There are several types of accounts available to help you save on your taxes and manage your medical costs.
Health Savings Account (HSA)
You don't need to have health coverage through an employer to set up and contribute to an HSA, but you do need to be enrolled in a high deductible health plan that meets Internal Revenue Service (IRS) requirements. For calendar year 2019 the annual limitation for deductible for an individual is $3,500 and for a family is $7,000.. There are other eligibility rules set by the IRS, so be sure you ask about those before you start contributing.
An HSA is a tax-exempt account that belongs to you. The funds may be used to pay for your plan deductible and/or other qualified medical expenses that do not count towards your deductible. You can use your HSA to pay for qualified health care expenses for you, your spouse and/or your eligible tax dependents. It gives you a way to save up for planned or unexpected medical expenses, or save for health care expenses in retirement.
The IRS sets a limit on how much can be contributed to your account each year. If you are 55 or older, your contribution limit is higher. (Once you're enrolled in Medicare, you can't contribute to an HSA but you can still withdraw money tax-free to pay health care expenses.)
The key features of an HSA include:
- Your HSA contributions are tax-deductible (if you participate through your employer's plan, your contributions may be deducted from your paycheck pre-tax).
- Interest or investment returns earned on your account are tax-free. Often, your account balance has to reach a certain level before you can earn interest or invest it.
- Withdrawals for qualified medical expenses are tax-free. (You can withdraw money for non-medical reasons, but you'll need to pay taxes on it.)
- Unused funds and earnings are carried over, without limit, from year to year.
- You own the money in your HSA -- even when you change plans, change jobs, or retire.
- Your HSA is administered by a trustee/custodian (typically a bank).
If you have HSA questions, contact the organization that administers your account.
Health Reimbursement Account (HRA)
An HRA is an employer-funded tax-free account that that you can use to pay for qualified medical care expenses. HRAs are typically combined with a health plan with a high deductible. You cannot contribute to an HRA.
The account belongs to the employer and the employer sets the rules. If you have an HRA, be sure you review how it works so that you understand whether you need to do anything in order to receive the employer contribution, if you can roll over unused funds from year to year (or the limit on how much can be rolled over), which expenses are eligible, whether you will forfeit your unused balance when you leave that employer, etc.
Flexible Spending Account (FSA)
Health care FSAs are offered by many employers to give employees a way to set aside pre-tax money to pay for qualified medical expenses.
- You contribute to your account pre-tax. Typically, you choose how much you want to contribute for the year. That amount is divided equally and deducted pre-tax from your paychecks throughout the year. There's a limit on how much you can contribute each year.
- You can use your health care FSA to pay for eligible expenses for yourself, your spouse and/or anyone you claim as a tax dependent.
- Each year you need to use up your FSA for expenses that happen in that same year. Some plans allow you to carry over a certain amount to the next year. But, generally, there is some kind of 'use it or lose it' rule.
- You need to re-enroll every year if you want to participate.
Employers sometimes offer more than one type of FSA:
- Health insurance premiums (known as a "premium-only plan").
- Qualified medical expenses.
- Dependent care (day care) expenses.
It's important to know that these are separate accounts and you cannot move money from one to the other. Each type of account has its own limits and rules.
If you have flexible spending account questions, contact your employer.