Consider a spending account

Health Savings Account (HSA)

The HSA is a special kind of bank account designed to help you build tax-free funds for healthcare throughout your lifetime – even after you retire. You, your employer, or anyone else can contribute money to the account.

You can use the money in your HSA to pay for IRS-approved expenses including medical care, prescription and over-the-counter drugs, vision care, and dental services.

HSA advantages:

• HSAs are typically tax-free – You never pay federal taxes on HSA money – when it's taken out of your paycheck, as it grows, or when it's spent – as long as you use the money for approved expenses and you don't contribute more than the IRS allows. Some states do not allow tax-free contributions.
  
  
• Funds grow over time – You can earn interest on the money in the account. In addition, unused balances carry over from year to year.
  
  
• Rollovers from other healthcare accounts – You can transfer FSA or HRA funds to the HSA if your employer allows it and if you follow certain rollover rules. Plus, the rollover doesn't count toward your HSA maximum annual contribution.
  
  
• IRA transfers – You can make a one-time transfer to the HSA from an Individual Retirement Account (IRA), unless it's a "Simple" or "SEP" IRA. Funds from an IRA count toward your maximum allowed contribution.
  
  
• Funds are portable – Your HSA belongs to you. If you leave your current employer, you can keep all the money in your account, including any money your employer put in.
  
  

Healthcare Flexible Spending Account (FSA)

A healthcare FSA helps you budget for expenses with money from your paycheck. Your employer takes money out of your paycheck before federal taxes, and then you draw on the funds during the plan year. You may get a break on state taxes, too, depending on the state. Allowed expenses are usually the same as with HSAs, but your employer has the right to disallow items the IRS allows.

FSA advantages:

• It saves you money on taxes – When you use tax-free dollars for expenses you'd normally pay for with after-tax money, it's like getting a discount on healthcare.
  
  
• Funds available immediately – Your entire yearly account amount is available to spend on the first day of the plan year, even before all the money goes into your account.
  
  
• Not tied to a certain kind of plan – You don't have to have a qualified high-deductible plan. You can even sign up for an FSA if you opt out of your employer's health plan altogether.

Health Reimbursement Account (HRA)

The Health Reimbursement Arrangement (HRA) is like an "expense account" your employer puts money into. Most employers offer the HRA in combination with a Preferred Provider Organization (PPO) medical plan. As with the FSA, your employer chooses approved expenses, within IRS guidelines.

HRA advantages:

• It's free money – Your employer funds the HRA — not you — and lets you determine which approved expenses you use the money for.
  
  
• Reduce deductible with HRA – When you use your HRA for medical costs like doctor's office visits, you're essentially paying down your deductible with your employer's money. You can also use your HRA to pay for pharmacy costs.
  
  
• Funds available immediately – Your entire yearly amount is available to spend on the first day of the plan year.

Things to Consider:

• Higher deductible – At most companies, the PPO plan that comes with the HRA has a higher deductible than you may be used to, though it isn't necessarily the kind of high-deductible plan described in the Health Savings Account section above. Usually HRA funds reduce only part of the deductible.
  
  
• Not portable – If you leave your current employer, you typically can't take the money with you - but you do have a "window" when you can file claims for expenses you had incurred before you left the employer.

Bottom line:

Spending accounts are a great way to manage healthcare expenses. To gain the greatest advantage of a healthcare spending account, choose the one that's right for you.

How much could you save with an HSA, FSA or HRA? Find out more about spending accounts in health insurance basics on FamilyHealthBudget.com.

Additional resources

The Henry J. Kaiser Family Foundation
Centers for Medicare and Medicaid Services
FamilyHealthBudget.com

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