Woman reviewing a medical bill

Shopping for health insurance for 2019 isn’t just about finding the lowest-cost plan that suits your medical needs. It’s also about taking advantage of often confusing savings opportunities to lower your healthcare costs.

Whether you’re getting healthcare coverage from your employer or buying it on your own, you’re likely to be offered an alphabet soup of savings choices, including a flexible spending account, health savings account, or health reimbursement arrangement.

Funds in these accounts can be spent only on qualifying medical expenses and may include contributions from your employer or pretax earnings that can reduce your taxable income.

Although the acronyms are similar, FSAs, HSAs, and HRAs have distinct differences, and you can’t use them in conjunction with each other. That adds a layer of complexity on top of the other factors you need to consider when choosing a plan, including the amount you’ll pay in premiums, deductibles, and out-of-pocket costs.

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Still, the potential savings makes it worth taking the time to figure out whether one of these accounts makes sense for you to use, says Kim Buckey, vice president of client services at DirectPath, which provides benefits education and enrollment services to employers.

“More companies and insurers are offering these options as a way to combat higher healthcare costs, but people are wary about using them,” Buckey says. “There’s a serious lack of understanding of how these plans work.” 

For many people, the biggest drawback to these accounts is the requirement to put in money up front to cover future healthcare costs. That’s a challenge if you’re already struggling to pay premiums or deductibles. But if you can find a way to do it, funding one of these accounts can save you money in the long run, Buckey says.

To understand how these accounts work—and to avoid missing out on these savings—here’s what you need to know about FSAs, HSAs, and HRAs:

Flexible Spending Accounts

With an FSA, which is available only in workplace healthcare plans, you put away money pretax to pay for medical expenses that your insurer doesn’t cover.

That includes the deductibles you have to pay before your insurance kicks in, as well as co-pays (the flat fees you pay to go to a doctor or hospital, or to have a medical treatment). But FSAs can’t be used to pay your insurance premiums, which are deducted pretax from your paycheck. 

The maximum you could contribute in 2018 was $2,650. The IRS hasn’t announced 2019 limits yet, but based on the inflation rate, it’s expected to rise to $2,700.

By saving pretax, you get an immediate tax break. As in a 401(k) retirement savings plan, your contribution is funneled from your paycheck into the account, which lowers your taxable income. As long as you spend the money on qualified medical expenses, you are never taxed on it.

The amount you save in taxes will depend on your income bracket and how much you put into the account. But the breaks could add up to significant sums.

For example, if you’re in the 32 percent tax bracket, and you put the maximum in your FSA, you’ll avoid $848 per year in taxes. You can estimate your savings with this calculator offered by WageWorks.

One thing that trips people up is figuring out how much to put in the account. If you’re using an FSA for the first time, be conservative—you don’t have to put in the maximum. Start with, say, $500. If you find that you go through the money quickly, put more in the following year. One strategy, however, is to put in enough to cover your deductible because you know you’ll have to pay that first. 

Another FSA hurdle is time pressure—if you don’t spend the money before the deadline, typically year-end, you lose it. But some companies give workers till mid-March of the following year to use up their funds. Some employers also give you the option of rolling over up to $500 to use in the coming year. Check to see how your company’s plan works.

If you find yourself near year-end with unspent FSA funds, don’t stress. You can spend those funds on a wide variety of healthcare products and services—everything from dental care to acupuncture to reading glasses. If you have a prescription or doctor’s note, there are even more items and treatments that are covered.

An easy way to see what qualifies as a medical expense is to go to FSAStore.com. Everything sold on its site is eligible for FSA spending, and items that need a doctor’s approval are clearly marked. 

Health Savings Accounts

Similar to an FSA, you put pretax money into an HSA, which can be used tax-free for qualified medical expenses.

Unlike an FSA, though, employer insurance isn’t required to get an HSA. But you do have to opt for a high-deductible health plan (HDHP), which is insurance with a deductible of at least $1,350 per year (PDF) for an individual or $2,700 for a family for 2019. 

You can put more in an HSA than in an FSA: up to $3,500 annually for individuals and $7,000 for families in 2019. Those 55 or older can save an additional $1,000 per year.

Some employers will even contribute money to your HSA—one-quarter of workers with HDHPs get employer contributions that average $600, according to a Kaiser Family Foundation benefits survey. (For those with employer insurance, you generally can’t have both an FSA and an HSA.)

Another advantage of HSAs is portability—you can take your account with you if you change health plans or get other job-based insurance. You can also invest HSA money in stock and bond funds, which potentially allows you to build even more savngs.

Because you can’t have an HSA without a high-deductible plan, you first need to decide whether an HDHP is right for you

High-deductible plans are attractive because they have lower premiums than traditional health plans. Generally, if you’re young and healthy, you might do best with an HDHP because your medical spending is unlikely to hit the deductible.

Otherwise, you may come out ahead by paying a higher premium for traditional insurance if you’re likely to reach the deductible, allowing more of your healthcare costs to be covered by insurance. 

HDHPs are increasingly common for people with employer insurance and those who buy their own health insurance on the open market.

Some 29 percent of employers offer HDHPs with an HSA option, up from 10 percent a decade ago, according to the Kaiser survey. The average deductible on the benchmark Silver plans sold through the Affordable Care Act exchanges is $4,000 for an individual.

If you do opt for an HSA and you can avoid spending that money for current healthcare expenses, your account can keep growing into retirement. Decades from now, having a fund of tax-free money to spend on medical care could be especially valuable. And if you spend the money on nonqualified medical expenses after age 65, you won’t be penalized, though you will owe income tax.

Health Reimbursement Arrangements

In an HRA, your employer reimburses you for a range of healthcare expenses that your insurance doesn’t cover. Your employer determines which to reimburse you for based on an IRS-approved list of expenses.

Your employer also decides how much it will fund, but on average, companies reimbursed $1,149 for an individual and $2,288 for families in 2018. You can’t contribute your own money to the account because only employer funds can be used. HRAs don’t have to be paired with a high-deductible health plan, though they often are.

If you don’t spend the maximum covered by your HRA, the money can roll over to the next year. But if you leave the company, you lose the allotted funds. Some employers make HRA contributions contingent on other factors, such as completing wellness programs. Given those restrictions, HRAs are less attractive and less common—just 7 percent of employers with insurance benefits offer HRAs.

But that could change. Last month the Trump administration proposed a new regulation to expand the use of HRAs. Employers would be allowed to use HRA funds to reimburse employees who purchase their own health insurance on the individual market, not just for eligible healthcare expenses incurred while insured by the company.

Buckey at DirectPath says the option is likely to be attractive to small and midsized employers who find it costly to offer any or adequate insurance to workers. And for employees, it could give them a wider choice of insurance plans.

But it’s less clear that the option would work well for consumers, Buckey says. “It’s great to provide more choice, but consumers need to know how to navigate those choices,” Buckey says. “Most people struggle to understand basic healthcare terminology, and it remains to be seen whether they would get any support.”