Making Sense of FSA, HRA, and HSA

 

The lingo used in the medical business is constantly changing and usually hard to understand let alone stay up to date with, besides the complicated words there is also the issue of the excessive use of acronyms. It has been long enough, and it is now time to find out the true meaning of this all. To start with:

 

FSA=Flexible Spending Account

HRA=Healthcare Reimbursement Account

HSA=Healthcare Savings Account

 

Flexible Spending Account (FSA)

Those medical bills that are not covered within your insurance are the primary way to put your FSA to use.  Your FSA account is mainly for reimbursement, it allows you the opportunity to place money aside from your paycheck before taxes are taken out and then this money is put into a different account by your employer, this is very similar to a checking account.

 

However, changing jobs or quitting does not allow the money to be transferred (the money will be lost) and the money does will not earn interest.  The key idea to take away from FSA’s is that money not dispersed during the plan year is lost. Here are a few examples for using your FSA account:

  • Copay and deductibles (for doctor office visits)
  • LASIK surgery, contact lenses and eyeglasses
  • Chiropractic treatment and alternative therapy
  • Dental and orthodontic work
  • Select over-the-counter medicines such as antacids and cold medicines



Reasons to put money into a healthcare FSA

The main positive of creating a healthcare FSA and putting money into it is that when you use the money in that account to take care of eligible medical expenses, the money has yet to have had taxes taken out of it, this way you end up paying less taxes on your salary and in turn have a larger amount of spending money. On top of this, beginning the first day of your companies benefit plan year (Typically January 1st) you are given the opportunity to spend the amount of money that you put away.

 

To look at this with numbers let’s imagine you decided to put $3600 into an FSA for a given year, which is the same as $300/month. At the beginning of that plan you could venture to the doctor and immediately spend $3600 (if necessary) you can spend this even though $3600 has to still be taken out of your paycheck. This can be seen as a system to loan yourself money and gradually pay the loan back by having money taken out of each paycheck.

 

Make note of this: If you have a high deductible health plan and it is fit for a Health Savings Account (HSA), there is a chance you have a Limited-Purpose FSA (LFSA) but you cannot have an FSA. Read below in order to acquire HSA information and information on LFSAs.

 

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 do not put money into an HRA, and no taxes are paid on any HRA money.  The employer decides which expenses can be reimbursed.

 

In the case that you do not use all of your HRA money within a year, some HRAs are made to allow you to carry over the money that wasn’t spent to the HRA the next year. All of these details can be figured out with your employer.

 

In comparison to the restraint of having to choose either an FSA account or an HSA account, you are able to have an HRA as well as an FSA. Knowing that, if a medical cost is taken care of by the FSA and the HRA, the money in the HRA account is to be used before any money from the FSA.

 

Health Savings Account (HSA)

A Health Savings Account (HSA) is the newest of all the medical savings accounts. HSA’s first became available in January 2004. If you are part of a qualified high deductible health plan (ask your employer), you can set aside money before taxes are taken out in an HSA for healthcare expenses, exactly the same as an FSA.

 

The only time you can start a health savings account within your bank is when you have a high deductible health plan (HDHP).  A HSA earns interest similar to a savings account, and there is a plethora of ways to use the money for example investments in stocks and bonds.

 

In contrast to the HRAs that an employer owns, the employee has ownership of the HSA and this gives the most advantages to the individual. The employer alomgside the employee can put more into the HSA account, there is no minimum contribution is required, the employee cannot receive taxes for contributions made by the employer, also employee contributions are able to be made before taxes.  The maximum amount that can be put into an account yearly, as determined by the IRS, is $3250 for an individual, or $6250 for a family.

 

If you are involved in a qualified HDHP (check with your HR department) you can donate to an HSA vy using your paycheck or with payments that are tax-deductible. The money that is removed from your account is tax-free just as long as it’s spent on qualified healthcare expenses. Individuals under the age of 65 who use their accounts for expenses that are not medical will be forced to pay income tax and a 10% penalty on the amount withdrawn.

 

Another varying factor is the money put aside in FSA, the money you put into a HSA accrues interest and is transferrable from job to job. The money unused also carries over from year to year. Money put into an HSA account is never lost. 

 

Why Investing in an HSA is Smart

Using an HSA account to pay for your healthcare costs allows for you to use dollars that have yet to have taxes taken out of them, in the end you’ll end up with larger amounts of money for spending and less taxes.  Prior to using the money, it is required to be taken out of your paycheck and put in your HSA account. 

The money put into an HSA also accrues interest free and you don’t pay interest on it if you put the money towards medical expenses.

 

A Limited-Purpose Flexible Spending Account (LFSA) is something your employer might give you the option to use alongside your HSA.

 

A Limited-Purpose Flexible Spending Account (LFSA) is provided by many employers and it is a reimbursement account that is available to those with an eligible high deductible health plan (HDHP) in which you can obtain a Health Savings Account (HSA). Usually you are able to set aside money from your paycheck for out-of-pocket costs for preventive care before taxes are removed. This is a conversation to have with your LFSA administrator or Human Resource Department to discover what costs are suitable with your LFSA.

 

The Limited-Purpose FSA is typically looked at in comparison to a “traditional” Healthcare FSA, the difference is that it is intended for those who are listed in an HSA-eligible High Deductible Health Plan (HDHP). The actions are the same except the Limited-Purpose FSA usually gives you the option to pay for out-of-pocket preventive care, dental, and vision expenses alone.