FSA, HSA & HRA: What's the difference?

The video above covers the basics of a Flexible Spending Account (FSA), a Health Savings Account (HSA) and a Health Reimbursement Account (HRA). Now let Maxine, Phil, Sally and Mateo (fictional characters) show you how different life events and financial goals can affect a person’s choice of a health care account.

FSA: A mom budgets for her family’s health care

Maxine, 34, is a working mom who lives in Jacksonville, Florida. With her two kids out of the house in the mornings, Maxine has time for a run before work. The regular exercise makes her feel strong, but a nagging pain in her hip needs professional care. In addition, Maxine’s toddler often picks up viruses at daycare. This leads to fevers and ear infections. Her husband, George, has allergies and needs shots to ease his symptoms.

Given the family's many trips to the doctor, Maxine chooses a low-deductible health plan. That means she can open an FSA to reimburse her for qualified health expenses she incurs during the year. One great advantage of an FSA is that the funds are available to you on day one. So while Maxine makes monthly pre-tax contributions of $200, the entire $2,400 annual amount is available for her to use on the first day she’s enrolled. And because the account is funded with pre-tax money, she’ll save about 30 cents on each dollar on all eligible health care bills. The one drawback, however, is that you often must use all the funds in your FSA by the end of the  plan year or forfeit what’s left.

Maxine will use her FSA to cover costs for treating her hip, George’s allergies and their kids’ doctor visits. Toward the end of the year, if she still has  funds left, she can stock up on health care supplies she knows her family will use, such as bandages, over-the-counter pain meds or a heating pad. Juggling work and fitness isn’t easy, but Maxine is happy her FSA helps her save money.

HSA: A young man plans for the future

Phil, 26, is single and living in Raleigh, North Carolina. He loves his job as a programmer for a gaming start-up. But his real passion is hosting dinner parties for friends. His homemade dishes are chock full of fresh veggies, helping Phil stay healthy. In fact, the only time he visits his doctor is for preventive care for things like an annual check-up and a flu shot. Phil chooses a low-cost, high-deductible health plan (HDHP) because he thinks he'll have very few health expenses over the coming year. This means he’s eligible for either an HSA or an FSA.

He picks an HSA because the money he contributes to his HSA rolls over from one year to the next. His employer may even contribute to the account. And he understands the triple tax savings of an HSA:

• Funds are tax-free going into the account
• Money grows tax-free with interest
  
• Investment earnings and withdrawals for qualified medical expenses are also tax-free

Phil signs up to contribute $40 per paycheck, or $1,040 for the year. As he gets older, or if he starts a family, the cash adding up in his HSA will come in handy for medical expenses. He could also use the money to pay COBRA premiums if he loses his job.

And there’s another benefit. HSA plans often let you invest your funds, which earn profits tax-free. With an eye on the future, Phil knows that an HSA is the right choice for him.

Find out more about HSAs and eligible health expenses.

FSA and HSA: A savvy woman maximizes her savings

Sally, 49, is single and runs one of the top engineering firms in Philadelphia. She wears glasses with a strong prescription. And she recently learned she needs some dental work. Otherwise, her health is excellent, and she rarely visits the doctor.

Sally expects she won't meet her health plan deductible this year. But she’s certain she'll use vision and dental services. So, she signs up for vision and dental plans, as well as an HDHP. Her HDHP makes her eligible for an HSA, but Sally can also take advantage of a type of FSA known as a Limited Purpose FSA (LPFSA.) These accounts work like a regular FSA, but she can only use the funds for her vision and dental expenses. To maximize her savings, Sally plans to put pre-tax dollars to both an LPFSA and an HSA. Her HSA money will grow over time and be available to use on medical expenses she incurs in later years. Even after she retires.

Find out how seeing an eye doctor can be good for your overall health.

HRA: A new employee gets an unexpected bonus

A few months ago, Mateo, 55, started work for a restaurant chain based in Houston. Mateo has a bad back, so he has regular chiropractic visits. When looking at his health benefits, he got a nice surprise. His package includes a Health Reimbursement Arrangement (HRA) funded with $3,000.

He can use HRA funds for eligible out-of-pocket medical costs. Mateo figures his funds will cover his yearly chiropractor costs. And he’ll have some left over to pay part of his deductible. He’s grateful for this. He plans to put the money he saves on out-of-pocket medical fees into his retirement savings.

Unlike an FSA or HSA, only your employer may put money in your HRA account. Mateo’s funds are available right away, and his company allows unused dollars to carry over from year to year. But if he leaves his job or changes his health plan, his HRA can’t come with him. Any amount left in the account goes back to his employer. That’s fine by him. He hopes to stick with this company for the long term.

Key takeaways about FSAs, HSAs and HRAs

• FSAs and HSAs both offer tax benefits and have annual contribution limits.
• You must have a HDHP to qualify for an HSA.
• Funds in an HSA roll over year to year. There is no “use it or lose it” rule.
• Many HSAs offer investment options.
• FSAs are "use it or lose it." That means you’ll lose any funds you don’t spend by the end of your plan year unless the plan has a grace period or carryover feature.
• You can use your FSA to cover eligible health care costs at the start of the year. The entire amount is available on day one.
• HSA holders cannot spend more than the funds deposited in their HSA. But they can save receipts for qualified medical expenses and file for reimbursement later, after their balance has grown.
• You can't contribute to an HSA and a traditional FSA in the same year. But HSA holders can also use an LPFSA for dental and vision expenses, and a Dependent Care FSA for childcare costs.
• You can contribute funds to an HSA and FSA. Only your employer can contribute to your HRA.
• Anyone can contribute to your HSA: you, your employer or another person.
• With HRAs, employers may limit which health expenses are eligible and the amount you’re able to roll over from year to year.

It's important to do your research to figure out which account is best for you and your family. To learn more, contact your plan’s benefits manager.