What Are the Differences Between HSAs, FSAs, and HRAs?

By Morgan Carpenter

January 2021

If you have looked at insurance plans before, it is likely you have stumbled upon these acronyms at one time or another. But what exactly are HSAs, HRAs, and FSAs? While the letters differ, they all are ways to cover health expenses. Below, we will outline the major similarities and differences between the three.

Health Savings Account (HSA)

What is an HSA? A Health Savings Account (HSA) is an employee-owned account that can be utilized to pay for qualified health care expenses with federal pre-tax dollars. However, some state taxes, such as California, can still apply. Any employee who is enrolled in a High Deductible Health Plan (HDHP) is eligible for an HSA.

Who owns the account? The employee owns the account.

Who is contributing funds to the account? Both the employer and employee can contribute funds.

Who sets contribution limits? The Federal Government decides the annual contribution limits. In 2021, the annual maximum contribution amount for an HSA is $3,600 for self-only and $7,200 for families. The employee can decide how much they want to contribute from payroll deductions, but the amount they deposit and any amount the employer may deposit cannot exceed the Federal limits.

Do funds in the account rollover?  Yes, funds are never forfeited and they always belong to the employee.

What insurance plans can you have with an HSA? The employee needs to have a High-Deductible Health Plan (HDHP) to be eligible for an HSA.

What can be reimbursed with an HSA? Any eligible medical expenses as outlined in the IRS tax code section 213(d) are eligible for reimbursement with an HSA. Premiums are typically ineligible for reimbursement with an HSA.

What are the pros of an HSA? There is a triple federal tax advantage, so long as the funds are used for qualified medical expenses (contributions are pre-tax or tax deductible, interest earned is tax-free, and withdrawals are not taxed).

What are the cons of an HSA? The employee cannot make contributions to an HSA plan if they have dual health insurance coverage from a secondary insurance plan. They also cannot contribute to a health FSA unless the FSA is for excepted benefits only (dental and vision expenses).

Health Reimbursement Arrangement (HRA)

What is an HRA? Sometimes erroneously referred to as a Health Reimbursement Account, a Health Reimbursement Arrangement (HRA) is an employer-owned and funded account that can reimburse employees for out-of-pocket health care expenses. Any employee who is enrolled on a health plan through work, and if the health plan offers an HRA, is eligible for an HRA.

Who owns the arrangement? The employer owns the arrangement.

Who is contributing funds to the arrangement? Only the employer can contribute funds.

Who sets contribution limits? The employer decides how much can be contributed annually to an HRA.

Do funds in the arrangement rollover?  The employer decides if the funds rollover or not. The arrangement is not portable – in other words, if the employee moves to a different state or becomes unemployed, they will lose access to the funds.

What insurance plans can you have with an HRA? Different carriers have different rules, please check with your insurance carrier.

What can be reimbursed with an HRA? The employer, at the beginning of the year, decides what is eligible and ineligible for reimbursement.

What are the pros of an HRA? The HRA is regarded as one of the most flexible types of benefit plans.

What are the cons of an HRA? There is more third-party administration involved in administering the HRA.

Flexible Spending Account (FSA)

What is an FSA? A Flexible Spending Account (FSA) is an employer-owned account that covers health care expenses with pre-tax dollars. The general purpose of an FSA is to fund predictable healthcare expenses.

Who owns the account? The employer owns the account.

Who is contributing funds to the account? The employer can only match what the employee contributes, up to the maximum annual allowable amount.

Who sets contribution limits? The employee decides how much they want to deduct from their paycheck to contribute to the FSA. In 2021, the annual maximum contribution amount for an FSA is $2,750. These amounts may be less depending on how many employees participate in the plan in order to pass non-discrimination testing.

Do funds in the account rollover?  The employee is expected to spend the funds by the end of the end year. Depending on the health plan, the employee can carry up to $550 into the next year. The new COVID relief bill extends this amount for 2021 into 2022.

What insurance plans can you have with an FSA? The employee can pair any health plan with an FSA.

What can be reimbursed with an FSA? Any qualified medical expense as listed in the IRS tax code section 213(d) is eligible for reimbursement with an FSA. Premiums are ineligible for reimbursement with an FSA.

What are the pros of an FSA? An FSA is a pre-tax account. The money is taken out of the employee’s paycheck before taxes are paid; the funds can be used to pay for eligible health expenses.

What are the cons of an FSA? Self-employed employees are ineligible for FSAs.

What is the Right Fit for My Business?

Talk to our Principal Ron Bland to explore whether an HSA, HRA, or FSA is right for your employees. Our team, made of expert advisors, can also assist you in acquiring a robust and comprehensive benefits package. You can reach us at Ron@AEISAdvisors.com or 650.348.6234 x12.

Disclaimer: Any information related to compliance or other subject matters in this blog is intended to be informational and does not constitute legal advice regarding any specific situation. The content of this blog is based on the most up-to-date information that was available on the date it was published and could be subject to change. Should you require further assistance or legal advice, please consult a licensed attorney.

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