Common Healthcare Savings Accounts

Read all the rules on Health Savings Accounts with IRS Publication 969. 

Learn about Qualified Medical Expenses with IRS Publication 502. 

Flexible Spending Arrangement (FSA)

The “Use-It-Or-Lose-It” One

Flexible Spending Arrangements (FSA) are tax-advantaged accounts offered by employers that allow employees to set aside pre-tax dollars for eligible medical, dental, and vision expenses.  FSAs are funded through salary deductions, meaning that employees contribute a portion of their wages to the account before taxes are applied, reducing their taxable income and potentially saving on income and payroll taxes.

The funds in an FSA can be used to cover a wide range of qualified expenses, including copayments, deductibles, prescription medications, medical supplies, and certain over-the-counter items.  One crucial feature of FSAs is the "use-it-or-lose-it" rule, which generally requires employees to spend the funds within the plan year or a limited grace period (consult your plan rules). Any remaining funds at the end of the year may be forfeited unless the employer offers a carryover or grace period option.  There are limits to the carryover each year.  The IRS allows up to $610 into 2024 and $640 into 2025.  

FSAs can provide significant financial benefits by reducing out-of-pocket healthcare costs and lowering an employee's taxable income, making them a valuable tool for managing healthcare expenses. However, it's important to plan contributions carefully to avoid losing any unspent funds.

FSA Benefits:

1. Pre-tax contributions: FSAs allow employees to contribute pre-tax dollars, reducing their taxable income and potentially lowering their overall tax liability.

2. Immediate access to funds: Employees can use the funds in an FSA to pay for eligible medical expenses throughout the plan year, providing immediate financial relief for healthcare costs.

3. Wide range of eligible expenses: FSAs cover various qualified medical, dental, and vision expenses, including copayments, deductibles, prescription medications, and certain over-the-counter items.

4. Predictable budgeting: By contributing to an FSA, employees can set aside a predetermined amount of money each year, helping them budget and manage their healthcare expenses more effectively.

5. Employer contributions: Some employers may offer FSA contributions or matching programs, providing additional financial support for employees' healthcare expenses.

Drawbacks of FSAs:

1. Use-it-or-lose-it rule: FSAs typically have a use-it-or-lose-it rule, meaning that any remaining funds at the end of the plan year may be forfeited, unless the employer offers a carryover or grace period option.

2. Limited rollover options: While some employers may allow a carryover of a portion of unused funds or provide a grace period, the flexibility varies, and employees may risk losing unspent funds.

3. Lack of portability: FSAs are tied to specific employers and may not be transferable if an individual changes jobs or health plans, limiting long-term savings potential.

4. Contribution limitations: FSAs have lower contribution limits compared to HSAs, which may restrict individuals from saving larger amounts for future healthcare needs.

5. Dependency on employer offerings: The availability and specific features of FSAs are determined by employers, and not all employers offer FSAs as part of their benefits package.

Health Savings Account (HSA)

The “Triple Tax Savings” One

Health Savings Accounts (HSA) are tax-advantaged accounts available to individuals who are enrolled in high-deductible health insurance plans (HDHPs), providing a way to save and pay for qualified medical expenses.  HSAs offer a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.

Individuals can contribute to an HSA on a pre-tax basis through payroll deductions or make tax-deductible contributions if not done through an employer. The funds in an HSA can be invested, allowing for potential growth over time. HSA funds can be used to pay for a wide range of qualified medical expenses, including deductibles, copayments, prescription medications, vision and dental care, and certain medical devices.

The funds in an HSA roll over from year to year and remain with the account holder even if they change jobs or health plans, providing an opportunity for long-term savings and future healthcare expenses. HSA balances may be invested for further growth opportunities. 

HSA Benefits:

1. Triple tax advantage: HSAs offer tax deductions for contributions, tax-free growth on earnings, and tax-free withdrawals for qualified medical expenses.

2. Portability: HSA funds roll over from year to year and remain with the account holder, even if they change jobs or health plans, providing long-term savings and flexibility.

3. Investment potential: HSAs often allow for investment options, enabling the funds to grow over time and potentially accumulate significant savings.

4. Higher contribution limits: HSAs generally have higher contribution limits compared to FSAs, allowing individuals to save more for future healthcare needs.

5. Savings for retirement healthcare expenses: HSA funds can be used to cover qualified medical expenses in retirement, making them a valuable tool for saving for healthcare costs after retirement.

HSAs Drawbacks:

1. Eligibility requirement: HSAs are only available to individuals enrolled in high-deductible health insurance plans (HDHPs), limiting access to those specific insurance plans.

2. HDHP risks: HDHPs typically have higher deductibles and out-of-pocket costs, which may pose a financial burden for individuals with significant healthcare needs.

3. Limited flexibility for non-medical expenses: While HSAs offer tax advantages for medical expenses, using the funds for non-medical expenses incurs taxes and penalties until the account holder reaches retirement age.

4. Administration and fees: Some HSAs may have administrative fees or require minimum balance requirements, which can eat into the potential savings or investment gains.

Medical Reimbursement Arrangements (MRA) & Medical Savings Account (MSA)

While far more rate, both MRAs and MSAs are types of healthcare savings accounts that can offer benefits to employees of certain employers.  

Medical Reimbursement Arrangements (MRA) are employer-sponsored accounts that can only be contributed to by the employer and are not associated with any specific medical plan selection.  These accounts may be used to reimburse employees for qualified medical expenses. They rarely allow rollovers year to year or portability.  Allowances depend on you employer rules.  

Medical Savings Accounts (MSA) have been fazed out but some plans still exist as Archer MSAs for those that are grandfathered in.  No new MSAs are created today.  These accounts are associated with the use of High-Deductible Health Plans.