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TAX TALK: Comparison of Tax-Advantaged Funding of Health Care Costs

Posted by Hal Zemel, CPA, J.D., LL.M. on Jun 20, 2016 7:00:00 AM
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Health care costs are expensive and continue to climb. Here are a few tax-advantaged ways to pay for these expenses. Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs) all provide opportunities for tax-advantaged funding of health care expenses. The plan attributes are summarized below:

 

HSA

FSA

HRA

Owner of Account

The employee/individual owns the account.

The employer owns the account.

The employer owns the account.

Annual Contribution Limit for 2016

$3,350 Self-only coverage/$6,750 Family Coverage ($1,000 additional if age 55 or older)

$2,550

No limit

Funding made by

Employee (directly or payroll deferral) or Employer or both

Employer or Employee payroll deferral

Must be made by Employer

Required accompanying plans

Must be covered by a qualified high-deductible health plan (HDHP)

None

If you have an HSA, your FSA is limited to funding certain permitted medical expenses (HSA compatible plan).

Generally, must be integrated with a qualified group medical plan.

If you have an HSA, your HRA is limited to funding certain permitted medical expenses (HSA compatible plan).

Tax savings

Employee payroll deferral – excluded from taxable income, FICA and Medicare tax

Direct employee contribution – deductible above the line.

Employee payroll deferral – excluded from taxable income, FICA and Medicare tax

Tax free employee benefit

Qualified Expenses

Medical, dental, vision, prescription and some over-the-counter drugs. COBRA, retiree medical insurance premiums, Medicare premiums, LTC premiums and expenses.

Medical, dental, vision, prescription and some over-the-counter drugs.

Medical, dental, vision, prescription and some over-the-counter drugs. COBRA, health insurance premiums, Medicare premiums, and LTC premiums.

Earnings on Investments

Earnings grow tax free.

No earnings paid.

Generally no earnings paid.

Rollover of Unused Funds

Funds rollover year to year.

Up to a $500 rollover at employer’s discretion or the employer may give you  a 2 ½ month grace period to incur expenses for the previous year’s contributions

Rollover permitted at employer’s discretion.

Please contact me at hzemel@berdonllp.com or your Berdon advisor with any questions, or to discuss other ways to save taxes on health care expenses.

Hal Zemel, a Tax Principal at Berdon LLP, New York Accountants, has more than 20 years in public accounting and advises businesses in the real estate, service, and manufacturing sectors.

Topics: TAX TALK

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