The alphabet soup of health account options can be overwhelming and deciding which one is right for you can be a challenge. Health Savings Accounts (HSA’s), Health Reimbursement Accounts (HRA’s) and Flexible Spending Accounts (FSA’s) all offer tax advantages to employees that allow them to save for future health care costs, but in different ways.

Health Savings Accounts

A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit. By using untaxed dollars in an HSA to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall health care costs. Many employers offer HSA’s when the insurance plans they offer employees are high deductible plans, and they commonly contribute to the HSA to help their employees save money for future health care costs. Even if you don’t have the choice of a HSA through an employer, you can still open one on your own if you have a high deductible health plan and are not enrolled in Medicare or can be claimed as dependent on another person’s taxes. Some banks and other financial institutions offer opportunities to open an HSA.

The biggest benefit of contributing to an HSA is the tax advantage it offers. The money in the HSA will grow tax-free and if it is used to pay for qualifying health care-related expenses it is not taxed when withdrawn. HSA funds roll over year to year if you do not spend them. An HSA may earn interest or other earnings, which are not taxable. Qualifying expenses include things like medical-related services as well as equipment and supplies, health insurance premiums and prescriptions, but can vary. Some HSA’s provide you with a debit card to pay for expenses out of pocket, and then get reimbursed.

It is important to keep in mind that if you withdraw money from an HSA before you turn 65 years old, and do not use it for qualifying medical expenses, it will be taxed, and you will pay a penalty. After age 65, you will pay only the tax, and no penalty if you withdraw money from the account for anything other than qualifying medical expenses.

Health Reimbursement Accounts

An HRA is a workplace-based form of insurance that the employer pays for. Unlike the HSA, where you contribute to the fund, the HRA is fully funded by your employer. You cannot contribute added dollars to an HRA. Employees that take part in these types of plans are reimbursed tax-free when they incur expenses for medical, dental or vision. The employer decides which healthcare costs qualify for reimbursement and decides the rules associated with the program. Because of the tax advantage associated with an HRA, the money that you are reimbursed for expenses is not considered taxable income, so it is a great way to help offset healthcare costs that would otherwise be paid for directly from your wallet.

Although some companies allow you to rollover unused funds to the following year, this varies by employer. Some plans have a use it or lose it policy, and any unused funds at the end of a calendar year are lost. Like an HSA, an HRA often provides you with a debit card to pay for expenses.

Flexible Spending Accounts

Lastly, the Flexible Spending Account is a program that allows employees to set aside money from their paychecks pre-tax that can be used later to pay for qualifying healthcare-related expenses during that year. Although some companies do allow employees to roll over a part of any leftover money into the next calendar year, that varies by organization. According to Forbes.com, in 2022 the government cap for how much you can contribute to an FSA is $2,850. If your FSA dollars are going to expire at the end of this calendar year, why not use some of them to pay for prescriptions you will need?

In summary

Health Savings Account (HSA)

Are owned by the individual, who chooses what health care costs they want to pay from it

It must be paired with a high-deductible insurance plan

It offers tax savings

You can use it to pay for prescriptions with

Health Reimbursement Arrangement (HRA)

Is a fund employers set up for employees that pays for medical expenses not covered by their health insurance plan, like deductibles and coinsurance

Only an employer can fund an HRA, decide how much to put in it and what health care costs it can be used for

You can use it to pay for prescriptions with

Flexible Spending Account (FSA)

Is a health care spending account, where employees put money into the account through payroll deduction before taxes

The money to pay for qualified health expenses, childcare and elder care

Employers set up FSAs for employees and own the account, and employees put money into their FSA through payroll deduction only. Some employers let employees carry up to $500 into the next year. Otherwise, all money goes back to the employer at the end of the year

You can use it to pay for prescriptions with

Use your HRA, HSA or FSA debit card to pay for prescriptions you order from DiRx.

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