What are the differences between an HRA, FSA, and an HSA? Are all of these “use it or lose it” accounts?
It’s almost weekly that I speak with someone who is confused about how these are funded, who owns the money, and how the timing of distributions differ between these accounts.
Watch this short video to understand the key differences between these three medical savings account options.
Having this knowledge will help you understand how to best leverage the account type that might be available to you.
A primary difference between the three common medical spending account types:
If you want to read the transcript instead of watching the video, you can find that below… [Note: It seems I speak in really long sentences, so it doesn’t read as well as it sounds. Maybe just watch or listen to the video. :)]
Full Transcript – Clarifying the key differences between an HRA, FSA & HSA
HRA, FSA, and HSA.
It’s very easy to get confused about these different types of medical insurance-related accounts.
My name’s Brad Kingsley. I’m a certified financial planner and I want to just take a moment to help you understand the key differences between these types of accounts.
It’s almost weekly that I talk to somebody about these accounts and help explain the differences so they can make sure that they’re maximizing their benefits.
Health Reimbursement Arrangement
First, let’s talk about an HRA.
HRA stands for a health reimbursement arrangement.
That’s something that an employer would set up. The employer would fund the account and you would be able to submit receipts against the account. Then the employer would pay back the expenses of that receipt from that account that’s in your name.
At the end of the year, any money that’s not used by you in that account is kept by the employer.
It’s employer-funded and it’s their account and they get to keep it if you don’t use it.
It’s an employee benefit some places offer but others don’t offer.
Medical Flexible Spending Account
Next up is a medical flexible spending account – an FSA.
An FSA can be funded by the employer or the employee or a combination of the two.
A flexible spending account is similar to an HRA.
You’re gonna have money that’s contributed to this account – sometimes directly deposited out of your paycheck or it’s going to be contributed by the employer.
You can then submit receipts against it. There are a couple of different ways you can do that. You would talk to your HR person about getting that money back, but they would reimburse you for qualified medical expenses. So you would be able to get them paid through that work benefit.
That money is also owned by the employer. Even the money that is contributed from your paycheck that money is owned and controlled by them so at the end of the year you’re going to lose any of that money that you don’t use during the year.
So if you have a flexible spending account and you’re getting close to the end of the year, if you have money left it’s a great time to go out and get something taken care of medically.
Something to be aware of: there is a possibility that, depending on how the plan is set up, your employer can give a little bit of flex time – a little bit of buffer slightly into the new year – where you can use some of the money. Or they could allow a small amount of the money, say five hundred dollars, that you can carry over to the next year. But for the most part, you’re going to lose any of that money that you don’t use. So make sure that you understand how that’s
used and make sure that you’re estimating the amount you want to be taken out of your paycheck appropriately. That way it aligns with the money that you’re going to spend through the year and you don’t lose out on any benefits
The third account is actually the most powerful…
Health Savings Account
It’s an HSA, which is a health savings account.
Health savings accounts are actually owned by the employee or if you have your own insurance through the marketplace just owned by you directly. It’s your money right off the bat. The employer doesn’t have any say about it and they don’t have any control over it.
It’s 100% your money so it’s not anything that you can lose.
Now, this is a common point of confusion. Because HRAs and FSA’s have this “use it or lose it” type of setup a lot of people assume that the HSA does also. HSAs do not. In fact, you can maximize your contribution to a health savings account in one year, not use any of the money, and the entire balance rolls over to the next year.
It’s your money.
You can contribute one year, max it out the next year, then max it out keep maxing it out and the account continues to build. And you never lose that money. It’s your money 100% forever to be able to use for medical purposes at any point in the future.
Now whether or not you would want to leave some of the money in the account is a great question. It’s one of the most powerful planning tools for health savings accounts and it’s something that I have available in another post. It takes a little bit more time to help understand the three tax benefits of a health savings account and how to maximize it and cover your medical expenses 100% tax-free – and potentially even use it for retirement savings planning in the future.
Powerful Tax-Advantaged Medical Expense Planning
So there you go.
I hope that helps you understand the difference between those three different types of accounts. This information should help you make a decision about how to maximize those accounts if you have any of them.
Thanks and Happy Planning!
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