Understanding and Using HSAs, FSAs, and HRAs

Imagine this: You've just started a new job. Along with the excitement of a fresh start comes the avalanche of paperwork, including forms for benefits like health insurance. Among these forms, you might encounter terms like HSA, FSA, or HRA. Or maybe you saw the HSA designation on a Marketplace kynect plan. If you're like many people, you might find yourself wondering, "What on earth are these things? Will they benefit me?" 

 

Let’s start with HSA, which stands for Health Savings Account. An HSA is exactly what it sounds like – a savings account that allows you to set aside money for qualified medical expenses. Contributions to your HSA are tax-deductible, which means that you don’t pay taxes on the money that you put into an HSA account. Plus, the money in your HSA grows tax-free, and when you use it for qualified medical expenses, withdrawals are also tax-free. 

Not surprisingly, there are requirements associated with HSAs.  In order to open and contribute to an HSA, your health insurance plan must be what is known as a high-deductible health plan. HDHPs typically have lower premiums, but higher out-of-pocket costs compared to non-HDHP types of health insurance plans.  HSA programs are available with some Marketplace plans. You may also have access to an HSA program through your employer if your employer offers the option of high deductible health insurance through your job.

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If you have an employer-sponsored health plan with an HSA, you, your employer, or both can contribute to your HSA. However, the total contributions from both you and your employer must stay within the annual limit determined by the IRS. For 2024, for an individual, that amount is $4,150. So, the most that can be put aside in an individual HSA for 2024 is $4,150. For family coverage, the limit is $8,300. If you are over age 55, you can contribute an additional $1,000. 

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What are the benefits of having an HSA? First and foremost, the tax advantages make it a powerful tool for managing your healthcare costs. If you normally pay 20% of your income in taxes, an HSA would give you 20% more to spend on anything that the IRS has approved as a healthcare expenditure. As an example of these savings, if you earned $100 and would typically pay 20%, or $20, total for federal, state, and county taxes, it would leave you with only $80 left to spend. If you put the $100 into an HSA, you get to use the whole $100! Another benefit is that if you have put this money into a special account, it will be there when you need it for medical expenses. 

 

Additionally, unlike some other types of medical spending accounts, the money in your HSA doesn't expire at the end of the year. Any remaining funds stay with the account, or “roll over,” allowing you to build up a nest egg for future medical needs. Plus, often the funds in these accounts are invested in such a way that they earn interest-so any dollars that you put aside, but don’t need to use, can increase in value over time. 

 

Flexible Spending Accounts, or FSAs, also offer tax-free money to use for health care expenses. However, there are important differences in how they work compared to HSAs. Like an HSA, both the employer and the employee can contribute pre-tax money to an FSA to pay for qualified medical expenses. However, unlike an HSA, the employer, not the employee, owns the FSA account. FSAs are not available with Marketplace/kynect plans. Again, the benefit of an FSA is that the money you contribute is deducted from your paycheck before taxes are withheld. This means you lower your taxable income and can use this money, and the savings, to pay for health care costs.

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A key distinction between HSAs and FSAs is the 'use it or lose it' rule. Typically, any funds remaining in your FSA at the end of the plan year may be forfeited, although some plans offer a grace period or allow you to carry over a portion of your unused funds into the next plan year. Except in special circumstances, if you leave your job, you will lose any funds remaining in your FSA account. Lastly, FSA funds cannot be invested and do not earn interest. 

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Finally let’s look at HRAs – or Health Reimbursement Accounts. They can also be called Health Reimbursement Arrangements. Like FSAs, HRAs only exist as an employer-sponsored and owned benefit created to help employees cover medical expenses. HRA contributions are tax-deductible for the employer and tax free for the employee, reducing taxable income. Additionally, unused funds in an HRA can often roll over from year to year. Unlike HSAs and FSAs, the employee cannot contribute to the HRA. Another important distinction is that HRAs can be used to pay for insurance premiums. 

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So, how does an HRA work? Employers contribute funds to the HRA on behalf of employees. Employees can then use these funds to cover eligible medical expenses, such as doctor visits, prescription medications, and medical equipment. To use the money in their HRAs, employees pay for eligible expenses out of pocket and then submit a claim for reimbursement. Some HRAs may also provide a debit card for convenient payment at the time that medical services are provided or qualified items are purchased. Similarly to FSAs, the money in an HRA cannot be invested and remains with the employer if the employee leaves the company.  

 

We’ve mentioned qualified medical expenses. These are defined by the IRS and include a wide range of medical, dental, and vision expenses for you, your spouse, and your dependents, such as copays, co-insurance, prescription medications, and eyeglasses or contact lenses. In addition, HSA, FSA, and HRA funds can be used to pay for many over-the-counter items such as pain relievers, bandages, pregnancy tests, menstrual products, and more. It’s important to keep in mind that not all expenses are eligible, so be sure to check with your HSA, FSA, or HRA administrator or refer to the IRS guidelines. Note that for HRAs, the employer decides which health care expenses are eligible for reimbursement. 

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HSAs, FSAs, and HRAs offer valuable options for managing healthcare expenses. Each one has its unique features and may be available under different circumstances. HSAs provide a triple advantage, allowing you to save for medical expenses tax-free, invest funds for potential growth, and you retain control of the funds. FSAs are also a convenient way to set aside pre-tax dollars for eligible healthcare expenses incurred within a plan year, but you are at risk of losing any unspent funds at the end of the plan year or if you leave your job. HRAs are funded solely by employers and can cover a variety of healthcare expenses, including premiums, as determined by the employer.​​

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Whether you're considering opening an HSA, participating in an FSA, or utilizing an HRA through your employer, remember to explore your options carefully, consult with financial advisors if needed, and make informed decisions that align with your healthcare needs and financial goals. 

 

For a quick look at HSAs, FSAs, and HRAs, click here to download our helpful comparison guide.