Know Your Benefits: HRA vs HSA vs FSA

Between health insurance premiums, prescriptions, and deductibles, you can end up spending a lot of money on healthcare. And that doesn’t even include potential medical bills. Thankfully, options exist to help ease the burden of healthcare costs, including healthcare savings accounts. Three of the most common consumer driven healthcare accounts are HRAs, HSAs, and FSAs. What all three of these accounts have in common is that they are employer-sponsored accounts that provide savings opportunities to help offset the high cost of healthcare.  Though all three accounts help you cover healthcare expenses, they differ greatly in how they go about doing so.

If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs!

Health Savings Account (HSA)

A Health Savings Account (HSA) is both owned and funded by the employee, though the employer may also contribute. As of 2020, the contribution limit for individual coverage is $3,550 and $7,100 for families. Those over the age of 55 may make an additional $1,000 in catch-up contributions. HSA funds can be used to cover many types of medical expenses, including COBRA and long-term care premiums.

An important note on HSAs is that not everyone qualifies. Only those enrolled in a qualified High Deductible Health Plan (HDHP) qualify. But, if you do qualify, HSAs can be incredibly advantageous. Contributions are pre-tax, withdrawals for qualified medical expenses are both tax-free and penalty-free, and earnings and interest accrue tax-free. Furthermore, once you retire, you can withdraw HSA funds for non-medical expenses without incurring a penalty, though the funds will count as income and therefore affect your income taxes.

One of the biggest advantages of an HSA is that any unused funds from the previous year rollover to the next year. Upon reaching a certain amount, which varies from plan to plan, you can also begin investing your HSA dollars. Another advantage is that since the employee owns the account, the account stays with the employee, not the employer. 

Health Reimbursement Arrangement (HRA)

With a Health Reimbursement Arrangement (HRA) the employer both owns and funds the account. Since there are no government mandated contribution limits, the contribution amount is determined by the employer each year. Because the employer is the sole funder of the account, the employer receives the tax breaks from the account and the contributions do not have any impact on the income of the employee. 

When evaluating an HRA, you should make sure to review what is and isn’t covered. The definition of a qualified medical expense (what you can use the funds to cover) is determined by the employer and therefore varies from company to company. Whether or not the funds rollover from year to year will also vary from company to company, depending on the plan. 

Since an HRA account is owned by the employer, the account is not portable. The employer can set up a retirement HRA, though, and this account can continue to be used by the employee even after leaving the employer. Self-employed individuals normally cannot have an HRA, unless the self-employed individuals are eligible through their spouse’s employer. 

Flexible Spending Account (FSA) 

A Flexible Spending Account (FSA) is account option whose funds are eligible to cover many types of medical expenses. An FSA is set up and owned by the employer and funded by the employee. Contributions may or may not also be made by the employer. Contributions are made pre-tax, which can lower your tax liability for the year you make the contributions.

One of the biggest differences between an FSA and other health savings accounts is the rollover options of an FSA, which are far more limited, or even nonexistent. The exact rollover rules vary from plan to plan, but three of the most common options are having nothing rollover, allowing $500 to rollover, or allowing a grace period of 2.5 months to use the remaining funds. 

FSAs are owned by the employer, not the employee, which means that the accounts are not portable. One of the biggest advantages of these accounts, though, is that on day one of the plan year, you have full access to the entire amount of the year’s funds. This is in contrast to other accounts where funds accrue over the year. This can be advantageous if you have an expensive medical event occur early in the year. 

Get Personalized Advice

Picking the right account may feel overwhelming. HRAs, HSAs, and FSAs each come with their own advantages and disadvantages. Making matters even more complicated is that the details of each account often vary. For personalized guidance on how to take advantage of your current healthcare savings opportunities, consider speaking with a financial advisor from Good Life Financial Advisors of Mount Pleasant. We look forward to assisting you!

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