HRA, HSA, & FSA- which one is best?

Prior to me needing to learn the differences between these, I knew very little about what each of these types of accounts did, how the differed, and how I could use them.  In my younger years, had I of been aware of these, I could have utilized these to save a boat load of money.

So lets cover today the basic of a Health Reimbursement Arrangement (HRA), and Health Savings Account (HSA), and a Flexible Spending Account (FSA).  After comparing some of the similarities and differences, we will look a few real world scenarios on how the difference types of account benefit difference people depending on their specific situation.

Saving Money for Medical Expenses

At their core, all three of these accounts are design as a way to pay for medical expenses.  The funds that go into these accounts are all tax deductible, so you will not pay state, federal, or FICA taxes as an employer or a member when ever you make a contribution to one of these accounts.

That is really where the similarities end.  While the main goal of these accounts is the same, the method each one goes about it is different.

Health Reimbursement Arrangement(HRA)

An HSA is a type of account where you use pre-tax money to pay for medical expenses.  Any money that you invest into your HSA account grows tax-free and is spend tax free.  Additionally, HSA funds never expire.

To open an HSA, you will need either a qualified health plan or a high-deductible health plan.  Accounts can be opened at various financial establishment, both online and brick and mortar.  Once the account is opened, anyone can contribute at any time, even an employer, up to the contribution limit of $4,300 for individuals and $8,550 for family coverage. 

Money that is put into the HSA account is not taxed, the money will generate tax free interest, and the money can be spent tax free as well.

Unlike an HRA, and HSA account belongs to you.  This allows you to take it with you regardless of job and use the account for long-term savings.  The funds never expire and transfer between jobs and health plans, even if you retire.

HSAs are compatible with both HRAs and certain types of FRAs

Health Savings Account (HSA)

An HRA is an employer owned and employer funded account designed to help member pay for eligible healthcare expenses.  HRA are highly customizable and a great way for organizations to offset rising cost.  Common eligible expenses include deductibles, copays, and coinsurance.

Only the employer can contribute to these accounts, doing so at the beginning of the plan year only; the members themselves cannot invest.  As an employer, any money that you use to fund HRAs is tax deductible.  The funds are also used tax free by members.

Because these accounts are owned by the employer, the account does not move with you if you change jobs.  Additionally, funds expire if not used.

Different types of HRAs require different types of health plans, and the contribution limits vary by HRA type.  All HRAs are compatible with FSAs and HSAs.

Flexible Spending Account (FSA)

An FSA also lets members put aside pre-tax money to pay for certain medical expenses.  Unlike the HSA, the FSA is owned by the employer.

For companies that offer them, FSAs are available to people with a traditional health plan.  The money used to fund the accounts is determined during annual enrollment (or qualifying life event) and then contributed at regular intervals.  Both employees and employers can contribute and all money contributed is tax deductible.  Contribution limits are $3,200 per year.

One of the features about an FSA is that a year’s worth of funds are available to use on day one.  Any funds left over at the end of the year and given back to the employer.

FSAs are compatible with both and HRA and certain other types of FSAs

Real world examples

HSA- Long Term Savings

Aidan is 26, single, healthy, and just left his parent’s health insurance for his own Marketplace plan.  Because Aidan is healthy and only visits the doctor once a year for her annual checkup, he chose a low-cost, high deductible health plan (HDHP) because he figured he would not have very many health expenses in the coming year.  Because of this plan, Aidan is eligible for either a HSA or a FSA.

Aidan chooses a HSA knowing that he will not want to lose his money if he changes jobs or lose the money if he does not spend it all this coming year.  Aidan signs up to contribute $50 every two weeks when he is paid, or $1,350 per year.  This money will build interest over the years until he needs it.  Whether the need is for COBRA premiums 10 years from now, or to pay for over-the-counter medication for his a future child, that money will be there as it will not expire.

HRA- Free Money

Lauren started working for a small bakery down the street from where she lived.  When Lauren looked over her health benefits, she was excited to see the package included a HRA funded with $2,500.

Lauren knew she could use that $2,500 for any eligible out of pocket medical cost, like her deductibles or other cost shares with her health care plan.  Grateful for this, Lauren was able to divert her own funds to savings instead of needing to spend it on healthcare.

FSA- Budgeting a family's health care

Jackson is 35, married with two pre-school aged kids.  Jackson suffers from allergies, his wife has a nagging pain in her hip that needs professional care, and the kids often pick up viruses at daycare that lead to fevers and ear infections.

Given the family’s many trips to the doctor, Jackson chose a low-deductible health plan, which allowed him to open an FSA to reimburse her qualified medical expenses he and his family incur over the year.

While Jackson is making contributions of $200 a month, the entire $2,400 is available to use on the first day he is enrolled.

Jackson will be able to use these funds to cover doctor visits for the kids, specialist visits for his wife’s hip, and over the counter allergy medication for himself.  Towards the end of the year, any of the money left in the account can be used towards health care supplies such as bandages, pain medication, or heating pads so to not forfeit the funds.

Takeaways

HRAs, FSAs, and HSAs are all great tools for saving money on the cost of healthcare.  It is important to do your research so that you understand which is right for you and your family.

If you have questions on how to leverage these plans, sign up for them, or general questions on their usefulness, give us a call and we can talk.

Aaron

2 thoughts on “HRA vs HSA vs FSA- which one is right for you?”

  1. Pingback: Group Plan vs ICHRA - Cook Insurance Brokerage

  2. Pingback: How to save on health insurance - Cook Insurance Brokerage

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