The fall tends to be open enrollment time and you are likely in the middle of it now, or will be soon, so I thought this month would be a great time to review some of the crazy acronyms you see as your eyes glaze over the 50+ page benefits guide from your employer.
I can’t say here which benefits are the “best fit” for you. Reviewing benefit options is part of what I do with my clients each year. Lives change. Jobs change. Families change. Benefit packages change. For many, the confusion stays the same.
The Biggest Offenders
FSA – Flexible Spending Account
HSA – Health Savings Account
HRA – Health Reimbursement Account
These are very similar acronyms, but these are NOT the same thing.
I’ll get the HRA out of the way, as it is not as common as the other two. This is an EMPLOYER owned and funded account an employee can use for medical expenses. It generally stays with your employer if you leave, unless they offer a retirement continuation.
FSAs are offered with a standard HMO or PPO (I’m going to assume you know these two old friends).
I wrote a newsletter on HSAs a few months ago and the triple tax benefit they offer. They are only offered in conjunction with a HDHP. Yes, here’s yet another acronym for you!
HDHP – High Deductible Health Plan
Similarities
- Both are employee funded, although some employers will make contributions as an added benefit.
- Both are funded with pre-tax dollars. Always a PLUS.
- Both are used to pay for qualified medical expenses.
Differences
- Pre-tax contribution limits are higher for the HSA than the FSA. The HSA also offers a catch up contribution for those over age 55.
- The up front, out of pocket medical expenses are higher for Team HSA/HDHP.
- FSA contributions are forfeited if not used in the same calendar year. There is some flexibility for carry over and grace periods, but forfeiture is the general rule. Use it or lose it.
- HSA contributions are yours forever. No “use it or lose it” here. AND they can be invested. AND they grow tax deferred/tax free. As long as used for medical expenses, it’s tax free growth and distributions forever.
- Your FSA is not portable. If you leave your company, the funds in the account do not go with you. Assets in your HSA are yours forever.
While the HSA offers more flexibility and tax advantaged benefits than the FLEXIBLE Spending Account (oh the irony), it does not mean it is the right choice for you, even if both are offered by your employer. Every situation is unique.
So those are the big acronym offenders for your health care options, but a distinction I explain in this next section is REALLY important.
STD – Short Term Disability
LTD – Long Term Disability
Granted, you may actually know these two acronyms already, but are you aware of the distinction when it comes to whether this benefit it taxable or not?
It all comes down to how the premium is paid. I’ve worked with many clients who were not aware of the key difference because most benefit guides don’t do a great job of explaining it.
It makes a big difference in how much money you actually take home, should you become disabled.
- If premiums are paid by you with after-tax dollars, then the disability benefit will not be taxable.
- If premiums are paid by your employer, then the disability benefit will be taxable.
Most LTD benefits offer coverage for “60% of salary”. If that 60% is not taxed, you are in OK shape.
If that 60% is taxed, your monthly benefit will be significantly less than your regular pay.
One final scenario offering a TAX FREE disability benefit:
- Your employer pays the premium BUT adds the amount paid on your behalf to your gross earnings and you pay tax on the “phantom income” with each paycheck.
- Because you pay the taxes on the premium, any disability benefit you receive will be tax free.
If your employer offers a tax free disability benefit option, this is usually the option you want. Otherwise, you may want to consider a private policy to supplement your employer plan.
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