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Tax-Free Bill of Health

Health-care accounts with tax benefits

This story appears in the January 2005 issue of Entrepreneur. Subscribe »

Tax-advantaged health-care spending accounts areproliferating--and that means more opportunities to save on taxesas well as more ways to help pay for health costs. Here's alook at how each one stacks up.

  • Health SavingsAccounts (HSAs): With an HSA, an employer or employee--orboth--can make tax-free contributions to the account if theemployee is covered by a qualified high-deductible health plan.Employer contributions are tax deductible, excludable from grossincome, and are not subject to employment taxes. Employees can usetax-free withdrawals to pay for most medical expenses not coveredby the high-deductible plan. It's possible for employees tomake after-tax contributions and take a deduction on their taxreturns, or pretax contributions if the employer has a Section 125plan. In the latter case, employees reduce their salary by theamount of the contribution, and the employer makes the contributionon their behalf. HSA amounts are fully vested and can be retainedwhen an employee leaves employment.
  • Health ReimbursementArrangements (HRAs): HRAs are more beneficial for employersthan are HSAs. They can be used to pay any qualified medicalexpenses, including health-care premiums. HRAs are typically notfunded--they are bookkeeping accounts that are credited withamounts by the employer. No employer assets are actually set aside.Reimbursements to employees come from employer assets--it's atthat point that the employer pays for the expense and is entitledto a deduction.

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