HSA, HRA, and FSA Explained

 

Acronyms and Confusion

There is so much complicated jargon used in the medical world that it can be hard to keep up, on top of the complex words there are also acronyms used to combine multiple of these words. It’s time to find out the true meaning of these medical mysteries.  For starters:

 

FSA=Flexible Spending Account

HRA=Healthcare Reimbursement Account

HSA=Healthcare Savings Account

 

Flexible Spending Account (FSA)

A FSA in healthcare is used mainly for paying medical expenses that are not included in your insurance policy.  This is an account that is primarily for reimbursement giving you the ability to place money aside from your paycheck prior to taxes and then this money is placed into a separate account by your employer, a structure resembling a checking account.

 

If you switch jobs or quit the funds cannot be transferred (the money is no longer yours) and the money does not accrue interest.  The main rule of FSA’s: money that is not used within the plan year will be lost. Some ways that your FSA account can be used include:


Reasons to put money into a healthcare FSA

The benefits of placing money into a healthcare FSA is that when you use that money to pay for qualified medical costs, the money is pre-tax, thus in the end you pay fewer taxes on your salary and are left with more spending money. Also, from the first day of your companies benefit plan year (Usually January 1st) you are able to spend the sum of money you chose to put away.

 

For example, theoretically you agreed to put $2400 into an FSA account over the year equating to $200/month. Once the new plan year started, that same day you could go to the doctor and promptly spend $2400 (if need be) you can do this regardless of the fact that $2400 has yet to be removed from your paycheck. You can view it as a way to loan yourself money and then throughout the year pay the loan back by having money from each paycheck go towards the $2400 you have spent prior.

 

Note this: If your deductible health plan is high and is qualified for a Health Savings Account (HSA), you may have a Limited-Purpose FSA (LFSA) but you are not permitted to have an FSA. Read beneath please for HSA information and more information on LFSAs.

 

Health Reimbursement Account (HRA)

A Health Reimbursement Arrangement (HRA) will let your employer put aside money to assist you in paying for out-of-pocket healthcare costs. An HRA is not something you put money into, and there are no taxes to be paid on HRA money received.  In is up to the employer which expenses are eligible for reimbursement.

 

If not all of the money in your HRA is used during the year, certain HRAs are designed to allow you to carry over the leftover HRA money to the next year. These are things you need to verify with your employer.

 

As opposed to the restraint of not being able to have both an FSA account and an HSA account, you can have an HRA and an FSA. That being said, if a medical expense is covered by the FSA and the HRA, the money in the HRA account is required to be used prior to any money from the FSA.

 

Health Savings Account (HSA)

A Health Savings Account (HSA) is the new comer of medical savings accounts. In January 2004 is when it was first available. If you are enrolled in an eligible high deductible health plan (your employer knows this), you can put away pre-tax money in an HSA for healthcare expenses, identical to an FSA.

 

It is only when you have a high deductible health plan (HDHP) that you can open a health saving account through your bank.  A HSA accrues interest like a common savings account, and the money can be used in other ways to such as investments in stocks and bonds.

 

Differing from the HRAs which the employer owns, HSAs are owned by the employee and this gives the most advantages to the individual. The employer as well as the employee can add to the HSA account, no minimum contribution is required, contributions by an employer cannot be taxed to the employee, also employee contributions can be made on a pre-tax root.  The maximum amount allowed to be put in an account yearly, determined by the IRS, is $3250 for an individual, or $6250 for a family.

 

If you participate in a qualified HDHP (check with your HR department) you are able to donate to an HSA using your paycheck or with tax-deductible payments. Money taken out of your account is tax-free as long as it’s used for eligible healthcare expenses. Individuals younger than 65 who use their accounts for non-medical expenses will pay income tax and a 10% penalty on the amount taken out.

 

Another part that differs is the money you put aside in a FSA, the money you place in a HSA accrues interest and is portable from job to job. The money unused also carries over from year to year. Money put into an HSA account is never lost. 

 

Reasons to put money into an HSA

Paying for healthcare expenses with an HSA account allows for you to use pre-tax dollars, in the end you’ll end up having more money for spending and less taxes.  Before using the money must be taken out of your paycheck and places in your HSA account. 

 

The money deposited into an HSA also grows interest free and you don’t pay interest on it as long as the money is put towards medical bills.

 

A Limited-Purpose Flexible Spending Account (LFSA) is one thing your employer may give you the option to use with your HSA.

 

A Limited-Purpose Flexible Spending Account (LFSA) is offered by many employers and is a reimbursement account that is an offer for those with a qualified high deductible health plan (HDHP) in which one can receive a Health Savings Account (HSA). Typically you can put away money from your paycheck for out-of-pocket costs for preventive care prior to taxes being taken out. You must talk with your LFSA administrator or Human Resource to find out what expenditures are qualified under your LFSA.

 

The Limited-Purpose FSA could be compared to a “traditional” Healthcare FSA, the difference is it is for people who are registered in an HSA-eligible High Deductible Health Plan (HDHP). The way it functions is the same except the Limited-Purpose FSA typically allows you to pay for out-of-pocket preventive care, dental, and vision expenses only.