Medical Expense Accounts: FSAs, HRAs, HSAs, and MSAs

Four types of tax-advantaged accounts help individuals and families save and pay for medical expenses that are not covered by their health insurance:

• flexible spending arrangements (FSAs)
• health reimbursement arrangements (HRAs)
• health savings accounts (HSAs), and
• medical savings accounts (MSAs).

These accounts differ in their eligibility requirements, contribution guidelines, and the advantages they offer to account holders. Learning the basics about each type of account will help you decide which one is right for you.

Flexible Spending Arrangements (FSAs)

A health care FSA (as opposed to a dependent care FSA) is an employee benefit that allows you to set aside money on a pre-tax basis to pay for medical expenses not paid by insurance.

FSA Eligibility

Generally, any employee whose employer offers an FSA as a benefit can participate. However, certain limitations may apply if you are a highly compensated or key employee.

If you are enrolled in an HSA, you might also be able to enroll in a "limited" FSA if your employer offers one. This account is similar to a regular FSA but limits qualified medical expenses to dental and vision so that it complies with HSA requirements.

FSA Tax Treatment

Contributions are made with dollars deducted from your paycheck before your employer calculates your taxes. The more out-of-pocket medical expenses you have over the course of a year, the higher your annual election (the amount you want to set aside in your FSA) should be, and the greater your tax savings would be. Withdrawals for qualified medical expenses are typically tax-free.

FSA Contributions and Distributions

Your employer will deposit your annual election into your FSA in equal installments throughout the year, depending on your paycheck schedule. The employer also may contribute to your account.

The IRS places no limit on the amount of money you or your employer can contribute to the account. However, the plan itself is required to set either a maximum dollar amount or maximum percentage of compensation that can be contributed.

You can tap your FSA to pay qualified medical expenses up to your annual election amount, even if you have not yet placed the funds in the account.

To access account funds, pay for qualified medical expenses (which range from copayments and deductibles to orthodontics and eyeglasses) out of your own pocket and then submit a request for reimbursement. Or, you can use a debit card, credit card, or stored value card linked to the FSA if your employer provides one.

You cannot receive distributions from your FSA for health insurance premiums, long-term care coverage or expenses, or expenses that are covered under another health plan.

Carefully estimate your annual medical expenses. Make sure your estimate is as accurate as possible, because you forfeit any money in your FSA that you don't use by the end of the year. (The IRS now allows plans to provide an additional two and one-half months after the end of the plan year during which employees can use their funds. Not all plans provide this option.)

Health Reimbursement Arrangements (HRAs)

An HRA is an employer-funded account from which employees are reimbursed for qualified medical expenses not covered by the employer's health plan.

HRA Eligibility

Any employee whose employer offers an HRA as a benefit can participate, though contribution limitations may apply for highly compensated employees. You can take advantage of both an HRA and an FSA, if they are offered.

HRA Tax Treatment

Contributions by your employer are not added to your gross income. Employees are not taxed on their HRA reimbursements.

HRA Contributions and Distributions

Only your employer can contribute funds to your HRA, and the schedule and amount of the contributions are determined by your employer.

To use your available HRA funds, pay for eligible expenses and submit a request for reimbursement. Or, if your employer provides a debit card, credit card or stored value card linked to your HRA, you can use that to make payment.

Eligible expenses may include all medical expenses allowed by the IRS, or they may be limited by your employer. Unlike an FSA, an HRA does allow distributions for health insurance premiums and long-term care coverage.

Depending on your employer's policy, unused funds in your account may carry over to the next year.

Employers can customize an HRA program to meet their needs. Because of this, program guidelines vary from company to company. See your employer's plan documents for rules about your HRA benefit.

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