2022 Benefits Enrollment: Health Accounts (HSA, FSA, HRA)

As part of your benefits enrollment at work, you may be offered a health account. The type of account available to you will be linked to your decision about medical insurance. The decision to use one of these accounts can have a big impact on how you will pay for medical expenses in the coming year, and in some cases, future years.

Do your homework

The brief overviews below of the different types of accounts you may encounter is just that. Each employer’s offer will have nuance that requires reading the literature they provide and perhaps asking questions to an HR representative. Look for any benefits or costs before assuming an option is the best for you. Also, remember that the option you chose for the previous calendar year may not be the best for the year ahead.

Qualified Medical Expenses

You will see several references below to "qualified medical expenses". The IRS maintains this definition which is important to determine what the various health accounts can or cannot be used for. For example, a procedure to remove a potentially cancerous mole could be deemed ok to use with one of these accounts while a procedure deemed "cosmetic" at the same doctor might not. Keep this in mind as you weigh the options. 

HSA: Health Savings Account

Health Savings Accounts (HSAs) are a type of account available to you if your health insurance plan is a qualified high-deductible health plan (HDHP). Your employer should let you know if you are eligible for a HSA. The idea behind an HSA is you put money into the account on a regular basis and then withdraw money later when major medical expenses arise. You’ll have the option to set up an HSA at a financial institution of your choice or most likely through your employer. The advantage of the direct employer option is they can take money out of your paycheck directly to contribute to the HSA.

A health savings account can also offer a great way for families to set aside money in advance for large medical events and break the cost up over a several years. This could include something like the birth of a child or braces. Dedicated savings and growth while in the HSA can help tremendously with large medical events in your family. 

Go to IRS.gov for more specifics on limits and eligibility. 

Pros

• Tax advantaged: Money in an HSA receives a deduction for what you contribute, any interest or growth is tax-free, and withdrawals (made for qualifying medical expenses) are tax- free.
• You own the account and get to keep the money if it is not used. You also get to keep it if you leave the employer.
• Money inside an HSA can be invested to grow over time.

Cons

• You are responsible for funding the account for the most part. Some employers will make a small contribution, but this is guaranteed and likely not as much as you need.
• You need to keep good records of medical expenses to prove to the IRS an amount withdrawn is for a “qualified medical expense.” Missing this step can lead to penalties and taxes.

FSA: Flexible Spending Account

Flexible Spending Accounts (FSAs) are a type of account available in conjunction with certain health insurance plans. The idea is to use funds for expenses not directly covered by medical insurance. FSAs are offered in different types for specific uses so be sure to check what your employer is offering.

Health FSA-Can be used to pay for qualifying medical expenses.

Limited Purpose FSA-Can only be used for qualifying dental and vision expenses.

Dependent Care FSA-Can only be used for dependent care expenses like daycare, after school, or adult care.

You’ll have to decide how much to put in your FSA as an amount deducted from each paycheck.

Pros

• Money deducted from your paycheck is “pre-tax” which can help lower your overall income for tax purposes in a year.
• FSAs can be used for items that might not be covered by insurance.
• The full benefit is available right away. In other words, if you sign up to contribute $1,000 over the course of the year, the full $1,000 is available to you on January 1 to use for qualifying medical expenses.

Cons

• Funds in an FSA stay with your employer. In other words, if you leave for a new job you can’t take any remaining FSA funds with you.
• There’s no ability to invest the funds in an HRA or earn any interest.
• FSAs are generally use it or lost it during the calendar year. Some plans offer a grace period for the first 2 ½ months of the year to use unused amounts.

HRA: Health Reimbursement Account

Some types of medical insurance plans will offer a health reimbursement account (HRA). The account is setup, owned, and funded by your employer to pay for a portion of your medical expenses during the year. Whatever amount is in the account is completely determined by your employer. HRAs are often drawn upon automatically by the insurance provider when a claim is paid. In other words, most plans will pull money from this account when “out of pocket” medical expenses arise without you needing to act. This is not guaranteed, so you’ll need to confirm how your plan works.

Pros

• Your employer funds the account, albeit at an amount they choose.
• Some employers will reward healthy choices by making an additional contribution to your HSA.
• The amount put into your HRA is not taxed.

Cons

• Funds in an HRA stay with your employer. In other words, if you leave for a new job you can’t take any remaining HRA funds with you.
• There’s no ability to invest the funds in an HRA or earn any interest.
• Some plans are use it or lose it and do not carry over to a new calendar year.

Look at the whole picture

Health accounts can offer the opportunity to save ahead for future medical expenses. Carefully consider how your family might benefit from a particular option while balancing other factors like taxes that are impacted by a particular option. Best wishes with your benefits choices. 

We help Christian families on their journey to financial freedom. If you would like more posts from us on how to balance what's truly important with your finances, please sign up for our free newsletter. If you’d like to hear more about how Intrepid Eagle Finance helps families manage their financial lives, click here to learn more and schedule a free consultation.