Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs) have similar acronyms, and the confusion doesn’t end there. While they all offer valuable benefits, some of those benefits overlap. If these are available, be aware of their differences and similarities to determine which is best for your needs.
What are HSAs, FSAs and HRAs?
Health Savings Accounts (HSAs)
Health Savings Accounts (HSAs) are tax-advantaged accounts that are owned and funded by the individual, although employers are permitted to contribute. These accounts let you pay for qualified healthcare expenses with funds contributed by you, your employers, or others such as family members. They have the “savings” moniker because they can grow over time through balance rollover from year to year, interest earned on unspent balances, and gains on invested balances. They also provide tax savings as withdrawals, interest, and investment earnings are tax-free. And speaking of investments, you may begin to invest your HSA dollars once you reach a minimum balance threshold. However, you are only eligible to own this account if you are enrolled in an HSA-qualified health plan (HDHP). Once you turn 55, you can make catch-up contributions of an additional $1,000 per year.
Flexible Spending Accounts (FSAs)
Flexible Spending Accounts (FSAs) are set up and owned by an employer but only contain funds from an employee’s payroll. Further, those payroll deductions reduce income for tax calculation. FSA funds can pay for healthcare and some wellness expenses. An account owner must spend the full balance. However, you may be able to carry over some unspent balance to the following year or receive a grace period of 2.5 months to spend down funds, depending on your plan.
Further, the account balance does not earn interest, nor can it be invested. These accounts are notional, so the funds must be spent before requesting a reimbursement unless the funds are provided on a restricted debit card. A great thing about FSAs is that the full amount of your election is available on day one of your plan, even if you make contributions throughout the full year.
Health Reimbursement Arrangements (HRAs)
Health Reimbursement Arrangements (HRAs) are employer-owned and funded accounts that can be used to pay for qualified out-of-pocket medical expenses for employees and their qualified dependents. Unlike FSA and HSA, the list of qualified expenses is determined by the employer and may vary from one company to the next. The employer is the sole contributor to the HRA; therefore, the employer receives the tax breaks. However, contributions do not affect and are not counted against the employee’s income. These accounts are notional in that you must spend the funds before requesting reimbursement. Regarding eligibility, self-employed business owners are generally ineligible. But if the owner’s spouse is employed by the company and receives a regular paycheck, that person may be eligible.
How are HSAs, FSAs and HRAs similar?
HSAs, FSAs, and HRAs all help consumers manage their healthcare costs better. Employee participants can spend funds on a wide variety of healthcare expenses for themselves and their tax dependents. Most of the eligible products and services are the same for both FSAs and HSAs. Eligible items under HRAs vary, but abide within the same IRS-approved expense regulations as HSAs and FSAs.
Employers can sponsor all of these accounts, but you can’t have a full FSA if you have a HSA. There is an alternative FSA, called a Limited Purpose FSA, that pays only for dental and vision expenses. The LPFSA is the only type of FSA account that owners of active HSA accounts can have at the same time. HRAs on the other hand can be coupled with either a full FSA or a HSA.
What is the difference between HSA and FSA and HRA?
One the most notable differences between HSAs and FSAs involve ownership and portability. An HSA account is owned by the account holder, whether the employer contributes funds or not. If the employee leaves the company, the account goes with them. Conversely, FSAs belong to the employer, even though the employee makes all the contributions. If the employee leaves the company, unspent funds revert to the employer. With a HRA, the employer both owns and funds the account, so any unspent funds remaining after an employee leaves remain with the employer.
A HSA has two additional advantages over FSAs and HRAs. First, at the end of the plan year, any remaining money in the HSA account automatically rolls over to the following year. Second, account owners can invest their HSA balance without paying taxes on the earnings. The ability to invest tax-free contributions in any way you want, for as long as you want, offers a significant long-term financial advantage.
HSA vs. FSA vs. HRA – Breaking Down the Differences
|Health Savings Account||Flexible Spending Account||Health Reimbursement Arrangement|
|Eligibility requirement||Enrolled in High Deductible Health Plan (HDHP)||None||Must not be a self-employed owner of the business.|
|Funding||Account holder||Account holder||Account holder|
|2022 Contribution limits||Individual: $3,850; Family: $7,750||$3,050||No government limits on funding|
|Changing contributions||Any time during the year||During open enrollment or with a change in employment or family status||During open enrollment|
|Tax advantages||1. Tax-free contributions|
2. Tax-free withdrawals when used for qualified medical expenses
3. Earn tax-free interest
4. Employee-made contributions may be excluded from gross income
|1. Tax-free contributions|
2. Tax-free withdrawals when used for qualified medical expenses
3. Employee-made contributions may be excluded from gross income
|Contributions are tax-deductible for the employer. But they do not affect employee income.|
|Portability||Stays with account holder||None, except if eligible for FSA continuation through COBRA||None, unless the employer offers a retirement HRA to employees who retire, not just quit.|
|Integration with other tax-advantaged accounts||None||Yes||None|
|Ability to invest||Yes||No||No|
|Rollover/Account Accumulation||Yes||Partial. In 2023, some employers may offer up to $610 carryover or a grace period of 2.5 months to spend unused funds||Depending on plan parameters, unused funds in an HRA may rollover each year.|
|Funds available for use in retirement||Yes||No||Only if the employer offers a retirement HRA|
Consider the benefits of each and determine which is best suited for your situation.