Planning

Health Savings Plans: Making Sense of HSAs, HRAs, and FSAs

Did you eyes glaze over a little when you read that headline?  Well, sign up for a health care plan these days, individual or employer-sponsored, and that is the kind of alphabet soup you might have to wade through. More and more companies are looking to cut costs by offering high-deductible health plans (HDHP), also known in the industry as consumer-driven health plans (CDHP).  These plans feature lower premiums in exchange for a higher deductible—the part of care you pay for out of pocket before insurance kicks in.  They are often paired with some sort of savings account that allows you or your employer to set aside money to cover your expenses.

These savings plans can make a lot of sense from a tax-savings standpoint.  Funds can be set aside pre-tax or, if they are contributed later, deducted from taxes, so in effect any time you use the money to pay for your medical costs it is like you are getting a discount equivalent to your tax level.  That’s why it could be a smart move to set one up even if your employer doesn’t offer it as a benefit.

So which plan makes sense for you (if you have a choice)?  Let’s decode some of the TLA (three-letter acronyms):

HSA: Health Savings Account

Health savings accounts (HSAs) are a popular employee benefit: over 40% of companies offered an HSA in 2011, with 12% more expected to do so in 2012.

How it works: HSAs allow you to set a portion of each paycheck aside into an account that accrues interest like an IRA.  Employers or other people can also contribute to the account.

Who can have an HSA: Only people covered by a high-deductible health insurance plan, defined as a deductible of $1,200 for a family or $2,400 for a family.  If your employer doesn’t offer an HSA you can open one up on your own, so these are ideal for the self-employed.

What it covers: Qualifying medical expenses such as deductibles and co-payments.

Carry-over and portability: You own the funds that go into an HSA, and anything that you don’t use carries over from year to year.  If you leave your job you can take the funds with you.

HRA: Health reimbursement account

While an HSA is like an IRA in that it’s an investment owned by an individual, a health reimbursement account (HRA) is a benefit offered by an employer that ends when the employment does.

How it works: Only employers may offer HRAs, and only they may put money into it.  The money is not considered income, which means that it is not subject to income or payroll taxes.

Who can have an HRA: An HRA can be used with any kind of health plan.  You cannot open up an HRA on your own.

What it covers: An HRA is the only type of plan that can be used to pay insurance premiums as well as medical expenses.

Carry-over and portability: The funds in your HRA belong to your employer, and when you leave your job any funds in the account stay with them.  Your funds might roll over year-to-year or they might not; that is up the employer.

FSA: Flexible savings account

Flexible savings accounts are like HRAs in that they are employee benefits, and employees can only use the funds as long as they are employed.

How it works: Unlike an HRA where employers fund the account, with an FSA the employee funds the account with a portion of each paycheck.  The money is set aside pre-tax so you get tax savings, but it does not accrue interest.

Who can have an FSA: An FSA can be used with any kind of health plan, but you cannot open up an FSA on your own.

What it covers: An FSA may only be used on qualified medical or dental expenses (not premiums).  As of 2011 you cannot use FSA funds on OTC medicines without a doctor’s prescription.  In 2013, there will be a cap of $2,500 on the total funds in an FSA.

Carry-over and portability: An FSA is a “use it or lose it” plan; any unused funds in the account at the plan’s year-end are forfeited back to your company.  You also lose access to the funds at the end of your employment.

You may even come across a couple of other options, such as an HIA (health incentive account) or an RRA (retirement reimbursement account).  Whatever you encounter, just look at how the plan gets funded, what it covers, and whether you get to roll over or keep the funds.  Track deposits and expenditures carefully, keep receipts for tax purposes, and enjoy your savings!

Tomer Shoval is the CEO and Co-Founder of Simplee, a free online personal health care expense management tool. Connect with him on twitterfacebook or email.