HSA/HRA/FSA

HSA:

Health savings accounts (HSAs) are a growing trend in health care. An HSA is a tax-exempt savings account established for the purpose of paying for the qualified medical expenses of an individual and/or his or her spouse and tax dependents. HSAs are designed to provide eligible individuals with triple federal tax benefits: (1) HSA contributions are tax-free, (2) interest and other earnings on HSA contributions accumulate tax-free, and (3) amounts distributed from an HSA for qualified medical expenses are tax-free as well.

FSA:

A flexible spending account is an account in an employee’s name that can reimburse the employee for qualified health care or dependent care expenses. It allows an employee to pre-fund qualified expenses with pretax dollars deducted from the employee’s paychecks. The employee can receive cash reimbursement up to the total value of the account for covered expenses incurred during the benefit plan year and any applicable grace period.

“Use It or Lose It”

As required by the Internal Revenue Service (IRS), an FSA has a “use it or lose it” provision stating that any unused funds at the end of the plan year (plus any applicable grace period) will be forfeited. When electing an FSA during open enrollment, the employee must specify how much he or she would like to contribute to the FSA for the year. The goal is choosing an amount that will cover all medical or dependent care expenses, but that is not so high that the money will be forfeited and wasted.

The IRS allows employers to offer an extended deadline, or grace period, of two and a half months after the end of a plan year to use FSA funds. Thus, for a plan year ending December 31, the employees would have until March 15 to spend the funds in their FSA. This provision is strictly optional; the employer must choose to implement it.