HSA? HRA? FSA?

Posted By Paul

So just when you thought medical insurance couldn't get more confusing they added even more types of health related accounts for you to puzzle out. I've been trying to figure out what they all are so I thought I would share what I found.

Let's start with the FSA. For that I'm going to refer people to an earlier post which describes them in detail:
Are FSA's worth doing?

So then what is a Health Reimbursement Account (HRA)?
An HRA is an account setup by your employer that you can use for medical expense reimbursement. It's essentially your company telling you: "We're going to give you X dollars to help you pay for your health care costs this year."

Generally you have to submit proof of medical expenses to your company for reimbursement.

So what's the downside? As near as I can tell there really isn't one. However, the HRA might not be for everyone. For example, one thing I've seen are things where a company has two plans that you can choose from:

Plan A: Costs you $1000 a year and you don't get an HRA.
Plan B: Costs you $2000 a year and you get an HRA of $1500.

If you assume Plan A and Plan B have the same coverage, which one should you choose?

Well, if you are healthy Plan A might be better since you might have health care expenses that are so low that you might never even USE your HRA. However if you have some known health issues that makes you certain that you'll end up using that $1500, then Plan B becomes the better option.

Okay, so then the final account to cover is the Health Savings Account (HSA)

The first thing to know is that not everyone is ALLOWED to get an HSA. You only qualify for an HSA if you are in what is considered to be a High Deductible Health Plan (or HDHP...sigh all these abbreviations). If you are enrolled in an HDHP (your employer should let you know) then you are allowed to open an HSA.

So what does an HSA do? Well first lets cover how money goes INTO the HSA. Contributions come from YOU (not your employer like in the HRA), and contributions go in pre-tax (which is cool).

While in your account your money can be invested (the investment vehicles depend on the financial institution that holds your account usually a typical set of funds and a money market).

So how does money come out? You use it for reimbursement of medical expenses (by submitting paperwork to whoever is administering your HSA).

Now one cool thing about the HSA is that the money doesn't "expire" at the end of the year like it does with an FSA, it remains yours so if you have a lucky year you have that money saved up for the following year.

If you withdraw money from your HSA that isn't for a medical expense then you take a penalty, but from what I've read, this penalty disappears when you turn 65, so if you whatever money you don't use become yours without penalty when you turn 65, so in a way you can consider it part of your retirement funds.

Also, if you leave your job or change health plans such that you are no longer in a HDHP then your money doesn't disappear. If you leave your job your account remains yours. If you end up switching to a health plan later that ISN'T an HDHP then you're not allowed to contribute to your HSA any more, but you can still withdraw money for qualified expenses.

It seems to me that an HSA can be a good choice for people who are in a situation where they don't have many health expenses currently, but expect to in the future. They can put money in their HSA and if they are lucky enough to have a year without any significant medical costs then they have those contributions saved in case it happens the following year. If you manage to go several years without any significant medical costs then you could build up a pretty nice little rainy day fund for when something does happen.

I found a link to a pdf that did a nice comparison between the three accounts:

HRSFSAHSA.pdf

I also recommend the wikipedia entries as they all do a good job of explaining the accounts in further detail:

Wikipedia Entry - FSA
Wikipedia Entry - HRA
Wikipedia Entry - HSA