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Savings account for health care costs

As health insurance changes, out-of-pocket costs continue to grow. With special savings accounts, you can set aside tax-exempt money for your health care expenses. This means you will pay no or reduced taxes on the money in the accounts.

Types of Accounts

The following options may be available to you:

  • Health Savings Account (HSA)
  • Medical Savings Account (MSA)
  • Flexible Spending Arrangement (FSA)
  • Health Reimbursement Arrangement (HRA)

Your employer may provide these options, and some of them may be set up on your own. More people are using these accounts every year.

These accounts are approved or regulated by the Internal Revenue Service (IRS). The accounts differ based on how much money you can save and how the funds are used.

Health Savings Accounts (HSA)

An HSA is a bank account you use to save money for medical expenses. The amount you can set aside changes from year to year. Some employers contribute money into your HSA as well. You can keep the money in the account for as long as you want. In 2018, the contribution limit was $3,450 for a single person.

A bank or insurance company usually holds the money for you. They are called HSA trustees, or custodians. Your employer may have information about them for you. If your employer manages the account, you may be able to have pre-tax dollars put into the account. If you open one yourself, you can deduct the expenses when you file your taxes.

With HSAs, you can:

  • Claim a tax deduction on the savings
  • Earn tax-free interest
  • Deduct the qualified medical expenses you pay for
  • Transfer the HSA to a new employer or yourself if you change jobs

Also, you can carry over unused funds into the next year. After age 65 years, you can take out the savings in your HSA for non-medical expenses, without penalty.

People in high deductible health plans (HDHP) qualify for an HSA. HDHPs have higher deductibles than other plans. To be considered an HDHP, your plan has to have deductibles that meet a certain dollar amount. For 2018, this amount is over $1,350 for a single person. The amount changes slightly every year.

Medical Savings Accounts (MSA)

MSAs are accounts very much like HSAs. However, MSAs are for people who are self-employed and employees of small businesses (less than 50 employees), and their spouses. The amount you can set aside depends on your yearly income and health plan deductible.

Like an HSA, a bank or insurance company holds the savings. But with MSAs, either you or your employer can put money into the account, but not both in the same year.

With MSAs, you can:

  • Claim a tax deduction on the savings
  • Earn tax-free interest
  • Deduct the qualified medical expenses you pay for
  • Transfer the MSA to a new employer or yourself if you change jobs

Flexible Spending Arrangements (FSA)

An FSA is a pre-tax savings account offered by an employer for any type of health plan. You can use the money to be reimbursed for medical expenses. Self-employed individuals cannot get an FSA.

With an FSA, you agree to have your employer put part of your pre-tax salary into an account. Your employer also may contribute to the account, and it is not part of your gross income.

You do not need to file tax documents for your FSA. When you take money out of the account for qualified medical expenses, it is tax free. Like a credit line, you can use the account before you have put funds in the account.

Any unused funds do not roll over to the next year. So you will lose any money you put into the account if you do not use it by the end of the year. You also cannot take an FSA with you if you change jobs.

Health Reimbursement Arrangement (HRA)

An HRA is a simple arrangement offered by an employer for any type of health plan. It does not require a separate bank account and tax reporting. There is no tax advantage to this type of account.

Your employer funds an amount of their choosing and sets up the features of the arrangement. Your employer decides which out-of-pocket medical expenses qualify and offers reimbursement for those expenses when you use health care. HRAs can be set up for any type of health plan.

If you change jobs, the HRA funds do not move with you. Where HSAs are attached to you, HRAs are attached to the employer.

Alternative Names

Health savings accounts; Flexible spending accounts; Medical savings accounts; Health reimbursement arrangements; HSA; MSA; Archer MSA; FSA; HRA

References

Department of the Treasury - Internal Revenue Service. Health savings accounts and other tax-favored health plans. www.irs.gov/pub/irs-pdf/p969.pdf. Accessed August 10, 2018.

HealthCare.gov website. Health savings account (HSA). www.healthcare.gov/glossary/health-savings-account-hsa. Accessed August 10, 2018.

US Department of the Treasury. Health savings accounts (HSAs). www.treasury.gov/resource-center/faqs/taxes/pages/health-savings-accounts.aspx. Accessed August 10, 2018.

Review Date 8/3/2018

Updated by: Linda J. Vorvick, MD, Clinical Associate Professor, Department of Family Medicine, UW Medicine, School of Medicine, University of Washington, Seattle, WA. Also reviewed by David Zieve, MD, MHA, Medical Director, Brenda Conaway, Editorial Director, and the A.D.A.M. Editorial team.

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