HSA vs FSA vs HRA

There are several tax-advantaged ways you can pay for healthcare expenses, with the three most prominent being a Health Saving Account (HSA), Health Reimbursement Arrangement (HRA), and Flexible Spending Account (FSA). Each differs slightly, and it is valuable to understand the differences to take full advantage of them.

Health Savings Account (HSA)

An HSA is a type of personal savings account that allows you to set aside money on a pre-tax basis to pay for certain medical expenses, such as deductibles, copayments, coinsurance, and other qualified expenses, lowering out-of-pocket health care costs. You cannot use HSA funds to pay premiums. Banks, credit unions, and other financial institutions offer HSAs.

Although you can use funds in an HSA, you can only contribute to an HSA if you have an HSA-eligible plan known as a High-Deductible Health Insurance Plan (HDHP). HSA-eligible plans are available through the Health Insurance Marketplace, Small Business Health Options Program (SHOP), or outside the Marketplace. Note that you cannot contribute to an HSA if you have Medicare coverage or a plan where you don’t first pay deductibles or copayments.

The IRS does not tax your contributions to your HSA account if used toward qualified medical costs. It can earn interest or other earnings, which are also not taxable. You can (in some situations) use the money from an HSA to pay for the qualified medical costs of your spouse or dependents. Funds you don’t use will carry over to the next year.

Health Reimbursement Arrangement (HRA)

An HRA is an employer-funded group health plan where employees get reimbursed tax-free for qualified medical expenses up to a fixed dollar amount per year. Employees can also use funds from an HRA to pay their spouses’ and dependents’ qualified medical expenses. The employer funds HRAs entirely, so nothing gets deducted from the employee’s paycheck, nor are HRA contributions counted as part of the employee’s income.

For most types of HRA, employees must enroll in either their employer’s group health plan, individual health insurance coverage, or Medicare to receive HRA contributions. However, one-person stand-alone HRA, retiree HRA, and expected benefit HRAs (EBHRAs) do not require you to have a qualified health plan.

Standard HRAs have no maximum annual contribution limits; but, the IRS does set annual limits for qualified small employer HRAs (QSEHRAs) and EBHRAs. HRAs also do not earn interest, and the money does not roll over year-to-year unless the employer allows it. An HRA account is usually not portable if you change jobs, but your employer may permit you to use the remaining funds.

Flexible Spending Account (FSA)

An FSA is an account your employer manages that permits you to set aside a portion of each paycheck to pay for various out-of-pocket medical expenses, tax-free, throughout the year. Examples of allowed expenses you can pay for using an FSA include insurance copayments, deductibles, qualified prescription drugs, insulin, and medical devices. Additionally, you can use an FSA with any health plan, unlike HSAs.

If you have money left in the FSA at the end of the year, your employer will typically give you two choices:

• Two and half more months to spend the left-over money
• Carry over up to $640 to spend the next year

You decide how much to put in an FSA—however, there is a cap. In 2023, the cap went up from $2,850 to $3,050. In 2024, it increased again to $3,200. Employers can follow this limit or set lower caps, but never higher. If your spouse also has an FSA through their employer, you both could potentially increase your total household FSA to $6,400.

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