Savings Accounts Will Save You During Medical Contingencies

 

Our health needs and circumstances can be unpredictable at times. No matter how we keep ourselves in tip-top shape, there may be medical contingencies allow the way.

This is why we need a medical insurance. It takes care of unexpected medical bills that may leave us caught off guard. But what happens when an ailment or a procedure is not covered under your policy? What do you do?

There are some services that may not be covered by most health insurance – dental works can easily cost you thousands of dollars. A LASIK surgical procedure may not be completely covered by your insurance. Items and services like these, because they are not part of the health insurance coverage, may add up to a large amount of out-of-pocket expense.

There are several ways to cover these medical bills. You may choose to exhaust your savings or negotiate for a payment agreement plan. In some instances when the medical cost is really high, you ought to take on a medical loan.

However, you are not limited to just these three options. There is also another method to help you cover these medical expenses. That is through establishing “reserve” or “savings accounts” save you during medical contingencies. It can only be accessed to pay for health-related expenses.

Kinds of Saving Accounts for Medical Contingencies

These are actually three common kinds of health reserve accounts. Each type has its own process. There is one goal, to pay for bills that your insurance policy does not cover.

These are the 1.) basic flexible spending accounts, 2.) health reimbursement accounts, and 3.) medical savings accounts.

Let’s take a quick look at each of these types.

Flexible Spending Accounts

This first kind of health care savings accounts is established by your employer or medical insurance provider. You can withdraw funds from this reserve as needed to cover health care costs.

Through a flexible spending account, you can be reimbursed for specified medical expenses as they are incurred.

Each pay period, a certain amount of money will be deducted from your paycheck. Any money that goes to this account is not subject to any income or Social Security taxes. This is because of the salary reduction agreement of the Internal Revenue Code, “Section 125”.

Section 125 allows employed individuals to convert their taxable salary (or a part thereof) into non-taxable benefits. Example of a which is the flexible spending account. This is the reason this account is known as a “125 plan.”

The amount of money intended for the said reserve account is taken out for the employee paycheck first before taxes are deducted.

There is no standard limit as to the amount an individual can contribute. If you foresee a big medical expense in the future you may contribute over and above the payroll deduction set per pay period. In some cases, however,  employers may choose to put a cap on these accounts, so you have to also know about this detail.

In a flexible spending account, a regular deduction is set for a given plan year. Once this is established, you cannot contribute lesser than the set amount. You also cannot opt to drop from the program.

If you wish to change the deduction, you may have to wait until the end of the said plan year. At the end of each year plan, any unused money is forfeited.

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Health Reimbursement Accounts

In general, a health reimbursement account a reserve fund set aside by your employer. Through this plan, you can be reimbursed for qualified medical expenses.

This kind of insurance plan is otherwise known as “health reimbursement agreements” or “personal care accounts”. The HRA is an approved health benefit plan by the IRS. The employer funds it and the out-of-pocket medical expenses of an employee will be reimbursed through the HRA.

How this works is that you will be reimbursed with every dollar of your medical bill until you have exhausted all the funds in this account. This is why it is coined as “first dollar” coverage.

Unlike a flexible spending account where the money left unused after the plan year is forfeited, the remaining funds in an HRA can be rolled over to the next year. And, while the employer retains control of the account, you may still access these funds even if you choose to leave the company or retire for your work.

 

Medical Savings Accounts

A medical savings account is the last type of health reserve account. Just like the two other types, you can get a reimbursement for specified medical expenses. What sets it apart is that it can earn a tax-deferred interest

With a medical savings account, it is either you or your employer who makes the contributions, but never both. Nevertheless, you have full control over the funds in this reserve account.

Just like in an HRA, any unused money may rollover each year.  Additionally, you can also take them with you if you move to a new company if it still qualifies. The funds in the account can be used on a pre-tax basis to pay for COBRA premiums, long-term care insurance premiums, and any premiums paid while you are unemployed.

The money in a medical savings account can earn an interest which is not taxed. But if you withdraw and use these funds for non-medical expenses, they will be treated as taxable income. Meaning, the money will be subject to normal income tax and a 15% penalty. This penalty will only be waived once you have reached the eligibility age for Medicare, or if you become disabled. However, the regular income tax still applies.

 

These three different kinds of savings accounts have different guidelines. All of which have the same purpose, to provide you with money to cover the cost of unexpected medical bills. Make sure you learn about these plans when you get your insurance quotes. Information about these accounts will help you plan better for you future.

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