Medically Approved

HRAs, FSAs and HSAs — what are the differences? 

Woman reviewing her health savings account online

Everything you need to know about these powerful health care financial tools. 

Nancy Fitzgerald

By Nancy Fitzgerald

Just when you were beginning to make sense of HMOs, PPOs (Preferred Provider Organization) and EOBs (Explanation of Benefits), along comes the alphabet soup of health savings plans. But you can relax. If you have health insurance, these plans can help you save on taxes while paying for leftover medical expenses that your insurance doesn’t cover. Taking time to learn about them now can save you big bucks later.  

“There are some great options out there that can help you make your money stretch further,” says Samantha Roth. She’s a financial educator with the University of Minnesota Extension.  

“There’s a lot to sift through, but if you use these plans wisely, you can save a whole lot,” she says. “Choosing one of these plans can give you some peace of mind about your future finances. If something unexpected comes up, you’ll have the security of knowing you’ve got the money to cover it.” 

That’s good advice. After all, you never know what’s around the corner. Here’s what you need to know to make sense of these plans. 

Stock up on all your HSA- and FSA-eligible health essentials — feminine care products, as well as medications for allergies, colds, upset stomach and more — at the Optum Store

Flexible spending accounts (FSAs) 

Maybe your crystal ball is telling you that next year’s medical expenses will go up — there’s surgery, a new baby or expensive prescription medications in your future. A glance at your insurance policy tells you that some of these costs won’t be covered. An FSA can help you pay for them. 

How it works: These accounts are set up by your employer. You contribute up to the limit your employer sets. And your employer may add money to the pot, too. You’ll probably receive a debit card that you can use for allowed items. These could be insurance copays, prescription and over-the-counter medications and medical devices. (Check with your employer to find out exactly what’s covered.) 

The pros: You’ll have a fund set aside for health care costs that pop up during the year. And the money will be deducted from your paycheck before taxes. Plus, you won’t pay taxes on funds you withdraw to pay for approved medical costs. 

The cons: With an FSA, it’s use it or lose it. Whatever you haven’t used by the end of the year could go back into your employer’s pocket. “Your employer may set a limit of $4,000 on your investment per year,” explains Roth. “But you may end up needing only $1,000. So before you set up your account, review your health spending over the past few years. Make sure you understand how much you might need to contribute. Be realistic — and give your decision some careful consideration.” 

Recommended reading: 8 creative ways to use the money in your HSA or FSA. 

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Health Savings Accounts (HSAs) 

If your health insurance plan has a high deductible — that’s the amount of money you have to pay before insurance kicks in — an HSA can be a great option. It lets you set aside pretax money to pay for qualified medical expenses. These could include deductibles, copayments and many other health-related costs. You may qualify for an HSA if you have a high-deductible health plan (HDHP) and meet a few other guidelines. (Your benefits administrator can help you figure it all out.)  

How it works: You can set up an HSA through your employer or through a bank or other financial institution that participates in the program. Each year, you can contribute as much as $3,650 for yourself or up to $7,300 for your entire family. You can dip into this account for covered medical expenses, including deductibles, copays and lots of other health care items. 

The pros: The money goes into your account before taxes — and it comes out without taxes, as long as you use the money for qualifying medical expenses. Your employer may add money to the account as well.  

With an HSA, your money rolls over from year to year. And you get to keep your HSA funds even if you change jobs. Plus, the funds in your account earn interest. “If you have the opportunity to open an HSA, go for it,” advises Caitlin Donovan. She’s the senior director of public relations for the National Patient Advocate Foundation. “It can help you save money in the long run and lower your expenses in the short term. It’s a great deal.” 

The cons: Be super careful that any money you withdraw from your HSA is used for qualified medical expenses. If not, you could face penalties and extra taxes. (Find a list of all approved medical expenses at IRS.gov.) And be sure that you have a high-deductible health plan in order to qualify for an HSA. Speak with your benefits administrator at work.  

Health Reimbursement Arrangements (HRAs) 

An HRA is a way for your employer to help you with your medical expenses by reimbursing you. If the insurance plan your employer offers has a high deductible, these accounts can give you a hand.  

HRA accounts are funded entirely by your employer. The employer decides all the terms and how much to contribute — you don’t contribute at all. “It’s designed to help employees pay for their medical expenses,” explains Roth. “You could have quite a bit of money in the account, but the money belongs to your employer, not to you. If you leave your job, it stays behind.”  

How it works: If you have qualified medical expenses that your insurance plan doesn’t cover, you can request reimbursement from your HRA account. It’s usually up to you to keep track of your receipts and follow the reimbursement procedures.  

The pros: HRAs cost you nothing, and you pay no taxes on the amount you receive. And with some accounts, your money may be carried forward from year to year. 

The cons: You don’t have control of the money. It all belongs to your employer, who owns the account and sets a limit on how much you can be reimbursed. And you won’t receive interest on any of these funds. Talk to your benefits coordinator to see if an HRA is offered at your company. “And be aware of all the guidelines and the deadlines for requests to be turned in,” Roth advises. 

If you have copays for doctor visits or procedures, or you take prescription medications that your plan doesn’t cover, use your FSA, HSA or HRA to pay for those costs. Many everyday health care items are covered, too. Just go to the Optum Store to stock your medicine cabinet. 

 

Additional sources:
Glossary of health care acronyms: HealthCare.gov 
Overview of the types of health savings accounts: IRS.gov