Family Finance: Tax-Advantaged Accounts

Jennifer Wray

If you are among the 153 million Americans with employer-sponsored health insurance, chances are good that you recently waded through a bevy of choices during the annual re-enrollment process.

As if the major plan decisions weren’t confounding enough, one of the trickier aspects in recent years has become the array of choices related to health spending accounts. Should you enroll in a health savings account (HSA) or a flexible spending account (FSA)? What about a dependent care flexible spending account (DCFSA)? Does your employer offer a health reimbursement arrangement (HRA)?

With so many acronyms, it’s easy to feel like you’re drowning in alphabet soup. But this is not an area you want to ignore: The choices are important and carry yearlong financial ramifications, unless you qualify for a special enrollment period due to a major life event.

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Here’s a primer on what all of those similar-sounding acronyms mean, to make you a more informed consumer when tax time or the next sign-up period come around. 

Health Savings Accounts

An HSA is used to pay out-of-pocket medical expenses (think: doctor visits, medication, dental and vision coverage, and medical equipment). Contributions are made pre-tax or are tax-deductible (even if you don’t itemize). Earnings aren’t taxed, and there’s no penalty when funds are withdrawn for qualifying expenses.

Unlike other accounts, you—not your employer—own the HSA, and can keep it even if you retire, change employers or change health plans. Both individuals and employers can contribute.

Here’s the catch: To open an HSA, you need a qualifying high-deductible health plan. Under IRS rules for 2020, HDHPs must have an annual deductible of at least $1,400 for individuals or $2,800 for family coverage, with annual out-of-pocket expenses capped at $6,900 for individuals or $13,800 for family coverage.

Note there also are caps on how much can be deposited in a year. The IRS’s limits for 2020 HSA contributions are $3,550 for individuals and $7,100 for family coverage. (If you’re age 55 or older, you can make an additional $1,000 catch-up contribution each year.)

Flexible Spending Accounts

FSAs provide another tax-advantaged way to save money for medical and health needs. Like HSAs, contributions are pre-tax, and withdrawals for qualifying expenses are not taxed. Individuals who have an HSA also are eligible for a limited health FSA, which covers only dental and vision expenses.

Unlike an HSA, account holders usually lose any money contributed to an FSA if they change jobs or fail to spend it by the end of the plan year (although some plans may provide a grace period or a $500 carryover).

You don’t need to be on a high-deductible health plan to open an FSA. In fact, you don’t necessarily have to have health insurance at all. The IRS set the annual contribution limit for FSAs in 2020 at $2,750.

Dependent Care FSAs

If you’re a parent or someone who is responsible for a disabled family member, you know how expensive their care can be. Dependent care FSAs help you save money for qualified expenses while lowering your taxable income; employers withhold pre-tax contributions from your paycheck. You can then reimburse yourself from the account for dependent care costs. Married couples filing jointly, unmarried couples and single individuals can contribute up to $5,000 annually, depending on income; those married and filing separately have a $2,500 maximum. 

Qualified expenses include in-home and day care services, summer day camps, before- and after-school care, caregiver-provided transportation and more. School, tutoring, overnight camps and meals are not eligible.

Some caveats: In most cases, you can’t take advantage of both the DCFSA and the Child and Dependent Care Credit (which allows you to deduct eligible care-related costs from your federal tax bill). Those making less than $43,000 are likely to save more using the tax credit. 


With a health reimbursement arrangement, the employer funds an account that helps employees pay for qualified medical expenses. Contributions are tax-deductible for your employer (which owns the HRA) and tax-free for you. They can be used with all types of health insurance plans and can even be paired with an HSA. 

Unlike other health spending accounts, employers are the only ones who can deposit money into an HRA. Funds may roll over from year to year, based on the employer’s plan. And since HRAs are completely employer-funded, you’re essentially receiving free money to help pay medical expenses.

For more information about tax-favored health plans and restrictions, check out IRS Publication 969 or talk to your financial adviser.

Jennifer Wray is a freelance writer, mother and fan of all things pop culture.