Medical insurance helps to reduce the cost of medical care but there are sometimes accounts added to those plans (or offered separately) to assist with the remaining costs. HRAs, FSAs, and HSAs are all accounts that are paired with your health insurance to help give you some additional help with your health expenses. You and/or your company contribute to the account with pre-tax money and when you spend it, it is also tax free. That’s going to help quite a bit if you have an upcoming procedure or if you or your spouse are having a baby. Pre-tax allows you to save a lot of money on expensive procedures, so these accounts are highly encouraged. So what is the difference?
HRA (Health Reimbursement Arrangement)
More commonly known as a Health Reimbursement Account, an HRA is an employer-funded, tax-advantaged employer health benefit plan. Your employer contributed 100% of the funds in this account and you, as the employee, cannot contribute to this account. When you visit the doctor, the HRA can be used to pay for things like your visit, tests run, or any other health related expenses. Your employer is essentially reimbursing you for taking care of yourself.
The big benefit of this type of plan is that your employer is contributing an extra amount towards your health by funding the account.If you have an HRA and haven’t used all of the funds, make sure that you aren’t putting off care because of cost since unused funds are given back to your employer at the end of the year. Some plans may have a certain amount roll over, but most plans are emptied at the end of the year. This is considered to be a “use it or lose it” account.
FSA (Flexible Spending Account)
An FSA is essentially the opposite in terms of funding. You are able to contribute to an FSA with pre-tax dollars from your paycheck. Again, when spent this money isn’t taxed when used to pay for qualified expenses. Some FSA accounts offer debit cards that you can swipe to use the funds. Other require you to submit requests for reimbursements. However, all plans require proof of the expenditure, so always keep your receipt. There are two main types of FSAs: Health FSA and Dependent Care FSA.
Health Care FSAs allow you to spend money on health care for yourself and your family. So when you or your dependents visit the doctor, you can use money from this account to pay for the copay/coinsurance. This also goes for dental visits or the eye doctor. It’s all health, not just medical. Most FSA administrators will provide you with a list of eligible expenses. At my brokerage, we work with a company called TAG and you can find an example of such lists here.
Dependent Care FSAs are a little different. This type of account is useful if you and your spouse work but have a child at home. Another scenario is if you have a parent that has aged and is now a dependent of yours but you work outside of the home. The key words are outside the home. If you work from home regularly, you do not qualify for this plan. If you are eligible, dependent care FSAs can help pay for things like before/after school care, tuition for pre-k or nursery, summer day camps (not overnight), nannies, or in-home adult care.
There is an annual maximum that you are allowed to contribute to these plans and it changes every year. If you google “FSA max 2018” it comes up at the top.
HSA (Health Savings Account)
An HSA is almost like a combination of an HRA and an FSA. It’s an individual account, like a bank account so it cannot be accessed by your employer or your broker. Your employer is able to take contributions from your paycheck (pre-tax of course) and send them into your account, but they cannot take anything from it. Your employer can also contribute to this account on your behalf.
The money in this account can be used for qualified medical expenses. You are only able to have an HSA if you are enrolled in an HSA eligible medical plan. These plans are considered to be “High Deductible Health Plans” aka HDHP. In exchange for a high deductible (your out of pocket before your coinsurance kicks in), you are able to contribute to an HSA account. Since an HSA account is in your name, it sticks with you forever and the money in these accounts can usually be invested. If you don’t have any medical costs during the year, the balance continue with you and if you don’t use it, it’s like an extra retirement account. Eventually you will use it, but it’s more pre-tax money that you can use to save and dedicate to your health care.
If you have an HSA, you cannot have a health care FSA. You can have a dependent care FSA or an LFSA (limited FSA).
In Summary
All of these plans have tax-free benefits to them and help to make your health care less of a financial burden. To get the most out of your employer set-up account, make sure you know which one you have and how it works.
HRA – Your employer contributes and you benefit. The money stays with the company if you leave.
FSA – You contribute to this account. There are two main types: Health FSA or Dependent Care FSA. The first allows you to pay for out of pocket health costs with pre-tax money. The second allows you to pay for any dependent care if you and your spouse work outside of the home.
HSA – This account can be funded by you or the employer. It’s essentially a tax-benefited bank account that allows you to continue contributing and can be used a savings account if you don’t spend it first.
