Choosing the Right Plan

Spending Accounts For Health Care Expenses

A health spending account is a bank account that allows you to set aside money for health care expenses and save on taxes. If you want to open a spending account to help you save for health care expenses, you have several options to choose from.

Health Savings Accounts (HSAs)

An HSA lets you save money for qualified medical expenses, tax-free. You don’t pay taxes on the money you put in, the money you take out (for qualified medical expenses), or any money you earn on the account. The IRS determines what qualifies as a health expense, which includes your out-of-pocket costs (copays, deductibles, coinsurance), along with some services not covered by a health plan, such as Lasik surgery. Insurers can only offer an HSA with a special type of high deductible health plan which meets guidelines set by the IRS. With an HSA, you own the account even if you change health plans or change jobs.

Health Reimbursement Accounts (HRAs)

With an HRA, you can save money for health expenses, but the account is owned and funded by your employer. The employer determines what expenses it can be used for, whether any money in the account rolls over to the following year, and several other account options. If you change health plans or jobs, any unused money in your account cannot be taken with you.

Flexible Spending Accounts (FSAs)

An FSA is also available through an employer, but does not have to be offered with a particular type of health plan. There are three types of FSAs — one that can be used to pay for health expenses, a limited-purpose FSA, and one that can be used for dependent care expenses. You save money because your contributions to an FSA are deducted from your paycheck before taxes. When you choose an FSA, you need to budget carefully because a “use it or lose it” rule applies. Any money left over in your account at the end of the year is forfeited.

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