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Health Savings Accounts (HSA) Vs Flexible Spending accounts (FSA)


It’s almost November. Along with thinking about Thanksgiving and the upcoming holidays, it is also the open enrollment season. I have got all the materials for next year’s health plans. The decision is not just going with the lowest deductible or premium, there are also tax benefits, now and later, to consider.  Any  Health savings plan comes in a variety of flavors – Health Savings Account (HSA), Flexible Spending Accounts (FSA) or Health Reimbursement Arrangements (HRA). Here is the explanation and comparison of these plans to help you choose the right plan. If you want to know about the recent changes to FSA , HSA or HRA read about it here – FSA HSA changes 2011.

Comparison of the Heath Savings account (HSA), Flexible Spending account (FSA) and Health Reimbursement Arrangement (HRA)

Health Reimbursement Arrangement (HRA)

 

Flexible Spending Accounts (FSA)

Health Savings Accounts (HSA)

 

IRS Link Health Reimbursement Arrangements (HRA) Flexible Spending Accounts (FSA) Health Savings Accounts (HSA)
Overview HRA is an employer funded account used to reimburse employees for qualified medical expenses FSA is a cafeteria plan created to reimburse qualified medical expenses, health insurance premiums for premium-only accounts, or dependent care expenses HSA is a tax-exempt trust or custodial account created to pay for qualified medical expenses of the account holder and his/her spouse/dependents
Account Type Established by the employer Third party accounts set by the employer Trust, Banks or Custodial accounts
Eligibility HRA can only be established by an employer for the employee. Health FSA are employer-established benefit plans. These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. Employers have complete flexibility to partake ofvarious combinations of benefits in designing their plan. You do not have to be covered under any other health care plan to participate. To be eligible to open a HSA you must be covered under a high deductible health plan (HDHP), not be a dependent on anyone else’s health coverage and not be enrolled in Medicare.
High Deductible Health Plan (HDHP) Not required Not Required You are required to have a HDHP to have a HSA
Minimum deductible for your health plan NA NA $1200 single /$2400 family (for 2011)
Control/Ownership Employer Employer Employee
Qualified Medical Expenses HRA medical expenses (look for the HRA changes 2011 here) FSA eligible medical expenses (look for the FSA changes 2011 here) HSA eligible medical expenses (look for the HSA changes 2011 here)
Can funds be used for non-medical expenses? No No The money withdrawn for non-medical expenses is subject to 10% penalty and taxes. But HSA is your money so it can be withdrawn after paying the penalty and taxes
Who can contribute Employer Employee Employee, Employer & Family
How can the money be withdrawn Reimbursement from the employer, probably by check Check or debit card Check or debit card
Contribution limits (for 2011) NA Depending on the employer. Mostly up to $5000 $3050 single/$6100 family
Portability At the discretion of employer Amount contributed to the Flexible spending account stays with the employer if you leave. Yes. It is a personal account. It goes with you.
Carryover By law, they can be carried over but its at the Employers discretion Use it or lose it – money belongs to the employer Yes
Tax (Contribution) The employer might deduct the HRA contributions as a business expense, but there is no tax liability for the employee. Contributions to FSA are tax free and so reduce annual taxable income. Contributions to HSA are tax free
Tax (Earnings) The earnings can be credited to the HRA account if the employer chooses to do so. And the eligible reimbursement is tax free. Interest doesn’t accrue, so there are no earnings Earnings are tax free if they are taken out for medical expenses.
Withdrawal (Cashing out) Withdrawals for non-medical expenses are not permitted. Withdrawals for non-medical expenses are not permitted. Funds not used to pay for qualified medical expenses may be withdrawn but are subject to an additional 10% tax penalty except when an individual is 65 or older, disabled or has died during the year.
Investment Employer account, so you can’t choose how to invest the money Employer or third party account. You don’t have any control You can choose how to invest the money.
Can I use it to pay Insurance Premium No No Yes. But only (1) when you are on unemployment (2) Medicare and other health care coverage if you are 65 or older
Subject to COBRA Yes Yes (sometimes) No

I also have included this as a downloadable pdf for easier access. Download it here - FSA HSA HRA Comparison.

{ 7 comments… read them below or add one }

Everyday Tips

Very informative post! All I know is that our health care costs are going up dramatically next year, as it does every year. I always seem to estimate wrong about how much we need to put aside each month into our FSA. I do always prepare properly when I know braces are coming up though!

Reply

Aloysa

Thank you for posting it! Very informative and helpful. We use Flex Account and so far it is good. The first year was a little tough because we overestimated our medical expenses and lost about $100.Now we are more careful. What helps us a lot is that we both need glasses and contacts. So if we have anything left at the end of the year we just get either glasses or contacts.

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James Fowlkes

This is awesome and super-timely as we have to set our health care allocations for next year. I have used an FSA for the past 4 years. I think I am going to switch and try an HSA this year. Thanks for this! Have a great weekend!

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The Biz of Life

This is definitely something I need to brush up on. Thanks for all the info.

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Karen

To maximize your growth, especially if you can pay your deductible out of pocket (not dipping into your HSA), invest it in no-load Vanguard Mutual funds. We use hsaadministrators to grow our HSA account tax free.

Reply

101 Centavos

Good post on the comparisons. We have an HSA and have found it very convenient, especially the feature that allows us to reimburse ourselves for any qualified medical expenses.

Reply

Debbie

There is one additional point for the contribution max – Catch-up contribution (over age 55 and not enrolled in Medicare)$1,000
in addition to the $3050 single/$6100 family

Reply

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