Saving For Healthcare Expenses

The good news is that healthcare spending in the U.S. is growing at a slower pace than in previous years. Costs are still increasing, they're just increasing at a reduced pace than in recent years. In fact, this year's annual increase, at 4.7 percent, is the lowest since 2001 and a far cry from the years when spending spiked to 9 percent. Unfortunately, that pace is still two times higher than the average family's annual income growth.

According to this year's Milliman Medical Index, the average American family of four currently spends upwards of $25,000 a year on healthcare. That sum includes premiums and all out-of-pocket expenses, such as co-pays, deductibles, and co-insurance.

For better or worse, the Patient Protection and Affordable Care Act (PPACA) launched a starting point for healthcare reform in this country. While more than half of Americans get subsidized health insurance through their employers, that doesn't mean their healthcare is hassle free. They also are impacted by rising premiums, escalating prescription drug prices, and increasing deductibles. Health insurance may be more universal, but it's also become more expensive.

The issue is intensified by employers transferring a larger share of healthcare costs to their workers. In 2001, employers paid about 61 percent of costs; today that share has dropped to 57 percent. However, during this timeframe several types of accounts have become popular to help workers save and pay for medical expenses with tax-free earnings.

These plans include the Health Savings Account (HSA), Health Reimbursement Account (HRA), and Flexible Savings Account (FSA).

HDHP + HSA
Health Savings Accounts (HSAs) were established as part of the Medicare Prescription Drug Improvement and Modernization Act of 2003. The HSA was originally adopted by self-employed workers who had to pay the full cost of their own insurance. To do so, most purchased high deductible healthcare plans (HDHP) to take advantage of lower premiums. HSAs were introduced as an add-on for HDHPs as a way to save money earmarked for medical expenses on a tax-advantaged basis. The plans quickly became popular and soon employers began to offer them to their workforce in conjunction with the lower-cost HDHP plans. Today, 24 percent of workers (employed by companies with two to 5,000+ covered members) are enrolled in a high-deductible health plan (HDHP) with an HSA or reimbursement account.

Tax breaks are a huge advantage to HSAs:

• Pay no taxes on money contributed
• Money grows tax-deferred
• No taxes are due when funds are used to pay eligible medical expenses
• Account owners pay no income or capital gains taxes on any distributions once they turn age 65

In fact, the only way taxes are due on HSA savings is if the money is used before age 65 for any reason other than to pay for qualified healthcare expenses. In that case, the account owner also will be liable for a 20 percent penalty on the funds used for nonqualified expenses.

In 2016, the combined annual contribution limit for employers and workers is $3,350 for individuals and $6,750 for families. Folks age 55 and up may add another $1,000 each year.

Older individuals may no longer contribute to an HSA once they have registered for Medicare, but they can still use the money in their HSA for medical expenses such as co-payments, deductibles, vision and dental care, and a portion of long-term-care premiums (based on age). The funds also can be used to pay for Medicare Part B, Part D, or Medicare Advantage premiums (but not Medigap premiums).

The HSA is an ideal pairing for a high deductible health plan because you can pay for medical expenses tax-free until you meet the deductible, at which point the insurance plan will kick in. One of the perks of the health savings account is that it belongs to the worker even if he leaves his employer, and he can use it in subsequent years – there's no deadline.

HRA
Many HDHPs also can be combined with a health reimbursement arrangement. An HRA is similar to an HSA but it is owned by the employer, not the worker. With an HRA, an employer funds an individual reimbursement account for each participating employee and decides how much to contribute each year. As the plan sponsor, the employer defines what those funds can be used for – such as copays, coinsurance, deductibles, and services not fully covered by the insurance plan – as well as whether or not the funds will roll over from year to year. When a worker leaves the company, the employer retains the funds in the account.

FSA
Unlike an HRA, a flexible spending account is funded only by worker salary deferrals, and his contributions are not taxed as long as the funds are used to reimburse qualifying expenses. Some plan sponsors provide an FSA debit card that enables the eligible expenses to be automatically deducted from the account, so there's no paperwork to be filed or waiting for reimbursements. Each employer determines the annual contribution limit, subject to federal restrictions; in 2016 the maximum limit is $2,500. Note that the FSA is not portable; it is retained by the employer.

Until recent years, money in an FSA had to be used by the end of the year or it defaulted to the plan sponsor. In 2013, the Treasury Department made the following changes:

• A grace period was introduced to permit workers an additional two-and-a-half months to incur new expenses using prior-year FSA funds. At the end of the grace period, all unspent funds are forfeited.

• A carryover provision was introduced so that workers can roll over up to $500 of unused FSA dollars to the next year; any remaining amount above $500 is forfeited at year-end.

Note that plan sponsors may offer either the carryover feature or the grace period, but not both.

• FSAs also may provide a "run-out period" of 90 days beyond the end of the plan year, during which time workers may request reimbursement for expenses incurred during the previous plan year. After this time, all remaining money is forfeited.

FSAs that offer a carryover option and a run-out period will deduct run-out expenses from the $500 carryover amount, and any remaining carryover will still be available. For example, if the account holder carries over $500 dollars and submits $200 in run-out expenses, he or she will have $300 remaining in carryover funds for the ensuing plan year.

Note that the grace period and run-out period overlap, so even if a plan offers both, all expenses must be claimed before the period ends. At that point, any un-used funds are forfeited.

Spending Tips for Leftover FSA Dollars
Naturally, it's a good idea to use up all the money in an FSA rather than forfeiting it, but workers can't always plan when they'll get sick. However, employers can help by reminding them of some of the ways to use this available money by year end, such as:

• Purchasing eligible healthcare products such as first-aid kits, hot and cold therapy packs, breast pumps, and contact lenses
• Scheduling ancillary healthcare visits with dentists, ophthalmologists, chiropractors, and acupuncturists.
• Using account funds to pay for healthcare services for a spouse and qualified children.

Eligible Expenses for an HRA and Standard FSA
The following is a list of medical expenses that can be paid for with funds from an HRA and Standard FSA. Note that not all of the expenses listed below are eligible under all plans. Workers should refer to their Summary Plan Description (SPD) to find out which expenses are eligible under their plan. Other healthcare expenses also may qualify depending upon the situation.

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