Is an HRA the Same as an FSA? Key Differences

Healthcare costs can be a significant financial consideration for individuals and families, making it important to understand available options for managing these expenses. Various health spending accounts exist to help individuals set aside funds on a pre-tax basis, specifically for qualified medical expenditures. These accounts offer a way to reduce taxable income while providing a dedicated resource for healthcare needs, allowing for more proactive financial planning.

Understanding Health Reimbursement Arrangements (HRAs)

A Health Reimbursement Arrangement (HRA) is an employer-funded benefit plan designed to reimburse employees for qualified medical expenses and, in some cases, health insurance premiums. Employers establish these plans and determine the maximum amount available to employees each year. Employees cannot contribute their own money to an HRA; it is solely funded by the employer.

The employer retains ownership of the funds within an HRA, and it functions as an agreement to reimburse expenses rather than a physical account with segregated funds. Reimbursements are generally tax-free for employees when used for eligible medical expenses, and employers can claim a tax deduction for these contributions. The specific expenses covered are defined by the employer but must adhere to Internal Revenue Service (IRS) guidelines for medical care expenses.

One notable feature of HRAs is that unused funds may often be rolled over from year to year, depending on the employer’s plan design. While some HRAs allow full carryover, others might set a maximum rollover limit or choose to reset allowances annually. If an employee leaves their job, the HRA funds typically revert to the employer, as the benefit is not portable. HRAs are frequently offered alongside high-deductible health plans (HDHPs) to help cover out-of-pocket costs. Various types of HRAs exist, such as Individual Coverage HRAs (ICHRA) or Qualified Small Employer HRAs (QSEHRA), providing flexibility for employers to tailor health benefits.

Understanding Flexible Spending Accounts (FSAs)

A Flexible Spending Account (FSA) is an employer-sponsored health benefit that allows employees to set aside a portion of their earnings on a pre-tax basis to pay for qualified medical expenses. These contributions are made through payroll deductions, which reduces an employee’s taxable income. Employees can use FSA funds for a wide array of eligible medical expenses, including deductibles, copayments, and prescription medications.

A defining characteristic of an FSA is the “use-it-or-lose-it” rule, which generally means any unspent funds at the end of the plan year are forfeited to the employer. However, employers can offer exceptions to this rule, such as a grace period of up to 2.5 months into the following year to incur new expenses, or allow a limited carryover amount to the next plan year. An employer can offer either a grace period or a carryover, but not both.

Although employees contribute the funds, the FSA is technically owned by the employer. Employees gain immediate access to the full elected amount at the beginning of the plan year, even if they have not yet contributed that much through payroll deductions. This upfront availability can be advantageous for managing early-year medical costs. FSAs are commonly offered with various traditional health insurance plans. Beyond Health FSAs, other types exist, such as Dependent Care FSAs for childcare costs or Limited Purpose FSAs. Employees must re-elect their FSA contribution amount each year, as elections do not automatically renew.

Key Similarities and Differences

Health Reimbursement Arrangements (HRAs) and Flexible Spending Accounts (FSAs) both serve as valuable tools for managing healthcare costs. Both are employer-sponsored benefits and offer tax advantages, allowing for tax-free reimbursements of qualified medical expenses. Contributions to either an HRA or an FSA are not subject to federal income tax, and FSAs also provide payroll tax savings.

Funding Source

HRAs are employer-funded; FSAs are primarily employee-funded through pre-tax payroll deductions.

Fund Ownership

Employers retain ownership of HRA funds. While employers technically hold FSA funds, the employee has the right to use them for qualified expenses.

Carryover Rules

HRAs generally allow unused funds to roll over. FSAs typically follow a “use-it-or-lose-it” rule, with limited exceptions.

Eligibility

HRA eligibility is tied to specific employer health plans and can be customized. FSA eligibility is broader, available to most employees, with some limitations for HSA holders.

Portability

Neither HRA nor FSA funds are portable; unused funds remain with the employer if an employee leaves their job.