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

 Navigating the differences between Health Savings Accounts (HSAs), Health Reimbursement Accounts (HRAs), and Flexible Spending Accounts (FSAs) can be challenging, but each offers unique tax advantages for managing healthcare costs. HSAs are individually owned and must be paired with high-deductible health plans, allowing tax-free growth and rollover of unused funds. HRAs are employer-funded and reimburse employees for qualifying medical expenses, while FSAs let employees set aside pre-tax money for healthcare expenses but may have a “use it or lose it” policy.

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in the HSA will grow tax-free and if it is used to pay for qualifying health care-related expenses it is not taxed when withdrawn.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.

Health Reimbursement Accounts

An HRA is a workplace-based form of insurance that the employer pays for. Unlike the HSA, where you contribute to the fund, the HRA is fully funded by your employer. You cannot contribute added dollars to an HRA. Employees that take part in these types of plans are reimbursed tax-free when they incur expenses for medical, dental or vision. The employer decides which healthcare costs qualify for reimbursement and decides the rules associated with the program. Because of the tax advantage associated with an HRA, the money that you are reimbursed for expenses is not considered taxable income, so it is a great way to help offset healthcare costs that would otherwise be paid for directly from your wallet.

Although some companies allow you to rollover unused funds to the following year, this varies by employer. Some plans have a use it or lose it policy, and any unused funds at the end of a calendar year are lost. Like an HSA, an HRA often provides you with a debit card to pay for expenses.

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