You can save 30% or more on healthcare expenses due to the tax advantages from an FSA, HSA, or HRA, but do you know what the differences in these benefit accounts? Which one is right for you?
An FSA, or Flexible Spending Account, allows you to make contributions for healthcare expenses before taxes are taken out of your paycheck. Each pay day, when you contribute to your FSA, the amount is deducted from your gross taxable income before taxes. You still make the same amount, but you also pay less in taxes than if you did not contribute, and the money is available for you to use for qualified healthcare expenses through your FSA. It’s important to keep in mind, though, that an FSA is owned by your employer.
HSAs, or Health Savings Accounts, are similar to FSAs with a few important differences. You make contributions to the account before taxes for your healthcare expenses. However, the account is owned by you, the employee, and the money is yours whether you switch jobs or retire. The tax advantages are also greater: you get a triple tax advantage, including tax-free contributions, tax-free reimbursements for qualified medical expenses, and tax-free growth on interest and investment income.
Finally, there’s the HRA, or Health Reimbursement Arrangement. HRAs are different than an FSA or HSA because employees do not contribute to the account. An HRA can be used for qualified healthcare expenses, but the account is owned and funded by your employer. The best part for you is that not only are you paid back for healthcare expenses, but you do not have to pay taxes on the money that is reimbursed to you, and it does not count toward your taxable income.
You do have another option – deducting your medical expenses at tax time. But keep in mind, besides having to pay your healthcare expenses using after-tax dollars, you can only deduct expenses that exceed 10% of your adjusted gross income.
Make the smart choice and enjoy the tax benefit savings of an FSA, HSA, or HRA!