Can You Have Both an HRA and an FSA?

To help manage healthcare expenses, various tax-advantaged accounts are available, providing avenues for saving or reimbursement. These accounts are designed to make healthcare more affordable by allowing individuals to pay for qualified medical costs with pre-tax dollars, thereby reducing their overall taxable income. Understanding the specific characteristics and rules of each type of account is essential for maximizing their benefits and effectively planning for healthcare expenditures.

Health Reimbursement Arrangements Explained

A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses. Reimbursements received by the employee are generally tax-free, offering a significant financial advantage.

Employers establish the rules for their HRA plans, including which expenses are eligible for reimbursement and whether unused funds can roll over to subsequent years. This employer ownership also means that HRA funds are generally not portable; if an employee leaves the company, they typically forfeit any remaining balance. The Internal Revenue Service (IRS) outlines the general rules for HRAs in publications like IRS Publication 969. Common HRA types include Integrated HRAs, Qualified Small Employer HRAs (QSEHRAs), and Individual Coverage HRAs (ICHRAs).

Flexible Spending Accounts Explained

A Flexible Spending Account (FSA) is an employee-funded account, established through pre-tax payroll deductions, used to pay for qualified medical expenses. Contributions to an FSA are made before taxes are calculated, which effectively lowers an individual’s taxable income. Unlike HRAs, FSAs typically operate under a “use-it-or-lose-it” rule, meaning funds not used by the end of the plan year are generally forfeited.

However, some FSA plans offer exceptions to this rule, such as a grace period of up to two and a half months to use remaining funds, or a limited carryover amount to the next year. FSAs are commonly offered alongside employer-sponsored health plans. There are different types of FSAs, including Health Care FSAs for medical expenses, Dependent Care FSAs for childcare costs, and Limited-Purpose FSAs.

Combining an HRA and an FSA

The ability to simultaneously hold both a Health Reimbursement Arrangement (HRA) and a Flexible Spending Account (FSA) depends on the specific types of accounts involved and the employer’s plan design. Generally, an individual cannot have a general-purpose HRA and contribute to a general-purpose Health Care FSA at the same time. This restriction helps prevent individuals from receiving double tax benefits for the same medical expenses.

There are, however, specific scenarios where combining these accounts is permissible. A common exception involves a Limited-Purpose FSA (LPFSA). Because an LPFSA’s scope is restricted, it can typically be combined with a general-purpose HRA, allowing individuals to use their HRA for broader medical expenses while using the LPFSA for dental and vision costs. Another exception is a Post-Deductible HRA. This type of HRA begins to reimburse medical expenses only after the health plan’s deductible has been met, allowing a general-purpose Health Care FSA to be used for expenses incurred before the deductible is satisfied.

A Dependent Care FSA (DCFSA) can always be combined with any type of HRA or Health Care FSA. This is because Dependent Care FSAs address a different category of expenses than medical HRAs and Health Care FSAs. Even when rules permit combinations, the employer ultimately determines which benefits they offer and how these accounts are structured within their overall benefits package.

Managing Expenses with Both Accounts

When an individual is permitted to have both an HRA and an FSA, managing expenses requires careful attention to the specific rules of each plan. Claims are typically processed based on an established order of operations, which is determined by the employer’s plan documents. For instance, some plans may require that HRA funds be exhausted before FSA funds can be used for eligible expenses, or vice versa. Employers can design plans to prioritize one account over the other, influencing how quickly funds are drawn down.

Individuals might choose to prioritize using their FSA funds first due to the “use-it-or-lose-it” rule. Conversely, if an HRA has generous rollover provisions, saving those funds for larger, future expenses might be a beneficial strategy. Maintaining meticulous records of all medical expenses and reimbursements is crucial for both tax purposes and to ensure compliance with plan rules, particularly when coordinating benefits between multiple accounts. It is important to thoroughly review the specific plan documents provided by the employer for both the HRA and FSA, as rules for eligibility, reimbursement, and coordination can vary.