The HSA, HRA and FSA – which is right for you?

The alphabet soup of health account options can be overwhelming and deciding which one is right for you can be a challenge. Health Savings Accounts (HSA’s), Health Reimbursement Accounts (HRA’s) and Flexible Spending Accounts (FSA’s) all offer tax advantages to employees that allow them to save for future health care costs, but in different ways.

Health Savings Accounts

A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit. By using untaxed dollars in an HSA to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall health care costs. Many employers offer HSA’s when the insurance plans they offer employees are high deductible plans, and they commonly contribute to the HSA to help their employees save money for future health care costs. Even if you don’t have the choice of a HSA through an employer, you can still open one on your own if you have a high deductible health plan and are not enrolled in Medicare or can be claimed as dependent on another person’s taxes. Some banks and other financial institutions offer opportunities to open an HSA.

The biggest benefit of contributing to an HSA is the tax advantage it offers. The money in the HSA will grow tax-free and if it is used to pay for qualifying health care-related expenses it is not taxed when withdrawn. HSA funds roll over year to year if you do not spend them. An HSA may earn interest or other earnings, which are not taxable. Qualifying expenses include things like medical-related services as well as equipment and supplies, health insurance premiums and prescriptions, but can vary. Some HSA’s provide you with a debit card to pay for expenses out of pocket, and then get reimbursed.

It is important to keep in mind that if you withdraw money from an HSA before you turn 65 years old, and do not use it for qualifying medical expenses, it will be taxed, and you will pay a penalty. After age 65, you will pay only the tax, and no penalty if you withdraw money from the account for anything other than qualifying medical expenses. Read More