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.
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.
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.
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.
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.
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.