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HSAs, FSAs, HRAs -- what’s the best health savings plan for you?

Health care costs can be off the charts these days. In fact, health care costs are outpacing inflation and annual income growth.

More of your household budget is going to health costs than a decade ago. Lively, a health savings account (HSA) platform, estimated that 37 percent of personal household expenses are spent on health care.

It’s not getting any better, but there is a way to take the sting out of those costs -- medical savings accounts.

There are three types of savings accounts connected to health care:

  • HSAs
  • Flexible spending accounts (FSAs)
  • Health reimbursement arrangements (HRAs)

These accounts vary based on who contributes, how much you can contribute, how you can use the money, and how it impacts your taxes.

HSAs and FSAs are more common options than HRAs. About two-thirds of employers offer FSAs.

The Kaiser Family Foundation estimated that 22 percent of companies with health benefits provided an HSA in 2018. That’s compared to only 7 percent that offered HRAs. So, slightly less than one-third of all companies have either an HSA or an HRA.

Enrollment in those plans has increased from 20 percent of workers in 2013 to 29 percent in 2018, Kaiser Family Foundation said.

Here are how the three types of accounts compare:

HSAFSAHRA

How to think of this account

Your portable health savings plan

An annual health savings plan with money that goes away each year or if you change jobs

Your employer's way of helping you pay for health care

Who owns it?

Employee

Employer

Employer

Who can contribute? 

Employee and employer

Employee and employer

Employer

Can you take funds with you when you change jobs? 

YesNoNo

Contribution limits

$2,700 per person per year

$2,700 per person per year

None

Tax implications

Contributions are tax deductible

Employee contributions are tax-free

No

Investment opportunity

YesNoNo

Connected to what type of plan?

HDHP

Any plan

Any plan, but usually HDHP

Can funds carry over? 

YesNo

Allowable, depends on employer's plan

Catch-up contributions for people 55 and over? 

Yes, $1,000 on top of the contribution limits

NoNo

Can you use funds to pay for premiums? 

No

NoNo

Can you use funds for non-health care purposes if you're under 65? 

Yes, but you're subject to a tax penalty of at least 20 percent

NoNo

Can you use funds for non-health care purposes if you're 65 or over? 

Yes, but the funds are considered taxable income

NoNo

 Now, let’s take a deeper dive into the three types of savings accounts and how best to use them.

HSAs and how to use them

HSAs are paired with high-deductible health plans (HDHPs). As the name suggests, HDHPs have high deductibles. That means higher out-of-pocket costs.

HSAs have taken off over the past decade. Lively estimated that HSAs increased by nearly 400 percent between 2007 and 2017.

HDHP-qualifying plans must have a deductible of at least $1,350 for individuals and $2,700 for families. The HSA can help pay those out-of-pocket costs, as well as invest for the future.

The individual owns the HSA. You can roll over funds into the next year. You’re also able to take the account with you when you change jobs.

You can contribute to it until age 65 even if you’re not working. The HSA also lets you use the funds for non-health care reasons, but you will get penalized or pay a tax on the money.

Some employers have put restrictions on HSAs. One example is employers requiring that employees take part in wellness programs to get employer contributions for HSAs. Michael Thompson, president and CEO of the National Alliance of Healthcare Purchaser Coalitions, said that’s becoming more common.

Though HSAs have grown, Steve Wojcik, vice president of public policy, National Business Group on Health, an association of 435 large U.S. employers, said his group is seeing businesses offer HDHPs with other options than an HSA.

Wojcik said a recent NBGH survey found that only 30 percent of large employers planned to offer an HDHP with an HSA as their only health benefits. That’s down from 39 percent in 2018.

However, HDHPs remain a popular choice for employers.

“Our most recent survey showed that 91% of employer respondents offered these types of plans as an option for employees. The average employee-only plan deductible is $1,600, and average employer contribution to employees’ HSA accounts is $500,” Wojcik said.

HSAs allow people to invest, but most aren’t taking advantage of those benefits. Instead, rising health care costs are forcing people to spend more of their HSAs on health care now.

Lively estimated that 96 percent of HSA funds are spent annually to reduce present health care costs. That may benefit people now, but they won’t have that money squirreled away to help pay for a hospitalization. It also won’t be available to invest.

Overall, Lively said 86 percent of HSA funds go toward medical costs. Only 9 percent are spent on dental and 5 percent on vision costs.

When only accounting for medical costs, people are spending their HSA funds this way:

  • 41 percent on physician and clinical services
  • 25 percent on prescription drugs
  • 7 percent on hospital expenses
  • 4 percent on lab work

If you’re young and relatively healthy, it’s wise to invest some of the HSA funds to get the highest return possible. Along the same lines, if you have an established HSA from one job and move to another where an account is automatically set up for you, make sure you use the one with a better return.

You have every right to withdraw money from one account and deposit it in another. You will be taxed on this, but the interest on one account might be high enough to make it worth the move. Do your homework so you can make the best choice for your situation.

When you get an HSA, you’ll first need to figure out your contributions. Since these funds can carry over to the next year, you don’t have to be as exact as with an FSA. These funds could help you with health care costs in retirement. A recent Fidelity survey put a price tag on medical expenses for a couple in retirement at $280,000.

Individuals may contribute $3,500 per year to their HSAs, while families can add $7,000. The key here is to leave as much as possible in the account, so it’s available when you need it later in life.

A benefit of an HSA is that you can withdraw funds similar to a 401(k) or an IRA. There’s one major difference: If they’re used for qualified medical expenses, the HSA funds can be taken out tax-free. That fact can make an HSA a crucial part of an investment plan alongside a 401(k) or IRA. If they’re not for health care, you’ll get penalized or that money will be taxed.

 

FSAs and how to use them

FSAs are the oldest medical savings accounts. The idea is to let people save for their health care needs taxfree. FSA regulations were once more lenient, so you were able to use HSAs for more products, including contact lens solution.

However, regulations are now stricter, though you can pair an FSA with any health plan. You’re no longer able to go on a spending spree before the end of the year to stock up on contact lens products. Now, FSA money is limited to medical expenses, such as deductibles, copays, medications and medical equipment and supplies like crutches, and bandages.  

You lose unused FSA money at the end of the year, so it’s important to not put too much into those accounts.

The biggest challenge when setting up the savings accounts is knowing how much exactly to have deducted from your paycheck. A good rule of thumb is to figure out how much you paid out-of-pocket for health care expenses last year.

Using your credit card bills and receipts, and possibly your tax returns, you can figure out how much you should set aside from your paycheck into the accounts and feel relatively assured that you’re in the right ballpark for your needs.

For example, if you know your family deductible is $5,000 per year, it could benefit you to contribute $5,000 to an FSA and use that tax-free money to compensate for the high deductible.
Also, remember that if you change jobs, you lose that money. Make sure to keep that in mind before putting too much into your FSA and not take advantage of it.

Think of an FSA as a short-term savings account for health care. You won’t be able to carry over the funds into the next year. So, it’s critical to estimate how much you will need and then spend the money.

 

HRAs and how to use them

The employer owns HRAs. Those accounts carry over, but if you leave your job, you lose the HRA money.

Employers fund these accounts, and the money is intended to cover costs above and beyond the company-provided health insurance plans. Some companies also offer FSA plans in case workers want to contribute additional funds.

The HRA benefits both the employer and the employee. The employer gives tax-free contributions; the employees get an account with extra money in it.

Much like an HSA and FSA, using an HRA shouldn’t be difficult. Typically, account holders can use them in two ways:

  • A debit/credit card and pay for expenses directly with it.
  • File receipts and get reimbursed for the expenses.

 

What’s the right medical savings plan for you?

Most people won’t have a choice. Your employer will decide the plan it offers. However, if you can choose, here are some things to think about:

  • Do you want a savings account that collects interest?
  • Do you want a savings account that only helps you now, and you don’t care so much about the future health care costs?
  • Do you want a plan that you can take with you or does that matter?
  • Do you want a plan that allows you to use funds for non-health care-related matters?

Once you figure out your health care savings need, you can choose the right plan for you -- whether that’s an HSA, FSA, or HRA.

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