Guide to HSAs, FSAs and HRAs
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Healthcare costs keep rising, and they keep causing many people's stress levels to rise as well. In fact, recent studies show that a majority of Americans are now worried about their premiums.
Fortunately, special healthcare accounts can help. Three of the most helpful are health savings accounts (HSAs), flexible spending accounts (FSAs) and Health Reimbursement Accounts (HRAs).
HSAs
HSAs are accounts that employees own; by contrast, the two accounts described below are employer-owned. You can use your HSA to defray your healthcare-related costs.
You can manage this account on the internet and make contributions directly to it. Those sums are tax deductible, and any interest they earn is nontaxable. What's more, customer service professionals can provide help if you ever need it. Your HSA will also give you a debit card free of charge.
If your employer adds to your HSA, those contributions won't count toward your taxable income. Plus, if you get a new job or retire, your HSA will remain intact, and you can take it with you. FSAs and HRAs, however, are not portable when you change jobs.
To obtain an HSA, you must have a high deductible health plan, and you cannot be enrolled in Medicare.
FSAs
For their part, FSAs are accounts that employers set up for employees. The employee chooses how much money -- currently, a maximum of $2,700 for an individual or $5,000 for a household -- will go into the account each year. The employer then takes it out of his or her wages. This amount is not counted toward taxable income.
Workers can spend their FSA funds on any healthcare expenses that are listed in Section 213D of the tax code. And, by the way, FSAs reduce employers' payroll taxes, providing an extra incentive to create them.
HRAs
While HSAs and FSAs are funded by employees and employers, the money in an HRA comes entirely from an employer. In fact, with an HRA, the employer decides how much pre-tax money will go into the account at the start of each year.
Those contributions are tax-deductible for employers. And there are no minimum or maximum requirements for HRAs, whereas the IRS does set limits for HSAs and FSAs. Furthermore, you can have any type of health plan and still be eligible for an HRA.
In short, all of these accounts can lower a person's taxes and healthcare expenditures, and unused amounts will roll over at the end of the year. That's certainly a valuable -- and stress-reducing -- package of benefits.