HSA, HRA, FSA Oh My!

by Lauren Sweeney, Office Manager

As high-deductible plans become more common, people are more vigorously seeking methods of off-setting their health care costs. One of the most efficient ways to do this is with a tax-favored health plan, such as a health savings account (HSA), a health reimbursement arrangement (HRA) or a flexible spending arrangements (FSA). Each plan has its own benefits and considerations, and as not everyone wants to read the IRS's Publication 969, we're going to lay them out here.

Part of the allure of all three types of account is that they are tax-exempt, so the plan-holder can access the greatest benefit of their funds. This money can then be used to pay for a number of medical, dental, vision, prescription and over-the-counter expenses.

Unlike the other two types of account, HSAs are owned directly by the plan-holder: while the plan-holder may change jobs or insurance carriers, the HSA follows the plan-holder regardless. Plans with an individual deductible of $1350 (or a family deductible of $2700) or higher are generally eligible for an HSA. Contributions can be made by the plan-holder, the employer, or both, and can be made year-round. These contributions are either made pre-income tax or, if made by the plan-holder after income tax has been taken out, are eligible for reimbursement on yearly taxes. HSAs also allow for a fair amount of flexibility - the balance of the account can be carried over from year to year, so a year of relatively light medical expenses could make it easier to afford a more expensive procedure down the road.

HRAs, conversely, are owned solely by the employer - the plan-holder cannot make contributions, and the plan is tied to employment. As the name implies, the plan-holder pays for qualified medical services out of pocket, then submits the receipt to the HRA for reimbursement. There is no limit to amount that the employer can contribute to the HRA, and contributions can be carried over from year to year. Since the plan does end when employment ends, any balance remaining in the HRA can be returned to the plan-holder. And unlike the other two, HRA funds can be used to pay insurance premiums.

FSAs are also owned by the employer; however, both the employer and the employee can contribute. Unlike HSAs or HRAs, the funds in an FSA do not roll over, meaning that the plan-holder is incentivized to spend the balance of their FSA prior to year-end. Plans can have up to a 2.5 month grace period to use the funds following year-end, so there is a small amount of leeway if the plan-holder has a large expense that doesn't occur until, say, January 3. Generally, FSAs are also used to reimburse the plan-holder for the money spent on qualified medical expenses, and require the most documentation of all three types: a written statement from an independent third party - for example, a statement from a doctor's office - as well as a written statement that the balance in question hasn't been paid by insurance, all in addition to the receipt. Any balance remaining in an FSA cannot, unfortunately, be returned to the plan-holder if employment ends.

Physical therapy is considered a qualified medical expense, so if you're worried about the details of your coverage, your HSA, HRA or FSA can be used to offset the cost of visits. It's important to know the details of your plan, but that knowledge can mean real savings at tax time and on your out-of-pocket costs!

References:
https://www.irs.gov/pub/irs-pdf/p969.pdf