FSA=Flexible Spending Account
HRA=Healthcare Reimbursement Account
HSA=Healthcare Savings Account
WHAT IS A HEALTHCARE FLEXIBLE SPENDING ACCOUNT (FSA)?
A healthcare FSA is an account that can be used to pay for medical expenses not covered by your insurance. It is a reimbursement account offered by employers that allows you to set money aside from your paycheck before taxes and it is put into an account by your employer, similar to a checking account.
The funds are not portable which means the money can not be taken with you if you should switch jobs or quit (the money is no longer yours) and the money does not accrue interest. FSA's come with one important rule: if you don't use the money with in the plan year, you will lose it. The money in your FSA account can be spent on health care expenses that are not covered by your health insurance, such as:
- Copay and deductibles (for doctor office visits)
- Eyeglasses, contact lenses and LASIK surgery
- Chiropractic treatment and alternative therapies
- Dental work and orthodontia
- Some over-the-counter medicines such as antacids and cold medicines
Why would I want to put money into a healthcare FSA?
The advantage of putting money into an healthcare FSA is that when you use the money to pay for qualified medical expenses, you are spending pre-tax dollars, so you end up paying fewer taxes on your salary and end up having more to spend. Plus, from the first day of your company’s benefit plan year (most often 1/1) you can spend the entire amount of money you have elected to put away.
For instance, let’s say you signed up to put $1200 into an FSA account over the year or $100/month. When the new plan year started, you could go to the doctor that very same day and spend $1200 (if you needed too) even though the entire $1200 had not been taken out of your paycheck yet. It in a sense is a way to “loan” yourself money and then during the year pay the loan back by having money from each paycheck going towards the $1200 you already spent.
Please note: If you have a high deductible health plan that is eligible for a Health Savings Account (HSA), you may have what is known as a Limited-Purpose FSA (LFSA) but you are not allowed to have an FSA. Please see below for HSA information and more about LFSAs.
WHAT IS AN HEALTH REIMBURSEMENT ACCOUNT (HRA)
A Health Reimbursement Arrangement (HRA) allows your employer to set aside money to help you pay for out-of-pocket healthcare expenses. You don't make any contributions to an HRA, and you don't pay taxes on the HRA money you receive.
Each employer decides what type of expenses will be eligible for reimbursement. This may include deductibles, co-pays, prescription medications, dental services, and health-related expenses that may not be covered under the health care plan. Some HRAs even cover over-the-counter medications.
If you don't use all of the money in your HRA during the year, some HRAs are designed to allow you to carry over the remaining HRA dollars to the next year. Again, you should check with your employer to see how unused HRA dollars are treated in your plan.
Unlike the limitation with an FSA account and a HSA account, you can have an HRA and an FSA at the same time. However, if a particular medical expense is covered by both the FSA and the HRA, the money in the HRA account must be used first before any money can be used from the FSA.
WHAT IS AN HEALTH SAVINGS ACCOUNT (HSA)?
A Health Savings Account (HSA) is the newest form of medical savings accounts. It was first made available in January 2004. If you are enrolled in a qualifying high deductible health plan (check with your employer to find out), you can set aside pre-tax money in an HSA for healthcare costs (as defined in IRS publication 502), the same as an FSA.
A health savings account is a tax free investment account you open through a bank and is allowed only when you are enrolled in a high deductible health plan (HDHP). {See blog 2/23/10 Types of Medical Insurance Plans for HDHP information.) A HSA earns interest like a regular savings account, and the money can also be invested in stocks, bonds, mutual funds, and certificates of deposit.
Unlike the HRAs which are owned by the employer, HSAs are owned by the individual employee and offer the most advantages to the individual. Both employer and employee can make contributions to the HSA account, there is no minimum contribution required, contributions by an employer are not taxable to the employee, and employee contributions may be made on a pre-tax basis. There is a maximum combined amount (total money put in by employer + employee) allowed to be put into an HSA account each year, as determined by the IRS. For 2010, the amount is $3050 for an individual, or $6150 for a family
If you participate in a qualified HDHP (check with your HR department to see if your plan is a qualified HDHP.) you can contribute to an HSA from your paycheck or via tax-deductible payments. When you take money out of your account, it's tax-free as long as you use it for eligible healthcare expenses. Individuals under age 65 who use their accounts for non-medical expenses must pay income tax and a 10% penalty on the amount withdrawn.
Also, unlike the money you set aside in a FSA, the money you put into a HSA receives interest and is portable (the money is yours to keep if you change jobs or quit). Plus, if you do not use all of the money in your account during the year, it carries over to the next year. You never lose the money you elect to put into an HSA account. An HSA account always goes with you, so you can continue to use the money to pay for healthcare expenses in the future—even during retirement—on a pre-tax basis.
Why would I want to put money into a HSA?
If you use your HSA to pay for healthcare expenses throughout the year, the advantage is that you're spending pre-tax dollars, so you end up paying fewer taxes on your salary and having more money to spend. (However, unlike the FSA account, the money is NOT able to be used until it is actually taken from your paycheck and deposited into your HSA account.)
In addition to the tax savings advantage for putting money into an HSA the money deposited also grows interest free and you never pay interest on it as long as you use the money for medical related expenses
A wonderful resource for all you ever wanted to know and more about HSA accounts can be found at: http://www.treasury.gov/offices/public-affairs/hsa/
Finally, your employer may also offer a Limited-Purpose Flexible Spending Account (LFSA) to use along with your HSA.
A Limited-Purpose Flexible Spending Account (LFSA) is a reimbursement account available through many employers that offer a qualified high deductible health plan (HDHP) where the participants are eligible for a Health Savings Account (HSA). It usually allows you to set aside money from your paycheck for out-of-pocket costs for preventive care, dental, and vision before taxes are taken out. Because LFSA plans vary by employer, it is important that you talk with your LFSA administrator or your Human Resource department to find out what expenses are eligible under your LFSA.
The Limited-Purpose FSA is similar to a "traditional" Healthcare FSA, but it is for people who are enrolled in an HSA-eligible High Deductible Health Plan (HDHP). It works the same way, except the Limited-Purpose FSA usually allows you to pay for eligible out-of-pocket preventive care, dental, and vision expenses only.
Next blog: More alphabet soup, EOB, what is it and how to read one.
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