FSA vs HRA vs HSA

Understanding the Differences: FSA vs HRA vs HSA

FSA vs HRA vs HSAWhen it comes to FSA vs HRA vs HSA, can you tell the difference? Each has its own distinct purposes. Below is a quick overview, plus a helpful infographic that compares specific features of each type of account.

When it comes to consumer driven healthcare (CDH), there are three popular tax-advantaged benefit accounts:  the Flexible Spending Account (FSA), the Health Reimbursement Arrangement (HRA), and the Health Savings Account (HSA).

While each has some similarities, the accounts are not at all the same. For example, each of the three account types is sponsored by an employer, involves tax-advantaged contributions, is designed to help offset the high cost of medical care, and enables individuals to take more control of their personal healthcare needs. Beyond those factors, there are striking differences. Learn more below about the differences between FSA vs HRA vs HSA.

FSA vs HRA vs HSA

Flexible Spending Account (FSA)

Funding:  FSAs are set up and owned by the employer, but are funded by the employee-participant (employers may choose to contribute).

Contribution Limits:  Employee-participants reduce their tax liability through pre-tax contributions. In 2017, the maximum annual election is $2,600 for healthcare FSAs and $5,000 for DCAPs (Dependent Care Assistance Plans, often offered alongside the healthcare FSAs).

Eligible Expenses:  Employee-participants can use their FSA to pay for a wide range of out-of-pocket medical expenses approved by the IRS. Eligible purchases include copays, deductibles, and coinsurance for medical care, prescriptions, eye exams and glasses/contacts, dental care, first aid supplies, and more.

Unused Funds:  There are three options for dealing with unused account balances at the end of the FSA plan year; each plan adopts one of the three, chosen by the employer.

  • ‘Use It or Lose It’ – leftover funds are forfeited after last day of plan year
  • 2.5-Month Grace Period – extra time to spend the funds before ‘Use It or Lose It’ kicks in
  • Carryover – unused funds up to $500 are carried over to next plan year

Portability:  FSAs are not portable. The employer owns the account, so the employee-participant cannot keep it if he or she changes employers (whether voluntarily or involuntarily) or retires.

Additional Important Facts:  FSAs are “notional” accounts, meaning that the participant must incur an eligible expense before funds are paid out. A significant advantage to the employee-participant is that the full amount of their annual election is available immediately after the plan year starts; the funds do not have to accrue before being used.

Health Reimbursement Arrangement (HRA)

Funding:  HRAs are owned and funded by the employer only.

Contribution Limits:  There is no government-mandated limit on funding; the employer determines the amount each year. Since the employer is the sole contributor to the HRA, the employer receives the tax breaks; however, employer contributions are not counted as employee-participant income.

Eligible Expenses:  Employee-participants can use their HRA to pay for qualified out-of-pocket medical expenses for themselves and their dependents. HRA-qualified expenses are determined by the employer and may vary from one company to the next. Starting January 1, 2017, small employers with up to 50 full-time employees can now offer standalone HRAs that also reimburse for health insurance premiums. Learn more about the 21st Century Cures Act.

Rollover:  Unused funds may roll over from year to year, either in total or up to a certain amount, depending on the plan parameters.

Portability:  HRAs are not portable. An employee-participant loses access to the funds if he or she changes employers (whether voluntarily or involuntarily). Employers who offer retiree health insurance benefits may also offer an HRA for former employees enrolled in the retiree health plan.

Additional Important Facts:  HRAs are “notional” accounts, meaning that the participant must incur a qualified expense before funds are paid out. Self-employed persons are generally ineligible to have an HRA; however, if the self-employed person’s spouse is considered an employee and receives a paycheck (and W-2) from the business, then the spouse can have an HRA.

Health Savings Account (HSA)

Funding: HSAs are funded and owned by the employee (although some employers choose to contribute).

Contribution Limits: In 2017, the maximum annual election is $3,400 for employees with individual health coverage and $6,750 for those with family coverage. Learn more about 2017 HSA Contribution Limits.

Eligible Expenses: Employee-participants can use their HSA to pay for much of the same IRS-approved out-of-pocket medical expenses as FSAs. In addition, HSA owners can use their funds to pay premiums for COBRA, long-term care, and Medicare Parts A and B.

Plan Requirement: In order to be eligible to contribute to an HSA, the employee-participant must be enrolled in a qualified high-deductible health plan (HDHP).

Unused Funds: At the end of the plan year, the account automatically continues and any unused funds roll over to the next year.

Portability: HSA accounts, being individually owned, stay with the employee-participant for the life of the account, no matter any change in employment status.

Additional Important Facts:

  • HSAs offer a ‘triple tax advantage’. Contributions are made pre-tax, withdrawals for qualified expenses are tax-free, and both interest on the balance and any investment earnings are also tax-free.
  • Account owners may invest their HSA dollars once they meet the minimum balance threshold required by their plan provider.
  • Account owners over age 55 can make an extra “catch-up” contribution of up to $1,000 per year above the normal annual limit.
  • When the account owner reaches age 65, any HSA funds used or withdrawn for non-eligible expenses are taxed as regular income, rather than incurring both income tax and a non-qualified-withdrawal penalty.

FSA vs HRA vs HSA Infographic

FSA vs HRA vs HSA chart