HSA, FSA or HRA: Which is the Best Fit?
Your options at open enrollment often look like alphabet soup: You've probably seen the terms HSA, FSA and HRA among your employer-sponsored benefits. While it's easy to gloss over these benefits to maintain your current plan, there are advantages to wading through the chaos.
In 2017, the average cost of healthcare per U.S. citizen was $11,000, and that number's expected to climb to $17,000 by 2027. However, tax-advantaged accounts can lower your personal healthcare costs.
HSAs, FSAs and HRAs are all options for saving money, before taxes, to put toward your present or future health expenses. These accounts come in three basic forms: health savings accounts (HSAs), flexible spending accounts (FSAs) or health reimbursement accounts (HRAs). Each account offers unique advantages to those who enroll, so the best fit for you depends on your individual needs.
Here's what to consider before enrolling in a savings, spending or reimbursement account.
HSAs Are Employee-Owned and Portable
Health savings accounts (HSAs) can only be paired with high-deductible health plans (HDHPs). They allow you to contribute and accumulate money from your paycheck, tax-free, of up to $3,600 per year for individuals and $7,200 per year for families in 2021. People 55 years and older, can put an additional $1,000 in an HSA as a catch-up contribution. Although there is a cap on how much you can contribute per year, you can roll the full amount over to accumulate for future medical expenses.
"Unlike flexible spending accounts, HSAs can be saved for future needs," says Michael Fuhr, a certified financial planner and founder of Evergreen Wealth Services. "HSAs are a great way to contribute and save pre-tax money for medical expenses."
You can put this money towards qualified medical expenses, including your deductible and out-of-pocket costs. The best value from an HSA is to accumulate enough tax-free money over the years to cover large costs down the road, like elective surgeries. Because it's an employee-owned fund, the money it holds belongs to you and can move with you (as long as you have an HDHP).
FSAs Must Be Used Within the Year
Flexible spending accounts (FSAs) also allow you to contribute pre-tax money from your paycheck for qualified medical expenses for you and eligible dependents. You can also use a dependent care FSA to set aside tax-free money for dependent care expenses (this includes child care or care for elderly parents who are qualifying dependents, for example). You can contribute up to $2,750 per year, but you must use the money within that time or lose the bulk of it.
"You have to use all of the funds in the account by the end of the calendar year or, at the latest, by the end of March the following year," says Serina Shyu, a CFP at Delta Community Retirement & Investment Services. "Otherwise, you lose the money that's accumulated in the account." Generally, you may be able to roll over up to $500 for the following year.
HRAs Reimburse Qualified Expenses
Health reimbursement accounts (HRAs) are employer-owned and funded accounts that cover qualified medical expenses for you and enrolled dependents. The nature of the reimbursement account requires employees to incur the expense first and then be reimbursed by their employer. Employers define the terms of reimbursement, such as qualifying expenses and how much can be rolled over to the following year.
"Like FSAs, the HRA is not portable from company to company," Shyu says. "The advantage employees have with this account is not having to come out of pocket on qualified medical expenses until they have exhausted the company's contributions first." HRAs can be paired with an HDHP to reduce expenses, but you are not required to have an HDHP to participate.
Any of these tax-advantaged accounts can save you money on healthcare expenses, depending on your specific circumstances. Pick the one that works best for you.