What do I need to know about health spending accounts?

Health spending accounts might seem confusing, but the idea behind them is simple: They help you save money. There are three kinds:

• Health savings account, or HSA
• Health reimbursement account or arrangement, or HRA
• Flexible spending account or arrangement, or FSA

If you haven’t enrolled in a health spending account because you didn’t understand them, this article will give you the basics. Then you can read more about each kind of account and how they compare to each other. The links are at the end of this article. You should also read Publication 969 from the IRS.

Although each spending account is set up a little differently, you use them in pretty much the same way:

• Someone puts money in the account, usually you or your employer
• You use it to pay for qualified health expenses, like medical, prescription, dental and vision costs

How do funds get withdrawn or distributed? You may get a debit or credit card that you present at the doctor’s office, dentist or pharmacy. Or you pay up front, submit receipts to your spending account administrator and then get reimbursed.

You can use a health spending account to pay for the qualified expenses of:

• You and your spouse
• All dependents you claim on your tax return

Learn more about whose expenses you can pay in Publication 969.

You can use your health spending account to pay for qualified expenses as defined by Publication 502 from the IRS. The list includes things like:

• Basic medical care that treats or prevents illness
• Chiropractor visits
• Copays
• Dental treatment
• Eye exams, contact lenses and supplies, eyeglasses
• Hospital expenses
• Lab fees
• Prescriptions

You can’t use your health spending account to pay for:

• Expenses your employer excludes from an HRA
• Items listed in Publication 502; examples include over-the-counter medicines, vitamins, diaper service and teeth whitening

Can you use your health spending account to pay your insurance premium? It depends on the kind of account. HRAs, yes. FSAs, no. HSAs yes, but only for certain kinds and in some situations. Make sure you refer to Publication 969 for these rules, not Publication 502.

It may happen that you use your health spending account for something that isn’t a qualified expense. In that case, if you have an HRA or FSA, you pay the money back. If you have an HSA and you’re under age 65, you pay a 20 percent tax penalty plus income tax on the money used.

A deductible is the amount you pay for health care services before your health insurance begins to pay.

Health insurance plans with a higher deductible have a lower premium. That means you pay less each month, but more up front before your plan starts helping with the costs.

Health spending accounts were created to offset higher deductibles with tax savings. Money that goes into or comes out of a health spending account isn’t taxed when used for qualified expenses.

That can have two benefits for you. 

1. Your money goes further. When you earn $100, you only take home some of it, say $80. The rest goes to federal, state, Social Security and other taxes. But when you put $100 into a health spending account, you get to use the entire $100.
2. Your taxes get lower. Anything deducted from your income, like contributions to a health spending account, means less income to pay taxes on later.

When an employer puts money into a health spending account for you, they save on taxes too.

Related Items

• What are the differences between HSAs, HRAs and FSAs?
• What’s a health savings account and how do I use it?
• What’s a health reimbursement arrangement and how do I use it?
• What’s a flexible spending account and how do I use it?