What’s the Difference Between an HRA, HSA, and FSA?

hra hsa fsa

When it comes to the world of health insurance, an abundance of industry-specific terms, acronyms, and changing legislation can make even the most experienced industry veterans stumble. It’s no surprise then that distinct aspects of the insurance industry are commonly confused.

In this article, we clarify the differences between a health reimbursement arrangement (HRA), a health savings account (HSA), and a flexible spending account (FSA). Each one has its own purpose, and small business owners should be aware of specific regulations surrounding them.

What Is an HRA?

A health reimbursement arrangement is a type of insurance benefit that many small to medium-sized businesses use to offer health benefits to their employees. With an HRA, employers use tax-free money to reimburse employees for health-related expenses, up to a certain amount.

An HRA is not a savings account. However, employers can choose whether or not to roll over reimbursement allowances month to month, or year to year. Most small employers limit reimbursement rollovers to restart at the end of each year.

Beginning in January 2020, business owners can choose between six different types of HRAs. Each one is structured to meet specific needs, and leave businesses of any size the ability to provide a competitive benefits package for employees.

The six types of HRAs are:

  1. Qualified Small Employer HRA (QSEHRA)
  2. Individual Coverage HRA (ICHRA)
  3. Group Coverage HRA
  4. Retiree HRA
  5. Dental/Vision HRA
  6. Excepted Benefit HRA

The three most common HRAs for small businesses are the QSEHRA, the ICHRA, and the group coverage HRA. 

The ICHRA is a new type of HRA starting in 2020, but the other two are commonly used because they allow business owners to make tax-free reimbursements. Typically, business owners aim to provide a health insurance benefit that attracts and retains employees. The other types of HRAs cater to very specific, niche needs, and are therefore used less frequently. We’ll discuss the specifics of the three most common HRAs below.

Qualified Small Employer HRA (QSEHRA)

The QSEHRA is a reimbursement arrangement for employers that have fewer than 50 employees and that do not already offer a group health insurance plan.

With the QSEHRA, employers reimburse their employees for health insurance premiums and eligible expenses, tax-free.[1] In this arrangement, employers may save money on payroll taxes, and employees may save on income taxes.

In this type of HRA, employers must follow reimbursement limits according to the employee’s status. In 2020, single employees can be reimbursed up to $5,250 per year, whereas employees with a family status can be reimbursed up to $10,600 per year.

Individual Coverage HRA (ICHRA)

An ICHRA is a type of HRA that employers utilize in tandem with a group health plan. With the ICHRA, employers are able to reimburse their employees exclusively for their qualified, self-acquired health insurance premiums. If an employee does not have an individual health insurance policy, they cannot participate in the ICHRA.

Unlike the QSEHRA, neither employers nor employees can get tax benefits for reimbursements made toward other health-related expenses that are otherwise reimbursable through the QSEHRA.

One benefit of offering an ICHRA is it does not have reimbursement limits, giving greater flexibility to employers who want to provide competitive benefits. In addition, employers are able to offer different reimbursement amounts according to 11 different employee classes, rather than the two employee types (full-time and part-time) allowed by the QSEHRA.

Group Coverage HRA

The group coverage HRA is a reimbursement arrangement for any employer that offers a group health insurance plan and wants to reimburse employees, tax-free, exclusively for out-of-pocket medical expenses.

The group HRA is only available to employees who participate in a company’s group insurance policy and is designed as a supplement to help employees with high deductible costs.

One of the main benefits of using an HRA to reimburse employees for health insurance premiums and eligible health expenses is the tax savings. In any other form of reimbursement, such as a health insurance stipend, both the employer and the employee must pay taxes on the stipend amount. In addition, employers enjoy the ability to control costs and leverage health benefits to recruit and retain top talent.

In addition to its tax savings benefits, HRAs help employers that have employees based in multiple states. In these cases, employers often struggle to find a single group health insurance policy that works for all employees in multiple states.

What Is an HSA?

A health savings account is a government-regulated savings account that individuals or families can use to pay for medical expenses, tax-free. HSAs are typically set up by an individual, but they are also frequently offered alongside an employer’s high-deductible health plan (HDHP).

One important note is HSAs are always owned and controlled by the individual, not the employer. Therefore, if an employee changes employers, or moves across state lines, they are able to retain all the money in their HSA. This is a particularly attractive characteristic for many people because of the control it offers individuals and families over their own wellbeing, regardless of employment status.

Retirement Savings Alternative

In addition to the tax-savings benefits, HSAs can be used for retirement as well. And many financial experts even say that an HSA is better than the traditional 401(k) or IRA account for retirement purposes because of their tax-advantaged nature.

Before you turn 65, HSAs must be used for out-of-pocket medical expenses or you’ll face a penalty. However, after age 65, you won’t face a penalty. Additionally, because the money you put into this account can be invested, is yours forever, and doesn’t have withdrawal requirements, they can be a useful retirement savings vehicle.

Many HSA owners choose to contribute enough to their 401(k) to earn their employer’s matching contribution and then make the maximum contribution possible to their HSA. This approach may require some re-orientation in terms of how much is put into each savings account, but if done correctly, it can help maximize tax savings while capitalizing on free money from employers.

Contribution Limits

In 2020, contribution limits have increased by $50 for individual coverage and $100 for family coverage.

The 2020 HSA contribution limits are:

  • $3,550 for individuals
  • $7,100 for families

The 2020 contribution limits for HSAs tied to HDHPs are:

  • $6,900 for  individuals
  • $13,800 for families

What Is an FSA?

A flexible spending account (FSA) is a type of health savings account that is set up by an employer. Much like an HSA, the FSA allows people to use pre-tax income for medical expenses. As opposed to an HSA, which is not offered to Medicare recipients, an FSA is open to anyone that an employer offers it to, except for people who own more than 2% of the company (including S-corporations, LLCs, LLPs, PCs, sole proprietorships, or partnerships).

Some of the differences between FSAs and HSAs include, but are not limited to: 

  • Qualification rules: Medicare recipients can participate in an FSA; however, they cannot qualify for an HSA.  
  • Contribution limits: In an FSA, individuals can contribute up to $2,650 per year. With an HSA, individuals can contribute up to $3,450. Increased sums for households apply.
  • Rules for rollovers: With an FSA, employers decide whether or not FSA funds expire at the end of the year or not. In an HSA, contributed funds never expire or go away unless spent on health-related expenses.
  • Withdrawal penalties: With an FSA, employees may have to submit expenses to be refunded by an FSA. And, depending on an employer’s policy, employees may not be able to access funds for nonmedical expenses. With an HSA, funds can be taken out of an HSA for non-medical purposes with a penalty, or tax-free after the age of 65. In addition, if HSA funds are withdrawn for nonmedical purposes before the age of 65, a 20% penalty is incurred. In addition, withdrawn funds must be declared on the income tax form.

The most important differences between an HRA, HSA, and FSA are:

A reimbursement arrangement, not a savings account
Savings account that can be used to reimburse medical expenses
Savings account that can be used to reimburse medical expenses
Used to reimburse individual health insurance premiums and eligible medical expenses
Used to reimburse medical expenses; not designed specifically to pay for insurance premium expenses
Used to reimburse medical expenses; not designed specifically to pay for insurance premium expenses
Money reimbursed to employees is not subject to income or payroll taxes
Money withdrawn for medical purposes is not subject to income taxes; can withdraw tax-free for any purpose after age 65
Money withdrawn for medical purposes is not subject to income taxes
Typically rollover month-to-month and sometimes year-to-year
Not subject to rollover limitations; yours for life, even if you switch employers
May expire at the end of the year, depending on the employer

The Bottom Line 

The most important difference you should take away from this article is that an HRA is an arrangement between employer and employee, whereas HSAs and FSAs are accounts where employees save money for health-related expenses. Each of the terms discussed above, however, are valuable tools that employers can use to recruit and retain top talent. And they are tools employees can use to ensure they don’t have to forego essential medical treatment.

When setting up your employee benefits packages, you should consider offering an HRA in order to supplement your employees’ medical expenses while benefiting from tax savings. Additionally, you may want to contribute to employees’ HSAs to make your company stand out even more. 

Article Sources:

  1. PeopleKeep.com. “IRS Publication 502

Alex Flitton

Alex Flitton is the content marketing manager at PeopleKeep, creators of HRA benefits automation software that helps make offering benefits simple, painless, and personal for small businesses.

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