HRAs, HSAs and FSAs are three different types of accounts that can be used to pay for certain medical expenses while saving on taxes. So what is the difference between the three and what are the benefits for each type of account? Let’s just start with what they stand for:

HRA= Health Reimbursement Account

HSA = Health Savings Account

FSA = Flexible Spending Account

Still with us? Good. Let’s break down what the three of these accounts do and how they may be useful to you and/or your business.

HRA

A Health Reimbursement Account is employer funded only. This means that your employers owns and contributes to this account. The money in this account can pay for qualified expenses such as medical, pharmacy, dental and vision costs, as determined by your employer.

You don’t pay taxes on money that comes from an HRA. Also, your employer decides whether or not to let unused funds roll over from one year to the next.

There are two ways an HRA can work: either the HRA pays first, or you pay first. Your employer can decide to give you access to the HRA account to pay for medical expenses first. So for example, they can give you $2000, and you have access to that $2000 immediately. But once you spend that $2000, you then need to pay for your medical expenses using your own money. If it is the reverse, your employer can decide that you have to spend X amount of money out of pocket first, before you have access to the HRA account.

An HRA is a creative way for employers to save money on group health insurance. They can pick a less expensive plan for their employees, and to make up for that, they would offer the HRA funds, hoping that not all employees will actually use all the funds available.

HSA

A Health Savings Account is an employee funded account. An HSA can be set up only if you have a high deductible health insurance plan (HDHP) as defined by the government. The IRS defines a high deductible health plan as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $6,650 for an individual or $13,300 for a family. (This limit doesn’t apply to out-of-network services.)

You can decide how much money you want to contribute to your HSA account. There is no minimum contribution, however there is a maximum contribution of $3,450 for an individual and $6,900 for a family for 2018.

So what is the advantage of an HSA? One thing is that if you don’t use all the funds in your account for the plan year, it can roll over to the next year; you never lose that money. The money you put in your HSA account is tax deductible and funds in your account grow tax-free. You don’t pay taxes on withdrawals when paying for qualified medical expenses. Further, you may be eligible to invest your HSA similar to a 401K and you can use your HSA to help add to your retirement funds because after you turn 65 you can withdraw funds from your account for any reason without penalty.

HSA disadvantages: Although you may pay lower premiums each month, it may be difficult for some people to come up with cash to meet a high deductible. Unexpected healthcare costs may exceed what you planned for and you may not have enough money in your HSA account to cover those expenses. Another downside is that some HSAs charge monthly maintenance fees.

FSA

An FSA, or Flexible Spending Account, is an employee funded account (although an employer can contribute). An FSA can be used with any type of health plan and is often used in conjunction with participation in an HSA.

FSAs are limited to $2,650 per year per employer. If you’re married, your spouse can put up to $2,650 in an FSA with their employer too. You can decide how much you want to contribute to your FSA, and the amount you contribute to the account is deducted from your salary before income taxes. This reduces your taxable income, saving your money on taxes.

Unless you have ongoing medical expenses, an FSA may not be the best option for you. FSAs are “use it or lose it” meaning that at the end of the year, the amount in your account will expire. However, employers do have two options to prevent employees from losing any funds remaining at the end of the year

Option 1) Carry over funds or apply a grace period. This option lets you carry over up to $500 to the next year.

Option 2) Offers a grace period for 2.5 months to spend any leftover funds.

Employers can offer either option, but not both.

So unless you have continued medical expenses, it may not make sense to set up an FSA. However if you do have a ton of medical expenses, it is worth putting pre-tax dollars aside to pay for these costs.

In conclusion:

HRAs, HSAs and FSAs all offer ways to pay for health care expenses while saving on taxes. There are some big differences between how the accounts work, and it is important to pay close to the details so you pick which option is right for you. Maybe none are right for you, but it is good to know that there are creative solutions out there to help with the ever rising cost of healthcare. Talk to your employer to see if any of these options are offered at your job. Or if you are an employer, talk to us about how we can help get you and your company save money on your health insurance costs.