With healthcare comes great responsibility; from knowing your deductible, co-pays, co-insurance amounts to a multitude of other variables—who has the time to fully understand all of the other options that employers offer? Today, I’m going to describe to you the fundamental differences between HSA’s (Health Savings Accounts), FSA’s (Flexible Spending Accounts), and HRA’s (Health Reimbursement Accounts). While their titles may all sound similar—each of the three have distinct features that are extremely important in understanding how they work, so that you don’t assume something that could end up costing you money in the long run.
First on the list are Health Savings Accounts. These are accounts that are created for individuals who are covered under high-deductible health plans (HDHPs) to save for medical expenses that HDHPs do not cover. Contributions into a HSA are made either by you as the employee, or by your employer and are limited to a maximum amount each year. These contributions can be used throughout the year towards most medical care—including dental, vision, and over the counter drugs. The main advantage to these plans is that they are funded with pre-tax dollars, you earn interest on those pre-tax dollars, and the money can be rolled over into subsequent years. So, to sum things up—the money is placed into the account (tax free), and you use it when you need to without the worry of losing it at the end of the year!
Next on the list are Flexible Spending Accounts, or FSA’s. These accounts are very similar to Health Savings Accounts in that they are funded with pre-tax dollars, you can use these towards qualified medical expenses, and the account is employee funded. However, the one major pitfall to a Flexible Spending Account is that you have a ‘use it, or lose it’ provision. Meaning, that you HAVE to use the money in the account within a calendar year or it is gone. Another difference between HSA’s and FSA’s is that with an FSA, your money does not earn interest—at all. The money remains in the account until you use it. So, it is extremely important that when sitting down and deciding how much you plan to contribute—take your time and calculate how much you use on average per year, because if not, your hard-earned money is gone come renewal time.
Last, but certainly not least are HRA’s or Health Reimbursement Accounts. An HRA is an account offered to employees or retirees, where you can use the money to pay for deductibles and other medical expenses. Like an HSA, leftover dollars generally can be used from year-to-year, as long as you continue to be a member of the plan. This is funded by your employer, so the money contributed doesn’t count as income which saves you money once tax time rolls around.
As you can see, these are extremely similar, but the minor differences add up and could make or break your view as to how effective these can be for you. So, when choosing contribution amounts; be aware what account you’re contributing towards, as well as if those funds can be rolled into the next year. As always, the more knowledge you have about a subject, the better you are equipped to make informed decisions.