HRA, HSA, FSA: Understanding Health Spending and Saving Account

Health Savings and Spending Accounts

Health savings accounts (HSA), health reimbursement arrangements (HRA), and flexible spending accounts (FSA) are simple pre-tax ways for you to use for health care expenses today and save money for the future. But how do these accounts work, and how do you decide which type(s) might be right for you?

Health Reimbursement Arrangements (HRAs)

A Health Reimbursement Arrangement (HRA) is a medical spending account that is entirely funded by your employer.  An HRA reimburses you for eligible medical expenses, and your account can be used for anyone who is covered by your health plan. Your employer decides what types of expenses are considered eligible; typically, your HRA covers the same expenses that are covered by your health plan. 

Top benefits of an HRA

  • Your employer funds the account, tax-free.
  • You don’t put your own money into the HRA.
  • You can use your HRA money for anyone covered by your health plan.
  • You don’t pay taxes on HRA dollars and it’s not part of your income.

Health Savings Accounts (HSAs)

A Health Savings Account (HSA) is a tax-advantaged medical spending and saving account. HSAs work in conjunction with an HSA-eligible health plan that meets IRS guidelines.

HSAs have a unique a triple tax benefit that allows you to:

  • Contribute to the account tax free
  • Spend the dollars in the account tax free
  • Earn interest on the money in the HSA tax free

The money in your HSA rolls over year after year and is yours to keep, even if you retire or change jobs. You don’t pay any taxes on the money you put in or take out of your HSA, as long as you use it for medical expenses as defined by the IRS.

Top benefits of an HSA:

  • Money goes into your HSA before your state or federal taxes are deducted. This brings down your taxable income and helps you save on medical expenses.
  • There’s no “use it or lose it” rule: the money in your HSA belongs to you, even if you change jobs or retire.
  • The money in your HSA can immediately start earning interest tax-free.
  • You can use your HSA dollars for eligible health-related expenses , allowing you to purchase these services tax free.
  • Your HSA can help you even out your medical expense over time: Since you manage your funds, you can save HSA money when you’re healthy so it’s ready when you need it.

Flexible Spending Accounts (FSAs)

A Flexible Spending Account (FSA) is a personal expense account that works with your employer’s health plan. There are two types of FSA accounts an employer can choose to can offer; if both are options available, you may choose to participate in either one or both:

  • Medical FSA: A medical FSA allows you to pay for eligible health care expenses that are not covered by your health plan, such as deductibles, coinsurance, dental care, orthodontia, and vision care. With a medical FSA, you set aside a portion of your salary pretax and the total amount you choose to contribute is available to you on the first day of the plan year, even if you have not actually contributed that much yet.
  • Dependent Care FSA: A dependent care FSA allows you to pay for day care expenses for your children under age 13, or for older dependents who aren’t capable of the self-care required for you to be able to go to work. With a dependent care FSA, the money must be in your account before you can request reimbursement.

It’s important to note that, unlike the funds in an HSA account, the money in your FSA must be used up by the end of the year unless your employer allows FSA rollover or a grace period. Unused money in an FSA account is handled in one of three ways, based on your employer’s plan design:

  1. Unused funds are forfeited at the end of the plan year.
  2. Rollover: Up to $550 of the unused funds are rolled over to the next plan year, and the remaining balance is forfeited.
  3. Grace Period: You are given a grace period that allows expenses in the first few months of a new plan year to be paid with old plan year funds. When the grace period ends, the remaining balance is forfeited.

Top benefits of an FSA:

  • Pretax deduction from your pay lowers your tax burden and increases your spending power for health and dependent care expenses you’re already expecting.
  • Better ability to plan and budget for eligible expenses and smooth out anticipated expenses thanks to regular deductions spaced evenly across the year.

Which type of health spending or savings account is right for me?

There are eligibility requirements for each of these different health spending and saving account types. For example, you can only enroll in an HRA or FSA if it is offered by your employer, and you can only enroll in an HSA if it’s paired with an HSA-eligible health plan.

Interested in learning more about our HRAs, HSAs, and FSAs? Visit our Learning Center to explore our digital library of educational resources designed to help you make the most of your spending and savings options!