- FSAs, HRAs and HSAs all offer tax-free savings employees can use to pay for eligible medical, dental and vision expenses.
- The type of account employers offer (FSA, HRA, HSA) depends on what type of healthcare insurance plan(s) they provide.
- FSAs and HSAs have limits on how much money can be contributed annually.
- This article is for small business owners who want to create a benefits package for their employees with an FSA, HRA and/or HSA.
When you’re creating a competitive benefits plan for employees, good healthcare options should be a top priority. In addition to health, dental and vision insurance, many employers choose to offer employees supplemental tax-free accounts that can be used to pay for medical costs, such as flexible spending accounts (FSA), health reimbursement accounts (HRA) and health savings accounts (HSA). Although the purposes of these accounts are similar, there are a few key distinctions that will determine which one is right for your company.
The difference between FSAs, HRAs and HSAs
The primary differences between FSAs, HRAs, and HSAs are based on their ownership, funding, and requirements. Although each account type generally includes tax-free money, they are subject to different rules under the Internal Revenue Code. Kathy Berger, principal benefits consultant at ThinkHR and Mammoth, said employers and their advisors need to pay careful attention to all design, communication and administration requirements to avoid adverse tax consequences.
- An FSA is an employer-owned and employee-funded account that employees can use to pay eligible healthcare costs that are not covered by other plans. Employees can contribute up to $2,750 per year to the account. Employers can choose to allow up to $550 of unused funds to roll over to the next year or permit a grace period of up to 2.5 months for unused balance.
- An HRA is an employer-owed and employer-funded account that employees can use to pay eligible healthcare costs that are not covered by other plans. There is no limit on how much money an employer can contribute each year, and employers choose whether to allow unused HRA funds to roll over into the new year.
- An HSA is an employee-owned and employee-funded account that employees can use to pay eligible healthcare costs that are not covered by other plans. Funds can be invested, and employees must be enrolled in a high-deductible health plan (HDHP) to be eligible. Individual employees can contribute up to $3,550 annually, and all unused funds can roll over into the new year.
Key takeaway: Differences between FSAs, HRAs, and HSAs include how they are funded, who is eligible for them, who owns them, and how portable they are.
Flexible spending account (FSA)
A healthcare flexible spending account, also known as a flexible spending arrangement, is a type of savings account that is set up by employers for employees. These accounts are funded by employees through untaxed employee income contributions (up to $2,750 per year) and can be used to pay for qualifying medical, dental, or vision expenses for themselves, their spouse, and eligible dependents. The funds are relatively easy to access through a debit card.
Zane Dalal, executive vice president at Benefit Programs Administration, said that several different treatments, benefits and costs are considered qualifying expenses for today’s flexible spending accounts.
“FSA money can be used for acupuncture treatments, dental implants and even supplements if you receive a prescription from your doctor,” Dalal told Business News Daily. “Additionally, [it can be used to pay for medical costs that] insurance might not cover, like over-the-counter prescriptions, vaccines for travel or specific diagnostic tests. Some costs require reimbursement, like the purchase of frames for corrective glasses.”
FSAs have restrictions on when the money can be used. If an employee doesn’t spend the money in the account by the end of their plan year, they forfeit all remaining funds, unless otherwise determined by the employer. Employers can allow up to $550 of unused funds to roll over to the following year, or permit up to a 2.5 month grace period for unused funds. Employees who leave the company must forfeit all remaining funds, unless they are eligible for and choose COBRA continuation coverage.
Key takeaway: FSAs are employer-owned savings accounts that employees fund (up to $2,750 annually) through tax-free contributions. They can be used to pay for eligible medical expenses for the employee, their spouse or their eligible dependents.
Health reimbursement account (HRA)
A health reimbursement account, also known as a health reimbursement arrangement, is a type of savings account that is set up and funded by employers for employees to use on eligible healthcare, dental, and vision expenses for themselves and their dependents. (Dependents must also be enrolled in the HRA.) Since the employer funds the HRA, they choose which expenses are eligible for reimbursement and how much of the account funds can roll over into the new year.
“If an HRA is offered along with an HDHP, lower premiums can result in reduced healthcare costs for employees,” said Dalal. “Individuals can typically use HRA funds to pay for deductibles, coinsurance, copayments and prescriptions, among other out-of-pocket healthcare expenses, depending on HRA plan details.”
Similar to an FSA or HSA, the funds in an HRA are tax-free contributions. Employers can claim a tax deduction for the reimbursements they make through these plans. The account is owned by the employer, so if an employee leaves the company, the HRA money stays with the employer.
There are multiple types of HRAs available, each with its own requirements; however, they are all funded entirely by the employer to provide a tax-free benefit to the employee. Berger said the three basic types of HRAs are an original HRA, a qualified small employer HRA (QSEHRA) and an individual coverage HRA (ICHRA).
“With an original HRA, participating employees must also be enrolled in the employer’s traditional group medical plan,” said Berger. “A QSEHRA or ICHRA, on the other hand, is designed for situations where the employee does not have a group plan but purchases an individual insurance policy.”
Key takeaway: HRAs are employer-owned accounts that employers fund with tax-free contributions and employees can use to reimburse themselves for eligible medical expenses for themselves or their eligible dependents.
Health savings account (HSA)
A health savings account is a type of personal savings account that is owned and funded by an employee through employee income contributions (up to $3,550 per year for individuals, up to $7,100 per year for families, and an additional $1,000 per year for employees 55 or older). HSA contributions are not taxed by the federal government or most states; however, there are some nuances – like California and New Jersey – that do tax HSAs.
Since an HSA is funded and owned by the employee, they keep the money forever. So, there are no concerns for employees about spending all of the money before the end of the year or losing the money if they change employers. However, there are some limitations to HSA accounts. For example, to be eligible for an HSA, an employee must be enrolled in an HDHP.
Dalal said the minimum annual deductible for an HDHP in 2019 was $1,400 for individuals and $2,800 for families.
“Although employees may withdraw funds from an HSA for any reason, if the withdrawal is for an unqualified medical expense, the employee will be subject to both income tax and a 20% penalty,” Dalal said. “Like with IRAs and retirement distributions, if the employee is over 65, there is no tax penalty, but the withdrawal will still be subject to income tax.”
Key takeaway: HSAs are employee-owned saving accounts that employees (with HDHPs) fund (up to $3,550 per individual annually and up to $7,100 per family annually) through generally tax-free contributions. They can be used to pay for eligible medical expenses for the employee, their spouse or eligible dependents.
|Eligibility requirements||Any employee, unless otherwise specified by the employer||Employees enrolled in an HDHP|
|Contributions||Employee-funded (employers may contribute)||Employer-funded||Employee-funded (employers may contribute)|
|Taxation||Tax-free||Tax-free||Tax-free by the federal government and most states (with the exception of California and New Jersey)|
|Money usage allowances||Self-reimbursement for eligible healthcare, dental, and vision expenses for you, your spouse, and eligible dependents||Employer-determined eligible healthcare, dental, and vision expenses for you and your dependents (must be enrolled in the HRA)||Eligible healthcare, dental, and vision expenses for you, your spouse, and eligible dependents|
|Fund rollover into the new year||Yes (up to $550 rollover or up to 2.5-month grace period for unused balance, if allowed by employer)||Yes (if allowed by employer)||Yes (rollover at end of plan year)|
|Portability after termination||No||No||Yes (HSA stays with account holder)|
FSA vs. HRA vs. HSA FAQs
Can you claim FSAs on your taxes?
No. Unlike health savings accounts, you do not have to report your FSA on your income tax return. Since FSA contributions are made with pretax dollars, you cannot claim them as a tax deduction either. Any leftover FSA money forfeited at the end of the year cannot be listed as a loss, since it was taken pretax. Additionally, if you paid for a qualified medical expense with pretax dollars from your FSA, you cannot list it as an itemized deduction on Schedule A (Form 1040).
Do you need an FSA if you have an HRA?
Although you don’t need to have an FSA and an HRA at the same time, it can be beneficial, especially if you have several medical expenses. Sometimes employers choose to offer both account types to employees for maximum healthcare expense savings. Keep in mind that you can’t be reimbursed for the same expense from both accounts, and unless otherwise specified by the employer, employees should use the HRA to cover medical expenses before using the FSA.
Do you get a debit card with an HRA?
Yes, a debit card is one option. There are several ways to receive reimbursement through an HRA, including automatic payment to the provider, automatic payment to the member (paper checks or direct deposit), personalized pay, manual paper claims and a debit card. The benefits administrator determines which of these methods are available with your specific FSA plan. If you have a debit card, you can use it to pay for eligible expenses without paying out of pocket or filing forms.
How much should you put in an HSA?
You should put in as much as you can without exceeding the limit. Employees with HSAs can only contribute up to $3,550 per year for individuals and up to $7,100 per year for families. Employees 55 and older have the option of contributing an additional $1,000 per year as catch-up funds. Any contributed funds that exceed those amounts are not tax deductible and are typically subject to a 6% excise. HSAs are beneficial for covering eligible medical expenses; since the account and any unused funds stay with the employee indefinitely, it is wise to contribute as much as you can afford.
How do you choose the right supplemental healthcare account for your company?
The type of healthcare expense account you offer employees will partially depend on the type of health insurance plans you offer. For example, if an employee wants to access a standard HRA, they also need to be provided with a traditional group medical plan, whereas HSAs are only eligible for employees who have access to HDHPs specifically.
It is also important to consider how much you can invest in your employees’ health benefits. If you have a hefty budget, an employer-funded HRA may be the way to go, but if you are tight on cash or want to give employees more freedom with savings amounts, you may want to go with a plan that requires the employee to make contributions instead.
The best type of account for an organization to offer also depends on the demographics and needs of its employees, according to Dalal.
“One way to choose is to survey your employees, asking what they need,” said Dalal. “Are their healthcare expenses unpredictable and fluctuate year to year, or are they fairly common and easy to plan for? Does your company want to offer a high-deductible health plan, where it may make more sense to include a health savings plan?”