Let's compare health Reimbursement Arrangements (HRAs), Flexible Spending Accounts, and Health Savings Accounts (HSAs). They're all tax-advantaged tools that help individuals pay for out-of-pocket medical expenses for themselves and their families through set-aside funds. Figuring out how to stack these benefits and get the most out of them requires a little context and a lot of explanation. Let's look at HRA vs. FSA vs. HSA.
HSA vs FSA, HRA vs HSA, FSA vs HRA
Did that headline just make you go cross eyed? Alphabet soup comes with the territory when it comes to health insurance. Let's compare HSAs, HRAs, and FSAs and start with some simple features of each.
HSAs, FSAs, and HRAs have a couple things in common. For starters, they are tax advantaged and they allow employers to help their employees with medical expenses.
All about HSAs
An HSA (aka Health Savings Account) is:
- Funded by both employer and employee
- Owned by Individual; employee takes funds with them when they leave
- Employee has immediate access to money in account
- Funds only for medical expenses that fall under the health plan’s deductible
- HSA funds cannot be used for insurance premiums
- HSA participants must have a High Deductible Health Plan (HDHP)
- Tax benefits: tax deductible contributions, tax free reimbursements, and tax free accumulation of interest and dividends
Our friends at Lively HSA have a great HSA resource for learning more about this tool.
How HSAs work
Employees can set up monthly contributions through payroll to add money to their HSA account. If they anticipate high expenses for the year (say, they are having a baby) it might be a good chance to bump up the contributions. You can change contribution rates at any time. The idea is to have enough money in the HSA to cover that high deductible, which can be a pretty scary number sometimes. But in the event something happens and you end up with an out of network deductible that would normally break the bank, if you’ve been diligent about putting money in your HSA, it will soften the blow and help you cover your costs. If those costs never come, the HSA funds continues to grow and the account serves as a long-term investment account.
All about FSAs
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.
All about HRAs
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 newest around 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. For more details, check out our specific post about How HRAs Work.
Similarities between HSAs and HRAs
The main thing these tools have in common is their tax-friendly design. It's why we love them!
HSAs have three tax advantages:
- contributions made by employers are pre-tax, contributions made by the employee are tax-deductible.
- you don't pay tax on account growth
- withdrawals from the account (to pay for eligible expenses) are not taxed
HRAs boast no payroll tax for employers and no income tax for employees.
Differences between HSAs and HRAs
- With HSAs, you avoid the “use it or lose it” stipulation. It’s not like an FSA (flexible spending account) where you lose the funds at the end of the year. Funds are also portable, meaning they remain with the employee even if they don’t stay at the company.
This is also different from the QSEHRA, where the funds stay with the employer. - An HSA grows like an investment and an HRA does not.
- To take full advantage of HSA tax savings, it is suggested that you make the maximum contribution as set by the IRS. The 2021 HSA Contribution limits have just been announced. The contribution limits for 2021 are $3,600 for individuals and $7,200 for families. If you are 55 or older, a $1,000 catch-up contribution still applies.
- While the ICHRA does not have annual contribution limits, the QSEHRA does. The 2021 contribution limits for QSEHRA are $5,300/year (or $441.67/month) for individuals. For a family: $10,700/year (or $891.67/month).
Want to learn more about HRAs, HSAs, or FSAs?
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.
Looking for more employee benefit ideas? Check out our Employee Benefits Guide.
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