Medical Savings Accounts: FSAs, HSAs, and HRAs
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Most of us have at least some medical bills each year. And with the rising cost of medical care, they can add up even when you have health insurance.
The good news is, most people with employer health plans have access to tax-deductible medical savings accounts. HSAs, FSAs, and HRAs are different accounts that help you pay for healthcare costs tax-free.
Any medical savings account is better than none. But each type of account has essential differences.
Below, we’ll compare the difference between a health care FSA and an HSA (and describe an HRA). With this information, you can make the most of the account available to you.
HSAs and Medical FSAs: Similarities and Differences
An HSA is a Health Savings Account, and an FSA is a Flexible Spending Account (aka Flexible Spending Arrangement).
(While this article is discussing the Healthcare FSA, you can learn about the dependent care FSA here.)
The HSA and FSA are both medical savings accounts offering tax savings with some additional similarities.
But understanding their differences is crucial because it affects how you select and use each one.
HSA vs FSA Similarities
- Tax-advantaged. Both accounts offer tax-free savings to pay for medical expenses.
- Eligibility. Both are available to people with health insurance coverage.
- Annual contribution limits. Both have limits to how much you can contribute.
- Use. Pay for things like doctor visits, insurance company copays, medications, dental expenses, and vision care often through the use of a special debit card or by claims reimbursement.
- Penalties. You will pay a penalty if you use the money for unqualified expenses.
FSA vs HSA Differences
Eligibility. To qualify for an HSA, you must have a high deductible health plan (HDHP) and cannot be claimed as a dependent on another person's tax return. You can have any health plan with an FSA.
Availability. FSAs are a benefit only available through employers. HSAs are available through employers and other financial institutions, making them an option for self-employed individuals. (if your health plan is eligible).
Access. HSA accounts follow you, even if you leave your employer. FSAs don't follow you. If you leave your employer, your FSA ends unless you continue health coverage through COBRA and pay your health insurance premiums.
Rollover. Funds from an HSA roll over from year to year; unused funds in an FSA do not rollover. FSA funds have to be spent that year, or you lose that money (though some plans offer up to a $500 carry-over option or limited-time grace period.)
Investment options. HSAs often have investment options. FSAs funds cannot get invested.
Contribution. HSAs have a higher annual contribution limit than FSAs. Also, you can adjust HSA contributions at any time. FSA contributions are via payroll deductions and set at your time of hire and during open enrollment. Both provide tax benefits by reducing the amount of your taxable income.
2022 HSA contribution limits are $3,650 (2023 – $3,850) for an individual and $7,300 for those with family coverage (2023 – $7,750); an extra $1k may be contributed by individuals 55 and older.
The IRS limit for FSAs is $2,850 (2023 – $3,050), although your employer may set a lower limit. If spouses are both eligible for an FSA through their employers, they each may contribute up to $2,850 in their own FSA.
Spending limits. You can only spend what you currently have in an HSA. But FSA funds are available at the beginning of the year before you make all the contributions. In other words, you can spend all your FSA savings before it gets fully funded.
But what if you spend your FSA funds and quit your job before making all your annual contributions? According to the IRS Uniform Coverage Rules, you don't have to make up the difference. So, let's say you elected $1000 for your 2022 FSA, and you use the entire $1000 for medical expenses by February of 2022. Then, even if you quit on March 1, 2022, after only contributing $167, you won't owe the employer for the remaining $833.
You can only have one. You can’t contribute to both an HSA and medical FSA in the same year. (But you can contribute to an HSA and limited-purpose FSA specifically for child care or dental/vision expenses.)
What is a Health Reimbursement Arrangement (HRA)?
HRAs are medical savings accounts funded by an employer. Like an HSA and FSA, the money in an HRA account gets used for out-of-pocket medical expenses.
The difference is only employer contributions fund this type of account. And if you leave your job, you lose the money in the HRA account.
Is an HSA or FSA for you?
Some employer benefit programs offer choices for an HSA or an FSA. You can only choose one, and there’s no wrong answer. But maybe you don’t have a choice, or perhaps one is better for you based on your situation.
The good news is, no matter which one you use, you’ll enjoy tax-free savings.
You can’t predict all medical costs. But estimating your current (and future) expenses can help if you need to decide between an HSA vs FSA.
For self-employed people, your only option is a health savings account when you've also chosen medical coverage through a high-deductible plan.
One significant advantage of an HSA is that you don’t have to spend it within a limited time. So you won’t lose unspent savings.
And with most programs, HSA money can get invested too. But you have to have a qualified high deductible health plan (HDHP) to use an HSA, meaning you’ll pay much more out-of-pocket for your healthcare expenses.
Those that are younger, healthy, and have other savings are more likely to consider an HSA. But even if you don’t expect many medical costs, it’s wise to prepare for unknowns.
Some high-deductible health insurance plans have out-of-pocket maximums of $10,000 or more. And the annual limits for contributing to an HSA are lower than that. So, you could incur more expenses than you have saved.
An HSA isn’t for everyone, and some employers don’t offer health care coverage that's HSA-eligible.
Older people or those with more health issues, medications, or little savings are more likely to consider an FSA.
A health insurance plan associated with FSAs can have a higher premium but lower out-of-pocket costs. Though an FSA isn’t as flexible, it’s still a great way to save money for medical expenses tax-free.
How much should you save in an FSA?
Since FSAs are “use it or lose it,” you want to be careful when deciding how much to save.
Your goal is to save enough to cover eligible health care expenses, but not so much that you lose unspent funds at the end of the year.
(With an HSA, you can keep every penny you put in, so saving as much as you can makes sense.)
Considerations for Healthcare FSA contribution amounts
Current medical expenses. Calculate the costs of regular doctors’ appointments, medications, or other routine medical costs.
If you spend $200/month on eligible expenses, you could safely put $2400 in your FSA and not have leftover funds at the end of the year.
Expected non-medical expenses. If you plan to visit the optometrist, replace lenses, have dental work or chiropractic services performed, save for them in your FSA.
You can't know the exact amount, but you can price it with your provider's office or use past bills to help you estimate.
Other costs to consider. FSA funds can get used for therapy, braces, medical equipment, and Lasik surgery. If you know you’ll incur these costs, save for them in your FSA account.
How to spend extra FSA money
Even the most well-planned FSAs can have a balance at the end of the year. Most employers will allow you to roll over up to $500 into next year’s FSA.
If you don’t have any eligible expenses, a roll-over is an excellent option. But if you still have a balance, you can get creative to use the money before it’s gone.
More ways to spend Healthcare FSA money:
- Chiropractic care
- Over-the-counter medications
- Sunscreen (SPF 15+)
- Blood pressure monitors
- First-aid supplies
- Feminine hygiene products
- Birth control
- Reading glasses
- Smoking cessation products
- Orthopedic shoe inserts (if to treat a medical condition)
As you can see, there are several similarities between medical FSAs, HSAs, and HRAs.
All these help you save money on a pre-tax basis to ensure you have funds available when it comes time to pay out-of-pocket health care costs.
But, by understanding their differences, you can make the most of the account you have—and save money on income taxes too!
Be sure to review your employee benefits and sign up for those you aren't currently using during the open enrollment period at your company to start saving for upcoming health expenses.
While much of the future is uncertain, we know we'll face medical and dental expenses, eye exams, other vision care expenses, and preventive care costs through the years. Start saving for them now.
Article written by Amanda
Amanda is a team member of Women Who Money and the founder and blogger behind Why We Money. She enjoys writing about happiness, values, money, and real estate.