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More of your household budget is going to health costs than a decade ago. Lively, a health savings account (HSA) platform, estimated that 37% 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 health care savings accounts:

  • 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 20% of companies with health benefits provided an HSA in 2020. That’s compared to only 8% that offered HRAs. So, slightly less than one-third of all companies have either an HSA or an HRA.

Here are how the three types of accounts compare:


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?




Who can contribute? 

Employee and employer

Employee and employer


Can you take funds with you when you change jobs? 

Yes No No

Contribution limits

$3,600 per person or $7,200 for family coverage per year

$2,750 per person per year


Tax implications

Contributions are tax deductible

Employee contributions are tax-free


Investment opportunity

Yes No No

Connected to what type of plan?


Any plan

Any plan, but usually HDHP

Can funds carry over? 

Yes No

Allowable, depends on employer’s plan

Catch-up contributions for people 55 and over? 

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

No No

Can you use funds to pay for premiums? 


No No

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%

No No

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

Yes, but the funds are considered taxable income

No No

 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% since 2007.

However, Lively also found that people with HSAs aren’t putting enough money into them. In a recent study, Lively said 56% of HSA members have less than $1,050 in their accounts. The average family spends more than $8,000 annually on health care, which shows that HSAs aren’t helping people as much as they could if members contributed more to the accounts. 

HDHP-qualifying plans must have a deductible of at least $1,400 for individuals and $2,800 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 at 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.

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% 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% of HSA funds go toward medical costs. Only 9% are spent on dental and 5% on vision costs.

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

  • 41% on physician and clinical services
  • 25% on prescription drugs
  • 7% on hospital expenses
  • 4% 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 $3,600 per year to their HSAs, while families can add $7,200. 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.


HSAs and taxes

HSAs affect your taxes in three ways, according to Shobin Uralil, COO and Co-Founder of Lively:

  • HSA contributions can be deducted on your personal income tax return.
  • HSA contributions can be taken from your paycheck before they’re taxed. 
  • Interest and dividend gains connected to HSAs are tax-deferred.

    Since HSAs impact your taxes, you’ll need to keep that in mind at tax time. Uralil said you’ll need to fill out HSA Form 8889 to claim deductions.

    Uralil added that you may need other IRS forms if you have an HSA: 

    • IRS Form 1040 (individual income tax return) — You need the 1040 long form to file your HSA. You can’t use the 1040EZ form if you have an HSA.
    • IRS Form 5498-SA (total HSA contribution) — Your HSA custodian will provide you the total contributions made to your HSA for the tax year by May 31. It will be on Form 5498-SA. “While you don’t need this to file your tax return, it’s handy to confirm your contribution amount and to keep it in case you get audited,” Uralil said. 
    • IRS Form W-2 (wage and tax statement)W-2 provides information about your employer’s HSA contributions, in addition to your wages and taxes withheld. Look for Box 12-W for pre-tax HSA contirbutions made to your HSA. That will help you fill out Form 8889. “Contributions made by other means, like after-tax, will not turn up on your W-2 and should be reported on Form 8889,” Uralil said. 
    • IRS Form 5329 (excess HSA contributions) — You need to submit a 5329 with a 1040 to report excess HSA contributions. Uralil said you only need this form if it’s applicable. 


      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 tax-free. FSA regulations were once more lenient. Back then, you were able to use HSAs for more products.

      However, regulations are now stricter. 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 can also use an FSA for over-the-counter medications and feminine products. 

      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 to the $2,750 limit to an FSA and use that tax-free money to compensate for the high deductibleAlso, 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. 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.

      HRAs were once a more common savings account. Now, less than 10% of employers have this option. 


      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.

      Les Masterson contributed to this article.