Step 23: HSAs, FSAs, and Healthcare

Until recently, every time I’ve entered a new job, I’ve called my father, read him the summary of all healthcare and insurance options, and dutifully waited for him to tell me which to sign up for. I’ve never understood, nor cared to understand, my options.

Once married, it’s a little babyish to ask your dad to make important decisions for you and your husband.

Therefore, the Hubs and I strapped on our thinking caps and tackled the foreign world of healthcare acronyms. Here is what we learned:

1) An HSA and an HRA are two very different things.

Health savings account

Health savings accounts are similar to a 401(k) retirement account for medical expenses. You can only have an HSA if you enroll in a high-deductible insurance plan. Here are other things you should know about an HSA:

  • You own the account.
  • Anyone can put money into the account.
  • Money taken out of your paycheck by your employer for the account isn’t taxed.
  • Money put into the account that’s already been taxed (for example, money that was a gift), is tax deductible.
  • Money in the account can roll over from year to year.
  • You can invest the money.

Health reimbursement arrangement

health reimbursement arrangement is a benefit set up by your employer. It’s a fund that pays for medical expenses not covered by your health plan, such as deductibles, coinsurances or both. Other features of an HRA:

  • The fund is owned by your employer.
  • Your employer decides which expenses are covered by the HRA.
  • Money given to you for medical expenses is tax deductible for your employer.
  • You don’t have to pay taxes on money you get from an HRA used for qualified medical expenses.
  • Your employer decides whether leftover money in your HRA can roll over to the next year.
  • The money in an HRA can’t be invested.

 

2) An FSA is also different from the above.

Flexible spending account

An FSA is set up by your employer. They own the account, but you get to decide what qualified medical expenses to pay from your FSA. What makes it flexible? It works with most of our employer-sponsored health plans. Here are more facts about an FSA.

  • Only you and your employer can put money into the account.
  • You can only deposit money into your FSA through payroll deduction. That money isn’t taxed.
  • Some employers let you carry up to $500 into the next year. Otherwise, any money left in the account at the end of the year goes back to your employer.
  • You can’t invest the money.
3) Educating yourself on your healthcare and account options can help your budget.
By setting up an FSA with our employer and choosing an HRA plan, the Hubs and I are able to budget for medical expenses tax free. Because our employers own the accounts, we are never tempted to dip into them for other purposes. The money remains “out of sight, out of mind.” When an unexpected medical bill arises, we use our accounts to cover it instead of putting stress on our budget.
PLEASE NOTE: These fabulous account facts  were taken from the well-spoken educators at Blue Cross/Blue Shield: http://www.bcbsm.com/index/health-insurance-help/faqs/plan-types/health-spending-accounts/differences-between-an-hsa-hra-fsa.html