The world of employee benefits is challenging to navigate, especially with various plans on offer. Some of the most popular are Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs). Each of these accounts offers unique advantages and can be a valuable part of an employer’s healthcare strategy. This blog post will provide an in-depth look at HRA vs. FSA vs. HSA plans.
Health savings account (HSA)
An HSA is a savings account that offers tax benefits and is intended for people who have HDHPs. It allows employees to save money on medical costs while getting many tax benefits.
Benefits
- Tax savings: Contributions are tax-deductible. Profits increase without being taxed, and money taken out for eligible healthcare costs is also not taxed.
- Long-term savings: Funds roll over year to-year, allowing for long-term savings.
- Investment options: HSAs often offer investment opportunities similar to retirement accounts.
Eligibility
To qualify for an HSA, employees need to be enrolled in a high-deductible health plan (HDHP). They can’t enroll in Medicare and can’t be listed as a dependent on someone else’s tax form.
Contribution limits
For 2024, the contribution limits are $4,150 for individuals and $8,300 for families. Individuals 55 and older can contribute an additional $1,000 as a catch-up contribution.
How it works
Employees can contribute pre-tax dollars to their HSA through payroll deductions or make contributions directly. The funds can be used to pay for qualified medical expenses, including deductibles, copayments, and other out-of-pocket costs. Remaining funds carry over each year, and employees retain ownership of the account even if they switch jobs or change health plans
Flexible spending account (FSA)
An FSA is an account that provides tax benefits and enables employees to allocate pre-tax money for covering approved medical costs. Employers typically offer FSAs as part of a benefits package.
Benefits
- Immediate tax savings: Employees make contributions with pre-tax dollars, reducing their taxable income.
- Convenience: Funds are available for use at the beginning of the plan year.
Eligibility
Eligibility for an FSA is determined by employers. Generally, any employee who is offered an FSA as part of their benefits package can participate.
Contribution limits
For 2024, the contribution limit for FSAs is $3,200 per year.
How it works: Employees choose how much to pay for an FSA during open enrollment. Employers deduct the chosen amount from their paycheck pre-tax and deposits it into their FSA. Employees can then use these funds to pay for eligible medical expenses. Unlike HSAs, FSAs have a “use-it-or-lose-it” rule, meaning employees must use the funds within the plan year or forfeit them, although some plans offer a grace period or a carryover option.
Health reimbursement arrangement (HRA)
A Health Reimbursement Arrangement (HRA) is an account that an employer funds. It pays employees for medical expenses they can afford. Unlike HSAs and FSAs, only employers contribute to HRAs.
Benefits
- Employer-funded: No out-of-pocket costs for employees.
- Flexible: Employers can tailor HRAs to meet specific employee needs.
Eligibility
The employer determines HRA eligibility. Generally, employees can participate in an HRA if their benefits package includes one.
Contribution limits
There are no IRS-imposed contribution limits for HRAs. Employers set the contribution limits for their HRA plans.
How it works
Employers set aside funds in an HRA to reimburse employees for qualified medical expenses. Employees submit claims for reimbursement, and the employer pays them tax-free. Unused funds may roll over to the next year, depending on the employer’s plan.
HRA vs. FSA vs. HSA
Contribution limits
- HSA: $4,150 (individual), $8,300 (family)
- FSA: $3,200
- HRA: No IRS-imposed limits (employer-determined)
Tax advantages
- HSA: Triple tax advantage (tax-deductible contributions, tax-free growth, tax-free withdrawals for qualified expenses)
- FSA: Pre-tax contributions reduce taxable income
- HRA: Employer contributions are tax-free for employees
Usage of funds
- HSA: For qualified medical expenses
- FSA: For eligible medical expenses within the plan year
- HRA: For qualified medical expenses as defined by the employer
Rollover rules
- HSA: Funds roll over year-to-year
- FSA: Use-it-or-lose-it rule, with possible grace period or carryover
- HRA: Rollovers depend on the employer’s plan
Accessibility of funds
- HSA: Immediate access to contributed funds
- FSA: Full annual election amount available at the beginning of the plan year
- HRA: Access to employer-contributed funds as specified by the plan
Employer and employee contributions
- HSA: Employers and employees can make contributions
- FSA: Typically funded by employee pre-tax contributions
- HRA: Funded entirely by the employer
