Maximizing Healthcare Savings with FSA, HSA, and HRA
There are various types of health reimbursement options out there, which, of course, is great for our bank accounts, but I think many people find themselves lost in a sea of acronyms! No sweat, that’s why I’m here! Let’s go through those lists of letters and look at three types of accounts that can help you save money on healthcare expenses: the FSA, HSA, and HRA.
Do you need an FSA, HSA, or HRA?
As you navigate the world of employee benefits, you may come across the acronyms FSA, HSA, and HRA. At first glance, they may seem like alphabet soup (mmm, mmm good), but they are actually three different types of savings accounts that offer tax advantages to help you save money on different types of healthcare expenses.
These accounts can help you pay for those bigger medical and dental expenses (think your kid’s orthodontics or the LASIK surgery you’ve been wanting) but some accounts allow you to also pay for over the counter medications, Band-Aids, and more!
So, what are the differences between these accounts, and which one is right for you? Let's break it down.
What is an FSA?
Let's start with the FSA, which stands for Flexible Spending Account. This little gem allows you to set aside pre-tax dollars to pay for qualified healthcare expenses. Think of it like a secret stash of cash, but that can only be used for things like medical bills, dental work, and vision exams.
Who can open an FSA?
Typically, FSAs are offered by employers as part of their benefits package. So, if you're lucky enough to have a job with sweet benefits, you may be eligible for an FSA.
What are the tax advantages of an FSA?
The money you contribute to an FSA is taken out of your paycheck before taxes are withheld. That means you can lower your taxable income and save money on taxes. Plus, any money you withdraw from the account for qualified expenses is tax-free. It's like getting a discount on your healthcare expenses without even trying.
What are the contribution limits for an FSA in 2024?
The IRS recently increased the amount you can contribute annually to your FSA. In 2024, the maximum contribution limit for an individual’s FSA is $3,200.
Be careful, though - an FSA is a “use it or lose it” account. If you leave the company or don’t use it by December, it’s gone for good. Some companies will allow one of two options*:
1) A grace period to use it up to 2.5 months into the following year
2) A carryover of up to $640 - anything additional in the account as of December goes back to the employer
*note that an employer can NOT offer BOTH options and doesn’t have to offer either option
Around 40% of people who use an FSA end up forfeiting part of their account contributions, so if you opt to go this route, don’t forget about that money!
Note that you also do not have to contribute the maximum amount. As with any money decision, do what makes you feel comfortable! But every little bit helps when it comes to paying for those major - or even minor - medical expenses.
Who could benefit from an FSA?
If you're someone who has predictable healthcare expenses, an FSA might be the way to go. Need a root canal? Bam! Use your FSA. Did you break your glasses? No problem, FSA to the rescue.
What is an HSA?
Next up is the HSA, or Health Savings Account. This bad boy is a triple tax-advantaged account (or, as I like to say, a unicorn 🦄 account) that allows you to save money for qualified healthcare expenses. The catch? You need to have a high-deductible health plan (HDHP) to be eligible.
Who can open an HSA?
Anyone with an HDHP can open an HSA. You can think of it like a secret club that only the cool kids with high-deductible health plans can join (very Gretchen Weiners, you can’t sit with us!).
What are the tax advantages of an HSA?
Like an FSA, the money you contribute to an HSA is tax-deductible. Plus, any money you withdraw from the account for qualified expenses is tax-free. But here's the real kicker: the money in an HSA can be invested. Shut the front door. That's right, it's an actual investment account. You can invest this money, and you won’t pay taxes on the growth of the money. Then, you will receive triple tax benefits! It’s the only account that exists like this!
Since you need to be on a high deductible healthcare plan to be eligible for this, it won't be a great fit for everyone. However, if you are eligible - make sure you're not forgetting to invest that money! The cool thing is that you can reimburse yourself in the future for medical expenses from prior years if you need to dip into the account. So think - you invest that money and allow it to grow, grow, grow - then reimburse yourself in the future for medical bills! In addition, once you reach 65, if you've never needed to pay for any medical expenses, it just turns into another retirement account! Win-win!
PLUS, your funds never expire! Yep. You heard that right. They roll over from year to year, so stack that cash and make it grow (by investing it, of course).
What are the contribution limits for an HSA in 2024?
For 2024, the maximum contribution limit for an HSA is $4,150 for individuals and $8,300 for families. If you're over 55, you can make an additional catch-up contribution of $1,000. Don’t forget that the great thing about this account is that it is owned by YOU. So if you leave the company or don’t use it within the year, it doesn’t matter—it all rolls over.
Who could benefit from an HSA?
If you're someone who is cool with an HDHP, wants to save for healthcare expenses in retirement, or wants to get in on that tax-free growth - it’s for you! 😎 Note: If you’re on an HDHP, but your employer doesn’t offer an HSA, you can just go open one yourself through Fidelity, Vanguard, Charles Schwab, etc. Just grab your tax form at the year's end to ensure you get the tax deduction for those contributions.
*For the HSA, not only are contributions tax-free, withdrawals for qualified medical expenses are tax-free AND interest earned on the account is tax-free.
What is an HRA?
Ah, the HRA, or known by its government name, Health Reimbursement Arrangement, is the unsung hero of healthcare savings accounts. And if your employer offers it, you might just feel like you've hit the jackpot. 🎰
This little guy is an employer-funded account that reimburses employees for qualified healthcare expenses. It's like your boss is saying, "Hey, we know healthcare expenses can be a pain in the @$$. Let us help you out.”
Who can open an HRA?
This one is highly exclusive. Only employers can offer an HRA, you can’t open this yourself. But don't worry, if your employer is feeling extra generous, you might be in luck.
What are the advantages of an HRA?
HRAs are hard to come by, but they offer these key advantages:
🏦 Employer-funded
Unlike an FSA or HSA, an HRA is entirely funded by the employer. This means that employees can enjoy the benefits of the HRA without having to contribute any of their own money.
🏦 Tax advantages
The money your employer puts into your HRA is like a gift from the medical tax gods - it's completely tax-free to you. And when you withdraw that money to get reimbursed for eligible healthcare expenses, you don't have to pay taxes on it either. So basically, it's like getting a bonus from your boss, but instead of cash, it's money you can use to keep yourself healthy and happy.
🏦 Flexibility
An HRA can be tailored to meet the specific healthcare needs of employees. Employers can set their own rules for what expenses are eligible for reimbursement, which can be especially useful for employees with unique or unpredictable healthcare needs.
If you're lucky enough to have access to one, don’t pass it up and definitely take advantage of it. It's like winning the healthcare savings jackpot and being part of the cool kids' club all at once.
What’s eligible?
Well, it’s a long list (quite literally, it’s a 42 page document that the government has). Check it out here and use the nifty little command + F function to search through the document to see whether the FSA, HSA and/or HRA covers the medical expense you have or need.
Wrapping Up
Hopefully, this information cleared up any misconceptions you might’ve had about health savings plans and filled in any knowledge gaps. Choosing the one that works best for your healthcare needs and financial situation is important.
