Health Care Expenses: HRAs, HSAs, and FSAs…Oh My!

Most people don’t really know or understand how to use these types of accounts to reduce their taxes and help pay for health care expenses.

Paying Health Care Expenses with an HRA (Health Reimbursement Account)

Ownership

HRAs are a little tricky for a few reasons. The first thing that you need to understand is that your employer owns your HRA, and only your employer can fund the account. The money that your employer contributes to your HRA account can’t be counted as income. It is up to your employer to determine if you can take the money if you leave the company (usually not). The good news is that you do not have to worry about reporting the account when you do your taxes.

Qualifying Expenses

You can use the money in an HRA to pay for COBRA (continues your insurance after your employment leaves if you meet specific criteria) or other plan premiums if your employer allows it. Although the IRS defines what counts as qualified medical expenses, your company can further limit what costs you can be reimbursed for at their discretion. You will need to provide documentation before being compensated by an HRA, and this can sometimes be a real hassle. Costs that may be covered by an HRA include:

  • Medical
  • Dental
  • Vision
  • Prescription and over-the-counter expenses
  • Post-tax insurance premiums

The CARES Act

As of 2011, the Affordable Care Act prohibited using HRA funds to pay for over-the-counter medications. However, the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) act changed that and you can now purchase many more products with HRA funds. The CARES act is permanent and won’t change even when the COVID-19 crisis ends.

Paying Health Care Expenses with an HSA (Health Savings Account)

An HSA is a tax-advantaged member owned accounts that let you save pre-tax dollars for future qualified medical expenses. The funds that you put into the account never expire. You can choose to keep your HSA money in a basic interest-bearing account, or, in some cases, you can invest the money in stocks, bonds, or mutual funds.

Ownership

You must be on a high-deductible health plan to participate in an HSA. You own an HSA, and either you or your employer can put money into the account. Of the three arrangements described here, only HSAs are available to individuals who self-pay for their insurance. These accounts can be used for medical care or saved for retirement. They are portable so you can take them with you if you leave your job.

Qualifying Expenses

Medical expenses covered include:

  • Medical
  • Dental
  • Vision
  • Prescription and over-the-counter expenses, including things like sunscreen and lip balm
  • COBRA
  • LTC premiums or expense

New rules allow a high-deductible health plan to cover pre-deductible, specific health care benefits for specific chronic conditions, and the health plan can remain HSA- eligible. These services include:

ConditionTreatment
Congestive heart failure or coronary artery diseaseACE inhibitors
Beta-blockers
Heart diseaseStatins
LDL-cholesterol testing
HypertensionBlood pressure monitor
DiabetesACE inhibitors
Insulin or other glucose-lowering agents
Retinopathy screening
Glucometer
Hemoglobin A1c testing
Statins
AsthmaInhalersPeak flow meters
Osteoporosis or osteopeniaAnti-resorptive therapy
Liver disease or bleeding disordersInternational Normalized Ratio (INR) testing
DepressionSelective serotonin reuptake inhibitors (SSRIs)

Tax Implications

You must report the HSA account on your taxes. HSA contributions made via payroll deduction are free of income and payroll taxes until you withdraw funds. When you reach age 65, it will be subject to income tax if you wish to withdraw the money. If you withdraw money before you turn 65 and use it for anything other than medical expenses, you’ll have to pay income tax and a 20 percent penalty. You do not have to start taking money out of the account by a specified age as you do with some other types of retirement accounts. However, after you enroll in Medicare, you can’t contribute any more to your HSA.

High Deductible Health Plan Minimum Deductible:

2020 – $1,350 single or $2,700 family

2021 – $1,400 single or $2800 family

Maximum Out of Pocket:

2020: $6,900 single or $13,800 family

2021: $7,000 single or $14,000 family

Contribution Limits:

2020: $3,550 single or $7,100 family

2021: $3,600 single or $7,200 family

Paying Health Care Expenses with an FSA (Flexible Spending Account)

Ownership

Your employer owns your FSA, but you can put money into it if you would like. The IRS sets the amount that you and your employer can put into an FSA each year. You do not need to declare an FSA account on your taxes.

Contribution and Forfeiture of Funds

If you are contributing to your own FSA, a specified amount is taken out of your paychecks. If you don’t use the money by the end of the year, you might forfeit the amount left in the account to your employer. At their discretion, some employers will let you pay expenses from the previous year for the first two and a half months of the new year, or they might allow you to carry over up to $500 from one year to the next. If you lose your job, the money in an FSA is forfeited. 

Submitting Expenses

You will either be issued a debit or credit card loaded with your total FSA amount at the beginning of the year, or you will pay with your own money and submit receipts for reimbursement afterward.

Types of FSAs

  1. Health care FSA – Used to pay for qualified medical, pharmacy, dental, and vision expenses. Sometimes these are post-deductible health FSAs, meaning that you must meet your plan’s deductible before using the funds. FSA funds can be used to cover deductibles, copays, and coinsurance. 
  2. Dependent care FSA – You can use this to pay for qualified expenses for your dependents, who might be children under age 13 or adults who can’t care for themselves. Qualified expenses include daycare, elder care, preschool, and day camp. 
  3. Limited purpose FSA – This kind of FSA is for paying qualified dental and vision expenses.

Summary

Although all three options are tax-advantaged accounts that allow you to save money and pay for medical expenses, they have many differences. If you buy your own insurance, the only one that you’re eligible for is the HSA. However, employers can offer any of these options, and often more than one simultaneously. It’s up to you to educate yourself to make the best choices for yourself.