Health spending accounts are tax advantaged accounts that can be used to pay for eligible medical expenses.
There are three main health spending accounts that you will see in the workplace.
They are:
- Health Reimbursement Arrangements (HRA)
- Health Savings Accounts (HSA)
- Flexible Spending Accounts (FSA)
Let’t take a look at each of these types of accounts and how they work.
Health Reimbursement Arrangement (HRA)
An HRA is an employer funded account that employees can use to pay for their eligible medical expenses.
Rules vary by employer but essentially an HRA reduces an employees health insurance costs.
Health Savings Accounts (HSA)
Health savings accounts allow an employee to set aside pre-tax money to pay for medical, dental and vision expenses.
Each year the government establishes a maximum contribution limit. The amount of this contribution limit is determined by the tier of medical coverage you elect. If you elect employee only coverage, the limit is less than if you elect employee plus some version of family coverage.
If your employer contributes to your HSA, your contribution is reduced by the amount of the employer contribution.
In order to contribute to an HSA, you must enroll in an HSA eligible high deductible health plan.
Funds in your HSA can rollover from year to year. You do not have to use them in the year you contribute the money to your account.
Flexible Spending Accounts (FSA)
Flexible spending accounts also allow employees to set aside pre-tax dollars to pay for eligible medical expenses.
Most plans are set up on calendar year basis where the funds have to be used in that calendar year. If you do not use the funds, you will lose them with the exception of any roll over provision that might apply.
There are three types of flexible spending accounts:
- Medical flexible spending accounts A medical FSA can be used to pay for eligible medical, dental and vision expenses. You cannot contribute to a medical FSA and a HSA at the same time.
- Limited purpose flexible spending accounts A limited purpose FSA can be contributed to if you have an HSA. However, with the limited purpose FSA, you can only use the funds for dental and vision expenses.
- Dependent care flexible spending account A dependent care FSA allows you to set aside pre-tax money to pay for eligible day care expenses.
A big advantage to the FSA is that the funds you put in your medical FSA and your limited purpose FSA are available on day one of the plan year.
With the dependent care FSA, you do have to accumulate the money in your account before you can use it. It is not advanced to you on day one.
Conclusion
Health spending accounts are great tools to save on your health care costs. If your employer contributes money on your behalf to a health spending account, that’s an added bonus.
The big benefit is that any money you contribute to these accounts is on a pre-tax basis which reduces your taxable income.
