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How to use FSAs, HSAs and HRAs to lower your health care costs

The names can be confusing, but figuring out how to use flexible spending accounts, health savings accounts and health reimbursement arrangements can cut your health care costs.

Choosing a health care plan can seem daunting. After going through your employer’s open enrollment season, you may be left you feeling like you’re swimming through the alphabet soup of medical savings options with little to show for it.

Yet finding affordable health care is more important than ever. Forty-two percent of Americans are worried about being able to pay medical costs, according to a recent Gallup poll. Meanwhile, a surprise hospital bill could break your budget, not to mention how prescription drugs, a midnight trip to urgent care and new glasses can add up over the year. In fact, the Kaiser Family Foundation found that 67% of people were at least “somewhat worried” about being able to afford unexpected medical bills.

Flexible spending accounts, health savings accounts and health reimbursement arrangements can all health you lower your medical expenses. The accounts have similar names, but understanding the differences may save you thousands each year on health care. “A health FSA, HSA, HRA – these are all great tools. They can help you offset expenses if used properly,” says Yossi Hettleman, the owner of SmartPay Payroll.

Follow these three steps to develop a strategy to lower your health care costs in a way that works best for you:

Step 1. Understand your options

Here are the particulars of the most common accounts to reduce your health care costs:

Flexible spending accountHealth savings accountHealth reimbursement arrangement
You own the account
Your employer owns the account
Employer-only contributions
You and your employer can contribute
Requires a high-deductible health plans
Money rolls over at the end of the yearSome employers may allow you to roll over up to $500✓ (limited rollover depending on the plan)
Offers investment options
Is portable
Can use the account in retirement✓ (depends on the employer’s plan)
Contribution Limits$2,700 in 2019 (The 2020 contribution limits have not been released yet.)Up to$3,550 for individuals, $7,100 for families in 2020No contribution limit, but some plans may limit reimbursements
Source: IRS

What is a flexible spending account (FSA)?

An FSA covers your out-of-pocket health expenses, such as copays, deductibles and some prescription costs. This account comes as a part of a benefits package from your employer, as a way to pay for medical expenses not covered by health insurance.

How much can you save under an FSA? You don’t pay taxes on money contributed to an FSA, up to $2,700 in 2019. That means you’ll save an amount equal to the taxes you would have paid on the money you set aside. So if you’re in the 32% federal income bracket, you would save $864 ($2,700 x 32%) this year if you contributed the maximum to an FSA.

In order to manage your FSA effectively, you need to find out how much you should contribute. This is because the money usually doesn’t roll over to the next year. So if you don’t use it, you lose it. That said, some employers may allow you to roll over up to $500 for the following year. Check with your HR department.

Keep in mind that you can’t use FSA money to pay health care insurance premiums, long-term care insurance premiums or expenses covered under another health plan.

There are also different variants of FSA. The two most common ones to consider are:

  •  Limited-purpose FSA: This account only covers dental and vision expenses.
  •  Post-deductible FSA: In this account type, you can use the FSA plan for all qualified medical expenses after paying the deductible. If you don’t reach the deductible, it only covers dental and vision costs.

What is a health savings account (HSA)?

An HSA comes with a tax deduction and contributions can be matched by your employer. However, the HSA is only an option for people with a high-deductible health plan (HDHP). That means your deductible must be at least $1,400 for an individual and $2,800 for families in 2020, according to the IRS.

Unlike an FSA, you own an HSA account, so if you change employers, you can take your money with you, and unused funds can roll over to the next year.

For 2020, you can contribute up to $3,550 for individuals, and $7,100 for families in your HSA. Depending on your HSA provider, you can invest your HSA in variety of options, including stocks, bonds, mutual funds and certificates of deposit.

However, if you plan to withdraw funds, they must be used for qualified medical expenses as defined by the Internal Revenue Service. Otherwise, the funds will be taxed at your federal income tax rate, plus a 20% penalty if you’re under 65.

What savings can you expect under an HSA? It depends on how you invest your HSA. But if you are in the 32% federal tax bracket and contribute the annual family maximum for 2020 of $7,100, you would save $2,272 on federal taxes in addition to any state and local taxes.

What is a health reimbursement arrangement (HRA)?

With an HRA, your employer reimburses you for IRS-approved health care expenses. An HRA is entirely funded by your employer, and usually unused dollars will roll over to the next year. (Whether the money rolls over or not depends on the employer’s plan.)

Your employer decides how much to fund your HRA. The Kaiser Family Foundation found that employers on average contributed $1,149 to HRAs for individual and $2,288 to HRAs for families in 2018.

Unlike an HSA, you don’t have to be enrolled in a high-deductible health plan to use an HRA, but many workers are.

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Step 2. Determine your current health care costs

Choosing the best plan isn’t just about short-term savings on health insurance premiums. It is also about thinking long-term. In fact, before even looking at health care plans, it is best to review your current health care expenses.

“Your ideal plan depends on many variables, such as how often you get sick, what options are available, and what options your employer is offering. The main question is, which health care plan makes sense for your specific situation?” Aaron Wieder of Cosmo Insurance Agency explains.

And this makes sense. Whether you use an FSA, an HSA or an HRA, your health care plan should align with your lifestyle and financial goals. There is no one solution. Hettleman suggests asking yourself the following questions when looking at your options:

  • What are your current health expenses today? That includes dental, vision, physical and mental health. Use a budgeting app to help you track how much you are spending on health care each year.
  • What are the details of your employer’s health care plans? Make sure you understand what your health plan covers and what you will pay out of pocket.
  • What are your financial goals in the next 5 years? When you understand what you may spend on health care and how much your health plan will cover, you can budget to meet your big money goals.

Step 3. Match your needs to your health insurance plan

The next part is to compare plans. The goal is to have your insurance plan match your health care needs, financial resources and goals as much as possible.

For complex situations, ask your HR department or a benefits expert to help you reach a decision that makes sense for your situation. It is crucial that you understand your health plan, fine print and all. But like any topic in health or finance, the answer lies with your health care needs and your financial resources.

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Kelsey Ray Banerjee is a freelance writer specializing in finance and fintech. An avid traveler, she spends her time trying to create a more efficient budget and learning languages.

Haven Life Insurance Agency (Haven Life) does not provide tax, legal or investment advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or investment advice. You should consult your own tax, legal, and investment advisors before engaging in any transaction.

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Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our editorial policy

Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.

Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.

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