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Morgan Carpenter • Jan 08, 2021

HRA vs HSA vs FSA: The Difference Between Each

Your business has just hired a new group of recruits, and as any caring employer would, you want to help your employees thrive by making sure your staff has the best benefit packages. You have decided on the retirement and investment plans you will offer, so now you turn your attention to the foundation of all benefits, the health plan. As you wade through the myriad of health care options, you find yourself wondering “What is the difference between HRA vs HSA vs FSA? What is going to be best for my employees and my business?”


These plans are quite different, but they are all avenues to help your employees cover inevitable health expenses.  We know this can be a confusing, overwhelming and daunting decision for employers. We want you to have confidence that you have chosen the right employee benefits, so we have outlined the most important similarities and differences between these three types to help you make the best decision for your employees and your business.


Note: Throughout this article we will reference “pre-tax dollars.” This means the funds are pulled from the employees’ paycheck before it has been taxed.

What is an HSA (Health Savings Account)?

An HSA is a Health Savings Account. An HSA is an employee-owned account that can be utilized to pay for qualified health care expenses with pre-tax dollars. However, California and some other states still tax the funds. Any employee who is enrolled in a High Deductible Health Plan (HDHP) is eligible for an HSA.


Answers to Common HSA Questions


Who owns the account?

The employee owns the HSA account.


Who is contributing funds to the HSA?

Both the employer and employee can contribute funds.


Who sets contribution limits for an HSA?

The Federal Government decides the annual contribution limits. In 2021, the annual maximum contribution amount for an HSA is $3,600 for individuals and $7,200 for families. The employee can decide how much they want to contribute from payroll deductions, but the amount they deposit and any amount the employer may deposit cannot exceed the Federal limits.


Do funds in the HSA rollover?

Yes, HSA funds are never forfeited, and they always belong to the employee.


What insurance plans can you have with an HSA?

The employee needs to have a High-Deductible Health Plan (HDHP) to be eligible to contribute to an HSA account.


What can be reimbursed with an HSA?

Any eligible medical expenses as outlined in the IRS tax code section 213(d) are eligible for reimbursement with an HSA. Premiums are typically ineligible for reimbursement with an HSA, except for COBRA and Medicare B & D premiums.


What are the pros of an HSA?

There is a triple Federal tax advantage, so long as the funds are used for qualified medical expenses (contributions are pre-tax or tax deductible, interest earned is tax-free, and withdrawals are not taxed). 


Another pro of the HSA is the fact that the employee owns the HSA themselves. Accordingly, if that employee moves to a new job, makes changes to their medical coverage, moves to a new state, or becomes unemployed, they will still keep their HSA. 


Finally, the employee can decide how much they want to deduct from their pre-taxed paycheck to their HSA each year, up to the maximum contribution amount.


What are the cons of an HSA?

The employee cannot make contributions to an HSA account if they have dual health insurance coverage from a secondary insurance plan. They also cannot contribute to a health FSA (discussed below) unless the FSA is for excepted benefits only (dental and vision expenses).


The HSA is a great tool and provides a lot of autonomy for the employee, however, the HSA does have some limitations, so it may not

be the best option for everyone.

What is a Traditional HRA (Health Reimbursement Arrangement)?

A Traditional HRA is a Health Reimbursement Arrangement. Sometimes erroneously referred to as a Health Reimbursement Account. Please note, this is different from a health risk assessment. 


Rather, an HRA for the purposes of this post is an employer-owned and funded account which can reimburse employees for out-of-pocket health care expenses. Any employee who is enrolled on a health plan through their employer, where the health plan offers an HRA, is eligible for an HRA.


Answers to Common HRA Questions


Who owns the arrangement?

The employer owns the arrangement.


Who is contributing funds to the arrangement?

Only the employer can contribute funds.


Who sets contribution limits?

The employer decides how much can be contributed annually to an HRA.


Do funds in the arrangement rollover? 

The employer decides if the funds rollover or not. The arrangement is not portable – in other words, if the employee moves to a different state or becomes unemployed, they will lose access to the funds, unless they want to fund the HRA themselves through COBRA.


What insurance plans can you have with an HRA?

Different carriers have different rules, and you should always check with your insurance carrier before making an assumption.


What can be reimbursed with an HRA?

The employer, at the beginning of the year, decides what is eligible and ineligible for reimbursement, which are limited to medical expenses.


What are the pros of an HRA?

The HRA is regarded as one of the most flexible types of benefit plans and can be bundled with a lower fixed premium fully-insured health plan. This provides noticeable savings for the employer. 


One notable difference between an HRA and the above-mentioned HSA: in an HRA, an employer only has to pay out of the arrangement if there is a claim. This differs from the consumer-driven health plan (CDHP) that has a high deductible and can be paired with a health savings account (HSA) in which an employer contributes funds to an employee’s HSA account with or without a claim.  


What are the cons of an HRA?

There is more third-party administration involved in administering the HRA. Additionally, Section 105 non-discrimination testing is required.


The HRA provides some financial protections for the employer, however, the HRA also has some limitations, so it may not be the best option for everyone. 

What is an FSA (Flexible Spending Account/Arrangement)?

A Flexible Spending Account or Flexible Spending Arrangement (FSA) is an employer-owned account that covers health care expenses with pre-tax dollars. The general purpose of an FSA is to fund predictable healthcare expenses, or qualified expenses, such as medical and dental services.


Answers to Common FSA Questions


Who owns the account?

The employer owns the account.


Who is contributing funds to the account?

The employees contribute some of their regular compensation, and these funds are not taxed. The employer can only match what the employee contributes, up to the maximum annual allowable amount.


Who sets contribution limits?

The employee decides how much they want to deduct from their paycheck to contribute to the FSA. In 2021, the annual maximum contribution amount for an FSA is $2,750. These amounts may be less depending on how many employees participate in the plan in order to pass non-discrimination testing.


Do funds in the account rollover? 

The money an employee and employer have contributed to an FSA is expected to be used annually, but the employer can offer temporary extensions. Depending on the health plan, the employee can carry up to $550 into the next year. The new COVID relief bill extends this amount for 2021 into 2022.


What insurance plans can you have with an FSA?

The employee can pair any health plan with an FSA.


What can be reimbursed with an FSA?

Any qualified medical expense as listed in the IRS tax code section 213(d) is eligible for reimbursement with an FSA. Premiums are ineligible for reimbursement with an FSA.


What are the pros of an FSA?

An FSA is a pre-tax account. The money is taken out of the employee’s paycheck before taxes are paid; the funds can be used to pay for eligible health expenses.


Qualified medical expenses for employees and their spouses and children are covered.


What are the cons of an FSA?

Self-employed workers are ineligible for FSAs. FSAs are also limited to medical care, so general health items or cosmetic surgeries are not eligible for reimbursement.


Which of These Three Plans Is Right For Me and My Employees?


Now that we've address what is the difference between HSA and FSA and HRA, you have a general idea what the key differences are. There are pros and cons to all three plans, and each has its own perks and limitations.


For your next step, we encourage you to talk to our Principal Ron Bland to explore whether a HSA, HRA, or FSA is right for you and your employees. We know you care about your employees, and we know you want them to thrive. Our team, made of expert advisors, can assist you in acquiring a robust and comprehensive benefits package to meet the needs of your business and staff.


You can reach Ron Bland at Ron@AEISAdvisors.com or 650.348.6234 x12.


Disclaimer: Any information related to compliance or other subject matters in this blog is intended to be informational and does not constitute legal advice regarding any specific situation. The content of this blog is based on the most up-to-date information that was available on the date it was published and could be subject to change. Should you require further assistance or legal advice, please consult a licensed attorney.

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