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Health care funding options

HRA. FSA. HSA. These "words" may seem like alphabet soup, but they could spell out savings for you when you are paying for health care.

HRAs, FSAs and HSAs are some of the most popular health care funding options currently on the market, each offering different alternatives and benefits. According to the Minnesota Society of Certified Public Accountants, taking the time to learn what each option might mean for you and your family might reduce your taxable income, which should be everyone's goal.

What is an HRA?

Health reimbursement arrangements, also called health reimbursement accounts (HRAs), allow participants and their dependents to receive health reimbursements for out-of-pocket health expenses. These accounts are owned and funded by your employer and allow you to save on the cost of health care. The amount contributed to your HRA is determined by your employer, but the IRS sets the guidelines and procedures.

When you incur approved health expenses, you submit a reimbursement claim to your employer to receive compensation. Reimbursements can be tax free if you pay qualified health expenses. Common expenses usually include medical, dental and vision expenses; co-payments; deductibles; over-the-counter medications; prescription drugs; and other medical supplies.

HRAs are usually provided to accompany a high-deductible health plan, but can be paired with any type of health plan or used alone. Once your HRA funds are gone, you pay all new and remaining expenses out of pocket.

What is an FSA?

A Flexible Spending Account (FSA) allows you to elect to have money taken from your paycheck before taxes (you determine the amount) and put into a special account. You can then use that money to pay for medical expenses over the course of the year. Important note: FSAs are "use it or lose it" accounts -- you must use the money in the year in which it is saved or you will lose it at the end of the year. FSAs are frequently set up to be used for medical expenses, but they can also be set up by employers to cover childcare and dependent care, commuting costs and other expenses. Check the specifics of your plan to make sure expenses are "covered," meaning they are approved by the IRS as a qualified medical expense that can be paid for with your tax-free dollars. Remember, tax free is good.

What is an HSA?

With a Health Savings Account (HSA), money may be taken from your paycheck before taxes or you can open up an individual HSA account and contribute money on your own. However it is funded, removing the funds from your pre-tax income will reduce your taxable income as long as you use the money for qualified medical expenses.

The funds contributed to an account are not subject to federal income tax at the time of deposit. Your employer or a family member can also contribute to your HSA.