HSA, FSA or HRA: What employees need to know before choosing one
Wednesday, November 04, 2020
Not to be confused with health insurance, HSAs, FSAs, and HRAs are tax-favored accounts that reimburse employees for eligible healthcare expenses, as defined by the Internal Revenue Service. All three share the common goal of helping employees save on healthcare costs, but in the end, they are separate accounts.
Here’s what you need to know before enrolling in an employer’s HSA, FSA, or HRA.
Health Savings Account (HSA)
A health savings account lets you set aside pretax money to pay for eligible out-of-pocket medical, dental, and vision expenses incurred by you, your spouse, or dependents.
Your HSA contributions are exempt from federal income tax, Social Security tax, Medicare tax and, in most cases, state income tax. The contributions are deducted from your salary/wages before taxes are withheld, boosting your overall take-home amount.
You can pay for eligible expenses directly from your HSA fund (such as via your HSA debit card). Alternatively, you can pay out of pocket and then request reimbursement.
- You can open an HSA on your own, without an employer, so long as you meet basic eligibility requirements.
- To contribute to an HSA, you must have a High Deductible Health Plan (HDHP).
- The HDHP must satisfy IRS requirements, regardless of whether you got it through the health insurance Marketplace/Exchange or your employer.
- Anyone can contribute to your HSA, including both you and your employer. The contributions cannot exceed the IRS’ annual limits.
- You can carry over your unused HSA funds to the next year.
- You own the HSA, which means you can take it with you if you leave your employer.
You may use your HSA funds to pay for eligible expenses until your HDHP coverage kicks in (which is after you’ve met the HDHP deductible).
Health Flexible Spending Account (FSA)
A health flexible spending account lets you set aside pretax money to pay for eligible out-of-pocket medical, dental, and vision expenses incurred by you, your spouse, or dependents.
Your health FSA contributions are taken out of your salary/wages before taxes, leading to tax savings. In addition, you can pay for eligible expenses directly from your FSA fund (such as by using your FSA debit card), or you may pay out of pocket and then request reimbursement.
Health FSA attributes:
- You cannot get a health FSA on your own. To contribute to a health FSA, you must be enrolled in your employer’s health FSA.
- To offer a health FSA, your employer must also offer a group health insurance plan — unless the health FSA is only for limited-scope vision and dental.
- You do not need to have health insurance to participate in a health FSA.
- Your health FSA contributions cannot exceed the IRS’ annual limit. Your employer can contribute, as well, up to the IRS cap.
- Your employer owns the FSA, which means you cannot take it with you if you leave the company.
- Your employer is not required to allow you to carry over unused FSA funds into the next year. They can, however, choose to let you carry over up to $500, or give you a grace period to use all the money.
Health Reimbursement Account (HRA)
A health reimbursement account lets your employer reimburse you for eligible medical, dental, and vision expenses incurred by you, your spouse, or dependents. Similar to both the HSA and FSA, HRA reimbursements are pretax, which results in tax savings. However, unlike the HSA and FSA, you cannot put money into an HRA.
- Only an employer can fund the HRA; employees are not allowed to contribute.
- Typically, the employer sets a monthly allowance for eligible out-of-pocket healthcare expenses. The employee pays out of pocket and submits proof of purchase to the employer who then reimburses the employee.
- The HRA is not pre-funded. It is purely a reimbursement account, based on the allowance amount established by the employer. This allowance amount is not portable, which means you cannot take it with you when you leave the company.
- The employer chooses whether unused HRA allowance amounts can be carried over to the next year.
- Employers can contribute any amount to an HRA. No IRS limits apply.
- HRAs come in several forms, including Qualified Small Employer HRA, Individual Coverage HRA, Limited Purpose HRA (for dental and vision alone), and group coverage HRA — which is linked to the employer’s group health insurance plan.
This is only an introductory look at HSAs, FSAs, and HRAs. For more information, see IRS Publication 969 about health savings accounts and other tax-favored plans.
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