. Unlike FSAs, HSAs allow unspent balances to roll over year after year. This makes unused funds able to be carried over indefinitely, allowing for long-term savings that can grow tax-free.
In 2024, the maximum contribution for individuals and families has been updated, ensuring that you can save more for your healthcare needs. HSAs also offer investment options, so you can increase your savings over time. Individuals maximum contribution is $4,150 while family coverage maximum contribution is $8,300. (The amount you can contribute has increased by about 7% from the year 2023.)
Employers contributing to HSAs must tread carefully, as they are required to contribute equally for all employees, avoiding any form of discrimination.
HRA: Employer-Funded and Employee-Benefiting
HRAs are solely employer-funded accounts, with no contributions from employees. These accounts reimburse employees for qualified medical expenses up to a certain amount. They are particularly advantageous for employers looking to offer a quality benefit to their employees. An intriguing aspect of HRAs is that any unused funds revert to the employer, not the employee. This approach raises questions about the fairness and optimal utilization of these funds. However, considering that the employee does not contribute to these funds, it adds up funds to be reverted back to the employer.
The Controversy: Why Do Unused Funds Revert to Employers?
It seems counterintuitive and, frankly, unfair that unused FSA and HRA funds often go back to the employer. Specifically FSA, considering it is contributed to by the employee. This policy can be seen as a deterrent to saving in these accounts, as there’s a risk of losing your money.
The rationale behind this is tied to the tax advantages offered by these accounts. However, it’s a policy that sparks debate about employee welfare and the true benefit of these healthcare savings options.This policy also raises questions about the alignment of such plans with the employees’ best interests. If the goal of these accounts is to encourage responsible healthcare spending, then returning unused funds to employers seems to counteract this purpose. It could potentially lead to unnecessary or rushed medical spending towards the end of the year, as employees scramble to use the funds rather than forfeit them. Revising this policy to either extend the grace period or allow a higher rollover amount could be a more employee-centric approach, ensuring that these health benefit accounts truly serve those they are intended to assist.
Conclusion
As we navigate the complexities of FSAs, HSAs and HRAs, it’s clear that while they offer significant advantages, there are instances that need careful consideration. The rollover options in 2024 for HSAs and FSAs offer some relief, but the issue of unused funds reverting to employers remains a point of contention. Understanding these differences and staying informed about changes is crucial in making the most of these healthcare savings tools.
Mark Herschlag is the founder and CEO of Cosmo Insurance Agency, which is based in Ocean County. Cosmo Insurance Agency offers personalized solutions for individuals and businesses looking to obtain health, life, dental, long term care or disability insurance. For more information or for a free, no-obligation quote, please call (201) 817-1388 or email [email protected].
