Health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement accounts (HRAs) are three spending accounts that fall under consumer-directed healthcare. They’re used solely for medical costs and expenses.

Health savings account (HSA)

A health savings account (HSA) is a tax-exempt savings account you can use to pay for certain medical expenses. To be eligible, you must meet the following requirements:

  • You’re covered under a high deductible health plan (HDHP).
  • You have no other health coverage.
  • You’re not enrolled in Medicare.
  • You can’t be claimed as a dependent on someone else’s tax return.
  • Each spouse who is an eligible individual who wants an HSA must open a separate account. You can’t have a joint HSA.

Any contributions you make to your HSA will remain in your account until you use them. Once you enroll in Medicare, you’re no longer eligible for this type of account. Beginning with the first month you’re enrolled in Medicare, your contribution limit becomes zero.

Flexible spending account (FSA)

A flexible spending account (FSA) is tax free or pre-tax account that you can use to pay for certain out-of-pocket healthcare costs. These costs include deductibles and copayments, but not insurance premiums.

  • You can use funds in your FSA to pay for certain medical and dental expenses for you, your spouse, and your dependents.
  • An FSA is usually funded through voluntary salary reduction agreements with your employer.
  • FSAs are limited to $2,550 per year per employer. If you’re married, your spouse can put up to $2,550 in an FSA with their employer too.
  • Employers may make contributions to your FSA, but aren’t required to.

Generally, you must use the money in an FSA within the plan year. But your employer may offer you a grace period up to 2.5 extra months or allow you to carry over up to $500 to use the following year. Your employer can offer either one of these options, but not both. It’s not required to offer either one.

As long as you’re employed, you can continue to make contributions to your FSA through payroll deduction. Medicare is not a determining factor, like it is for an HSA.

Health reimbursement account (HRA)

A health reimbursement account (HRA) is a tax-advantaged benefit that allows both employees and employers to save on the cost of healthcare. The following applies to this type of account:

  • The employer sets aside a specific amount of pre-tax dollars for employees to pay for healthcare expenses including premiums on an annual basis.
  • The plan must be funded solely by the employer and cannot be funded by salary reduction.
  • The plan may provide benefits for substantiated medical expenses only.

Depending on the plan design, expenses that may be reimbursed from an HRA include:

  • deductibles
  • co-payments
  • co-insurance
  • prescription medications
  • vision expenses
  • dental expenses
  • other out-of-pocket health-related expenses

There are several advantages to enrolling in an HRA:

  • a reduced health insurance premium resulting from the high deductible health plan (HDHP)
  • availability of employer-sponsored funds to pay for medical expenses incurred before the insurance deductible is met
  • no limit to the amount of money an employer can contribute
  • unused fund amounts may be carried over from year to year

Once you are retired or you enroll in Medicare, this type of account is no longer available to you.

High deductible health plan (HDHP)

A high deductible health plan (HDHP) is a health insurance policy that has a higher deductible and lower premium than traditional health plans. This type of plan combines a health savings account (HSA) or a health reimbursement arrangement (HRA) with traditional medical coverage. To contribute to a health savings account, an individual or family must be covered by an HSA-qualified HDHP. Once again, because these plans are combined with a HSA or HRA, individuals enrolled in Medicare are not eligible.