If you’re comparing the tax-advantages of an HRA vs. FSA, there are a few things you’ll need to know. While both are designed to help individuals pay for out-of-pocket medical expenses, they differ in how they achieve this. Figuring out how to stack these benefits and get the most out of them requires a little context and explanation. Let's get right to it.
HRA vs FSA Quick Summary
Health Reimbursement Arrangements (HRAs) and Flexible Spending Accounts (FSAs) are both tax-advantaged tools used for healthcare expenses. HRAs are funded solely by employers, while FSAs allow employees to contribute pre-tax funds. HRAs often have more flexibility in terms of what expenses they can cover (like health insurance premiums), and unused funds can sometimes be rolled over. In contrast, FSAs typically have a "use it or lose it" rule, meaning any unspent funds at the end of the plan year are forfeited.
Each option has its unique features and advantages, making the choice between HRA and FSA dependent on individual circumstances and needs.
Want to see how HRAs could benefits your employees and your bottom line?
What is an FSA?
A flexible spending account (or flexible spending arrangement) is an account employees put money into that they can then use to pay for certain out-of-pocket health care costs. You don’t pay taxes on this money, which means you’ll save an amount equal to the taxes you would have paid on the money you set aside.
Employers may make contributions to your FSA, but aren’t required to.
How FSAs work
Employees submit a claim to the FSA (through their employer) with proof of the medical expense and a statement that it has not been covered by their plan. They are then reimbursed for their costs. FSA funds can be used to pay deductibles and copayments, but not insurance premiums.
At the end of the year, any money left over in the FSA is lost, so it's important to plan carefully and not put more money in your FSA than you think you'll spend within a year.
Check out these facts about FSAs from healthcare.gov
- FSAs are capped at $2,750 per year per employer. If you’re married, your spouse can put up to $2,750 in an FSA with their employer too.
- FSA funds can be used to pay for certain medical and dental expenses.
- FSA funds can be used to pay deductibles and copayments, but not insurance premiums.
- You can spend FSA funds on prescription medications, as well as over-the-counter medicines with a doctor's prescription.
- FSAs may also be used to cover costs of certain medical equipment such as crutches, supplies like bandages, and diagnostic devices like blood sugar test kits.
This list shows generally permitted medical and dental expenses.
Benefits of Having an FSA
Here are the top benefits of having an FSA.
-
Tax Savings: One of the primary benefits of having a Flexible Spending Account (FSA) is the ability to use pre-tax dollars to pay for eligible healthcare expenses. This reduces your taxable income, which means you pay less in income and payroll taxes, providing immediate cost savings.
-
Covering Out-of-Pocket Medical Costs: FSAs allow you to use the funds to pay for a wide range of qualified healthcare expenses, including deductibles, copayments, prescription medications, and even over-the-counter items like bandages and first aid supplies. This can help you manage the out-of-pocket costs associated with your healthcare.
-
Predictable Budgeting: By contributing to an FSA, you can plan and budget for healthcare expenses with ease. The ability to set aside a specific amount of money from each paycheck helps you avoid unexpected financial strain when medical bills arise.
-
Complementary to High-Deductible Health Plans: For individuals with high-deductible health plans (HDHPs), an FSA can be particularly beneficial. While HDHPs offer lower premiums, they often come with higher out-of-pocket costs. An FSA can help bridge the gap by covering some of those costs with pre-tax dollars.
-
Flexible Spending: FSAs are versatile and can be used for various healthcare needs, including vision and dental expenses. This flexibility means you can use the funds to maintain and improve your overall health, making it a valuable benefit for you and your family.
Remember that FSAs are subject to annual contribution limits set by the IRS, so it's important to plan your contributions carefully to maximize the benefits while ensuring you use the funds within the plan year.
Types of FSAs
There are several types of FSAs. Let's go over them here.
Medical FSA
A Medical Flexible Spending Account (FSA) is a tax-advantaged financial account that allows employees to set aside a portion of their pre-tax earnings to cover eligible medical expenses. These funds can be used to pay for a wide range of qualified medical costs, including doctor's visits, prescription medications, dental and vision care, and medical supplies.
Dependent Care FSA
A Dependent Care Flexible Spending Account is a tax-advantaged benefit that allows employees to allocate pre-tax earnings to cover qualified dependent care expenses. These expenses usually include child care, after-school programs, and care for elderly or disabled dependents. The funds set aside in a Dependent Care FSA can help employees reduce their taxable income and offset the costs associated with dependent care, making it an attractive option for working parents and caregivers.
Limited Purpose FSA
A Limited Purpose Flexible Spending Account is a specialized type of FSA that can only be used for specific eligible medical expenses. Unlike a standard Medical FSA, a Limited Purpose FSA is designed to complement Health Savings Accounts (HSAs), which are typically used with high-deductible health plans. Limited Purpose FSAs can cover vision and dental expenses, making them a valuable tool for individuals with high-deductible health plans who want to set aside pre-tax funds for these specific healthcare costs.
What is an HRA?
An HRA (health reimbursement arrangement) is:
- Funded entirely by Employer (no employee contributions)
- Account owned by Employer- funds stay with employer if employee leaves company
- Reimburses health insurance premiums and medical expenses
- Money is reimbursed for expenses/premiums after they are incurred and receipts are provided
- Employees must have qualifying health insurance to participate
- Tax benefits: Tax free for both employee and employer
How HRAs work
An HRA is pretty straight-forward: the employer reimburses for premiums and medical expenses on a tax-free basis, and the employee chooses a plan that fits their needs. Employees are then reimbursed when they submit a claim.
There are a few HRAs available, but the two we talk about most are the ICHRA and QSEHRA.
We are so excited about these HRAs and all the benefits they offer, that we wrote comprehensive, in-depth guides to the ins and outs of both.
- Here’s our guide to the individual coverage HRA.
- Here’s our guide to the qualified small employer HRA.
And here are a few ways you can use HRAs to pay for insurance premiums and/or qualified medical expenses:
- Reimburse Insurance Premiums Only: Employers can limit reimbursements to only go towards eligible premium expenses. Typically, this refers to individual health insurance premiums but could also include eligible dental premiums, vision premiums, etc. as long as the employee has Minimum Essential Coverage (MEC) for QSEHRA or a qualified health plan for ICHRA.
- Reimburse Insurance Premiums and Medical Expenses: Most employers choose to allow medical expenses to be reimbursed too. Eligible expenses include doctor visits, copays, dental cleanings, prescriptions, eye glasses, diabetes supplies, etc. Note: Employers can choose to exclude categories of expenses (i.e., “prescriptions”) as long as the exclusion is applied fairly to everyone.
- Here’s a pretty comprehensive list of what counts as qualified expenses.
Benefits of having an HRA
Types of HRAs
As one might imagine, there are lots of types of HRAs. Here are the ones to know.
-
Integrated HRA (I-HRA): Works in conjunction with a group health plan, allowing employers to provide employees with funds for out-of-pocket medical expenses.
-
Qualified Small Employer HRA (QSEHRA): Designed for small businesses with fewer than 50 employees, offering tax-advantaged funds for employees to use for qualified medical expenses, including health insurance premiums.
-
Individual Coverage HRA (ICHRA): Allows employers to offer employees tax-free funds that can be used to purchase individual health insurance plans on the private market.
-
Excepted Benefit HRA (EBHRA): Provides limited, tax-advantaged funds to cover specific benefits, such as dental or vision expenses, without being integrated with a comprehensive group health plan.
-
Retiree HRA: Provides funds to help retirees cover eligible medical expenses, often used as a supplement to retiree health insurance.
-
Medicare Premium Reimbursement HRA: Specifically designed to help employees cover Medicare premiums and other eligible healthcare expenses in retirement.
-
Dental and Vision HRA: Offers tax-advantaged funds to cover dental and vision expenses, often as a standalone benefit or in conjunction with a comprehensive health plan.
-
Suspension-Only HRA: Commonly used when employees are not currently eligible for an HRA but can become eligible in the future. Employees do not receive any reimbursements until their eligibility changes.
Which HRA is right for you?
If you want to see which HRA is right for you, give our handy dandy HRA quiz a try. Here's the link.
Can I use an HRA and an FSA together?
Yes, it is possible to use a Health Reimbursement Arrangement (HRA) and a Flexible Spending Account (FSA) together, but the combination and its tax implications depend on the specific type of FSA.
Generally, you can use an HRA alongside a Limited Purpose FSA or a Dependent Care FSA without issue, as these FSAs are designed to cover specific types of expenses (e.g., dental, vision, or dependent care) that do not overlap with the HRA's coverage. However, using a general Healthcare FSA alongside an HRA can be more complex, as both accounts are intended for a broader range of medical expenses, and there are potential tax considerations and limitations to consider.
It's advisable to consult with your employer's benefits department or a tax professional for guidance on how to effectively use these accounts in combination while adhering to IRS regulations.
HRA vs HSA Tax Information
If you’re comparing the tax-advantages of an HRA vs. FSA, there are a few things you’ll need to know. While both are designed to help individuals pay for out-of-pocket medical expenses, they differ in how they achieve this. Figuring out how to stack these benefits and get the most out of them requires a little context and explanation. Let's get right to it.
Health Reimbursement Arrangements and Health Savings Accounts differ in how they are funded and the associated tax treatment. HRAs are typically funded solely by the employer, and the contributions made to HRAs are tax-deductible for the employer. For employees, HRA contributions are tax-free when used for qualified medical expenses. In contrast, HSAs are funded by the individual, with pre-tax contributions, and these contributions are both tax-deductible and grow tax-free. Withdrawals from HSAs for qualified medical expenses are tax-free, making them a more tax-advantaged personal healthcare savings account.
HRAs vs HSA Similarities, Differences, and Use Cases
Health Reimbursement Arrangements (HRAs) vs. Health Savings Accounts (HSAs): Similarities, Differences, and Use Cases
Similarities:
-
Tax Advantages: Both HRAs and HSAs offer tax benefits. Contributions to both accounts are typically tax-deductible, reducing your taxable income. Additionally, funds in both accounts can be invested and grow tax-free, and withdrawals for qualified medical expenses are also tax-free.
-
Use for Medical Expenses: Both HRAs and HSAs are designed to help individuals pay for eligible medical expenses. These expenses can include doctor's visits, prescription medications, hospital fees, and other approved healthcare costs.
-
Rolling Funds Over: Funds in HRAs and HSAs can often be rolled over from year to year. This means that if you don't use all the money in your account during the current year, it remains available for future healthcare expenses.
Key Differences:
-
Ownership:
- HRA: HRAs are typically owned and funded solely by the employer. Employees cannot contribute to HRAs.
- HSA: HSAs are individually owned and funded by employees. Employers can contribute to employees' HSAs, and individuals can also make their own contributions, up to annual limits set by the IRS.
-
Portability:
- HRA: HRAs are tied to the employer, and employees may lose access to their HRA when changing jobs.
- HSA: HSAs are portable and belong to the individual. They can be carried from job to job and even into retirement.
-
High-Deductible Health Plan (HDHP) Requirement:
- HRA: HRAs are not specifically linked to HDHPs, and they can be used with a variety of health insurance plans.
- HSA: To be eligible for an HSA, you must have an HDHP. The HSA is intended to complement high-deductible health plans.
-
Contributions:
- HRA: Contributions to HRAs come solely from the employer. Employees do not make contributions.
- HSA: Contributions to HSAs can come from both the employer and the individual. There are annual contribution limits set by the IRS.
| HSAs | HRAs | FSAs | |
| What does it stand for? | Health savings accounts | Health reimbursement arrangement | Flexible Spending Accounts |
| Tax treatment | Pre-tax | Pre-tax | Pre-tax |
| Eligible expenses | Qualified medical expenses | Qualified medical expenses and health insurance premiums | Qualified medical expenses |
| Ownership | Employee | Employer | Employee |
| Portability | Portable | Not portable (although the employee's health insurance plan is) | Not portable |
| Rollover fund policy | This can happen at the discretion of the employer | This can happen at the discretion of the employer | No rollover. This is a use it or lose it situation. |
Use Cases:
HRA Use Cases: HRAs are often used by employers to help employees cover healthcare costs. They are flexible and can be designed to meet various needs, such as reimbursement for out-of-pocket expenses or premiums for certain insurance plans.
HSA Use Cases: HSAs are ideal for individuals with high-deductible health plans. They offer a way to save for healthcare costs while taking advantage of the tax benefits. HSAs are portable, making them suitable for those who anticipate changing jobs or transitioning into retirement.
In summary, HRAs and HSAs share similarities in their tax advantages and use for medical expenses, but they differ in terms of ownership, portability, and eligibility requirements. The choice between HRAs and HSAs depends on factors such as your specific healthcare needs, your employer's benefit offerings, and your insurance plan.
HRA vs FAQs
Can you claim FSAs on your taxes?
You cannot claim Flexible Spending Account (FSA) contributions as tax deductions because they are already made with pre-tax dollars, reducing your taxable income.
Do you need an HSA if you have an HRA?
You can have both a Health Savings Account (HSA) and a Health Reimbursement Arrangement (HRA) concurrently, but your eligibility to contribute to the HSA is affected by the type of HRA and the specific rules governing it, so it's important to understand the regulations to determine if you can maximize both accounts.
Do you get a debit card with an HRA?
It depends. Depending on the HRA administrator and the type of HRA, some provide participants with a debit card linked to the HRA account, simplifying the process of using the funds for eligible medical expenses.
How do you choose the right supplemental healthcare account for your company?
Choosing the right supplemental healthcare account for your company involves assessing your employees' needs, considering the specific benefits offered by Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs), or Flexible Spending Accounts (FSAs), and aligning the chosen account with your budget and long-term benefits strategy.
How do you use the money in the account?
To use the money in your Flexible Spending Account (FSA), you can typically follow these steps: First, incur eligible medical or dependent care expenses like doctor's visits, prescription medications, or childcare costs. Then, pay for these expenses out of your own pocket, keeping receipts and documentation for each expense. Finally, submit a reimbursement claim to your FSA administrator, providing the necessary documentation, and you'll receive tax-free reimbursements for the qualified expenses you've incurred.
What are the benefits?
One key benefit of a Flexible Spending Account is the ability to use pre-tax dollars to cover qualified medical and dependent care expenses, resulting in lower taxable income and potential cost savings for account holders.
What expenses are eligible for FSAs?
Flexible Spending Accounts (FSAs) offer coverage for a wide range of eligible medical and dependent care expenses, providing financial assistance for various healthcare needs. These expenses can include co-pays for doctor's visits, the cost of prescription medications, dental and vision care expenses, the purchase of medical equipment, and even certain over-the-counter items. For dependent care FSAs, eligible expenses encompass child care or elder care costs that enable individuals to work or attend school, such as daycare or after-school programs. Employers typically provide a comprehensive list of eligible expenses, and the IRS offers guidelines to determine whether an expense qualifies for reimbursement from an FSA.
Key Takeaways
Here are five key takeaways to distinguish Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs), and Flexible Spending Accounts (FSAs):
-
Ownership and Funding: HRAs are typically funded by employers and owned by the employer. HSAs are individually owned and funded by employees, with contributions often coming from both employers and individuals. FSAs are typically funded by employees through salary deductions, with some employer contributions possible.
-
Portability: HRAs are usually tied to the employer and may not be portable if you change jobs. HSAs are owned by the individual and are fully portable, accompanying you even when changing employers. FSAs are often job-specific but may have some portability options.
-
Eligibility Requirements: HRAs are not tied to specific health plan types and can be used with various insurance plans. HSAs require a High-Deductible Health Plan (HDHP). FSAs can be used with various health insurance plans, and some may have specific requirements like the Limited Purpose FSA or Dependent Care FSA.
-
Annual Contribution Limits: HRAs have no IRS-imposed contribution limits, but employers set the funding amount. HSAs have annual contribution limits set by the IRS. FSAs have IRS-imposed annual contribution limits.
-
Tax Benefits: Contributions to HRAs are tax-deductible for the employer, and employees typically receive tax-free reimbursements for qualified medical expenses. HSAs offer tax-deductible contributions for both employers and individuals, and withdrawals for qualified medical expenses are tax-free. FSAs allow employees to contribute pre-tax dollars, reducing their taxable income, and qualified withdrawals are also tax-free.
Still have HRA vs FSA questions?
Need help making sense of how to get the most out of these tax-friendly tools? Our team of HRA experts is at the ready to chat with you on our website. You can also check out our guide on small business tax strategies for more ideas on how to play it smart.
Let's talk through your HRA questions
A wife to one and mother to four, Keely does all of the things. She’s also dabbled in personal finance blogging and social media management, contributed to MetroFamily magazine, and is passionate about good food, treasure hunting and upcycling. With a B.S. in Psychology from the University of Oklahoma and a knack for a witty punchline, it’s no surprise that Keely’s social posts are as clever as they get. In her (very little) free time, you’ll find Keely with her nose in a book or trying out a local restaurant with her family.
