How much money do you have saved for health care and medical expenses? If the answer is “not enough” then it’s time to start thinking about the various accounts that are available to help you set money aside to pay for your out-of-pocket expenses if you or someone in your family should get sick or sustain an injury.
At Addition Financial, we believe in helping our members with every aspect of their financial wellbeing and that includes healthcare. Opening a medical savings account is one of the best ways to prepare for the unpredictable. With that in mind, here’s what you need to know about HSA, FSA and HRA accounts, including the key differences between them.
What is a Health Savings Account?
Let’s start with the plan that most people think of when they think of a medical savings account, the Health Savings Account or HSA. An HSA is an account that allows people to set aside pre-tax dollars to pay for covered medical expenses. You may get an HSA through your employer in some cases or you may open one on your own.
Who Is Eligible to Open an HSA?
By law, Health Savings Accounts are available only to people who have a high-deductible health plan, which for 2022 is defined as a plan with a minimum deductible of $1,400 for an individual or $2,800 for a family. If you purchase health insurance on the Health Insurance Marketplace, it’s easy to identify plans that qualify because they will be labeled as “HSA eligible.”
How Much Can You Contribute to an HSA?
Personal contributions to an HSA are limited and the limits may change each year. The limits for 2022 are as follows:
- $3,650 per individual
- $7,300 per family
These numbers represent a slight increase over the limits for 2021. For HSA owners over the age of 55, the annual contributions are $1,000 higher than the limits listed here.
The rules governing HSA contributions say that employers may make matching contributions on behalf of employees. If you make contributions via your employer, the money will be removed from your pay on a pre-tax basis.
What are Qualified Medical Expenses for an HSA?
The funds in your health savings account may be used only for qualified medical expenses. These expenses include the following:
- Deductibles
- Copays
- Prescriptions (birth control is an example)
- Medical equipment (a blood pressure cuff is an example)
- Vaccines
- Dental care
- Over the counter medications
The final item, OTC medications, is a recent addition to the list thanks to the CARES Act. You should know that insurance premiums are not a qualified medical expense. We should note here that if you still have money in your HSA at the end of the year, the available funds will roll over to the next year, and if you have an employer plan and you leave your job, you may take the funds in your HSA with you.
Tax Benefits of an HSA
There are some tax benefits to opening an HSA. If you have an employer-sponsored account, the contributions may be taken from your paycheck and added to your account before you pay taxes. That means that your gross salary will be lower on your W-2 and you will have a lower tax basis when you file your taxes.
If you open an HSA on your own, you will make contributions with post-tax dollars but you’ll be eligible for the HSA deduction when you file your taxes.
One of the biggest tax benefits of an HSA is that if you withdraw funds to pay for a qualified medical expense, you will not be required to pay taxes on the money when you withdraw it.
What is a Flexible Spending Account?
A Flexible Spending Account, or FSA, is a type of employer-sponsored savings account that allows employees to save money to pay for qualified health expenses.
Who is Eligible to Open an FSA?
Unlike HSAs, Flexible Spending Accounts must be sponsored by an employer. You may not open an FSA on your own; however, if you have an employer-sponsored FSA where the funds are available for limited purposes, such as vision or dental care, you may open a separate HSA to use for other expenses.
There is no deductible limitation for an FHA, which means that even if you have a low deductible health plan, you can still have an FHA to help offset your qualified medical expenses. We should note here that there is no family plan option for an FSA. You may contribute up to the maximum for the year to cover your qualified expenses. If your spouse is employed and their employer offers an FSA, they may do the same.
How Much Can You Contribute to an FSA?
The 2022 contribution limit for Flexible Spending Accounts is $2,850, which represents a $100 increase over the 2021 limit. Like an HSA, contributions to an FSA are made on a pre-tax basis. As we noted above, your spouse may contribute the individual maximum to their own employer-sponsored FSA if they have one but there is no family limit.
You should know that unlike an HSA, the money you put into your FSA will not roll over in most cases. Employers have the option of offering a two and a half month grace period to spend funds or to allow employees to carry a maximum of $550 into the next year, but they are not required to offer either option and they may not offer both.
What Are Qualified Medical Expenses for an FSA?
The definition for qualified medical expenses for an FSA are nearly identical to those for an HSA. They include the following:
- Deductible
- Copayments
- Prescription drugs
- Medical equipment such as crutches
- Dental and vision expenses
- Over-the-counter medications (with a prescription)
Because FSA funds don’t roll over, many people find ways to spend their FSA funds at the end of the year. For example, you might stock up on necessary medical equipment and OTC medications.
Tax Benefits of an FSA
The tax benefits of an FSA are like those for an HSA with a few exceptions. The biggest benefit is that your FSA contributions are taken from your paycheck by your employer on a pre-tax basis. That means that the salary or total pay you use to file your taxes will be reduced by the amount of your contributions. Because all contributions are made on a pre-tax basis, there is no tax deduction for FSA contributions.
Like HSA withdrawals, FSA withdrawals are tax-free provided that you use the funds for qualified medical expenses. If you do not, then you may be required to report the funds on your taxes.
What is a Health Reimbursement Arrangement?
A Health Reimbursement Arrangement, or HRA, is an employer-sponsored group health plan that is set up to reimburse employees for qualified medical expenses up to a fixed annual limit.
There are two basic types of HRAs. The first is the HRA pays first option, where you can withdraw funds directly from your HRA to pay for qualified medical expenses as they are incurred. The second is the you pay first option, where you pay for your medical expenses out of pocket and the HRA reimburses you for them.
Who is Eligible to Open an HRA?
An HRA may only be opened by an employer on behalf of employees. The employer may offer HRA funds to any employee who is under the age of 65.
An HRA is not a health savings account that you may open on your own. If your employer offers an HRA, then you may participate.
How Much Can You Contribute to an HRA?
HRA contributions may only be made by employers. Unlike HSAs or FSAs, there is no annual contribution limit. Your employer may contribute as much money as they like on behalf of employees.
In certain circumstances, you may be able to open an individual HSA to save money for expenses that are not covered by the HRA.
What Are Qualified Medical Expenses for an HRA?
One of the biggest differences between HSAs and FSAs and an HRA is that, with an HRA, your employer will determine which expenses are qualified for the use of HRA funds.
For example, as we noted above, you may not use HSA or FSA funds to pay for health insurance premiums. That rule may not apply to an HRA if your employer decides to include premiums as a qualified expense. Your employer should provide you with a description that includes a list of qualified expenses.
Tax Benefits of an HRA
Because HRAs are always employer sponsored, there is no up-front tax benefit for employees. This means that your employer’s HRA contributions will not be deducted from your paycheck, nor will they reduce your taxable income.
The real tax benefit for the individual comes when they withdraw HRA funds to pay for qualified expenses. The funds are not taxed if you use them for qualified expenses, which means they are a type of income that you do not pay taxes on.
Setting money aside to pay for health expenses that aren’t covered by your medical insurance can be beneficial to you and your family. If your employer offers an HSA, FSA or HRA, then you may be able to use those funds to defray your expenses.
Are you ready to set aside some money to pay for your health care expenses? Addition Financial is here to help! Click here to learn about our Health Savings Account.
Posted on Feb 20, 2022
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