Over the years, I’ve used all three of these types of medical reimbursement accounts. I started with an FSA (Flexible Spending Account). Then I moved to an FSA with an HRA (Health Reimbursement Account). Now I use an HSA (Health Savings Account) with an FSA. Note: When you or your spouse have an HSA plan, you are limited limited to using your FSA for pretty much only dental and vision. Until recently, I never cared much about the differences between each. I just wanted to reduce my income tax bill and have money set aside for medical expenses. Here’s the gist of each one. The video goes into greater detail.
FSA
Annually you can make an election for how much you want withheld from your paycheck to be put in this Flexible Spending Account (FSA). The withholding reduces your taxable income. You just need to turn in receipts to be reimbursed. Health Equity has a great list of what is reimbursable for the various accounts. The limit you can have withheld is $3,200 for 2024.
The total annual amount is available on day one (usually January 1st). That means you can be reimbursed for more than you’ve had withheld from your paycheck. If you happen to leave employment, you also don’t have to pay it back.
If you don’t use up all the money by the end of the year, only $640 in 2024 carries forward into 2025. That mean if you have $1,000 in the account at the end of the year, you may have lost $360. Also, if you leave employment without using all the money, that stays with your employer.
HRA
The rules for a Health Reimbursement Account (HRA) can vary quite a bit from employer to employer. The HRA is usually built into the design for the health plan so you need to have the right plan in order to have an HRA.
The main thing to be aware of is that if you leave employment, you will lose this money. There may be an exception if you are leaving employment through retirement. You also can’t make personal contributions through a paycheck withholding. The amount the employer contributes is not taxable income.
The employer sets a lot of the terms. You may have the money available on day 1, or it may be added to the account throughout the year. Unused amount may rollover to the new year or be lost.
HSA
Certain high deductible health plans allow for employees to have a Health Savings Account. The employer may or may not choose to make a contribution. The employee can make contributions through payroll withholding which will reduce taxable income. The combined contributions for an HSA is limited to $4,150 for a single person and $8,300 for a couple. This combined amount includes your employers contributions, your contributions, and the contributions from your spouse and their employer.
An HSA is a type of bank account that is actually in the name of the employee. This is your money so you don’t have to worry about yearend rollovers or what happens if you leave employment. Reimbursements are limited to the balance of the account. Usually your employer will make monthly deposits.
Which would I recommend?
Here’s my 2¢ on what I would usually recommend:
- Who is the HSA right for? This is my favorite. If you have the option of choosing a health plan with an HSA, I would almost always choose this plan. I like that I can reduce my taxable income by up to $8,300. I like that I can invest the money in this account. I like that it’s in my name so I can build a personal safety net if everything goes south with either my health or employment.
- Who is the HRA right for? If the amount the employer provides for the HRA is about the amount you need to cover most of your medical expenses, I might choose this one as it’s free money. Do not use this as a savings account! The money is not yours and cannot be invested.
- Who is the FSA right for? For most people, I would avoid an FSA if I have an HSA plan already. If I don’t have an HSA plan, an FSA is a great option for reducing your taxable income. Make sure you are carefully in how much you elect to have withheld to avoid the risk of losing money at the end of the year.
Useful Links
- List of eligible health expenses: https://www.healthequity.com/hra-qme
- My QSEHRA post: https://jctaccounting.com/2020/08/14/how-to-reimburse-employee-health-costslegally/
Can both spouses have an FSA for medical expenses?
Yes! Both spouses can contribute up to the max for FSA’s. For whatever reason, FSA limits just apply to the individual while HSA limits apply to the family.
This information is golden! Thank you!