What Is the Difference Between an FSA and an HRA?

Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs) are employer-sponsored benefit programs designed to help individuals manage healthcare costs. While both assist with health-related expenses, they have distinct structures, funding mechanisms, and operational rules. Understanding these differences is helpful for navigating personal healthcare financing.

Understanding Flexible Spending Accounts

A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to contribute pre-tax money from their wages to pay for eligible out-of-pocket healthcare or dependent care expenses. Funds are deducted from an employee’s paycheck before taxes are calculated, which can reduce their taxable income.

There are two primary types of FSAs. A Health Care FSA is specifically for medical, dental, vision, and prescription expenses. A Dependent Care FSA (DCFSA) is designed for childcare or adult dependent care expenses, enabling the account holder and their spouse to work or look for work. Only employees whose employer offers an FSA are eligible to participate; self-employed individuals do not qualify.

Employees access their FSA funds through a debit card provided by the plan administrator or by submitting claims for reimbursement after an expense is incurred. The Internal Revenue Service (IRS) sets annual contribution limits. For 2025, the maximum contribution for a Health Care FSA is $3,300 per employee. For a Dependent Care FSA, the limits vary based on filing status: $5,000 for married couples filing jointly or single parents, and $2,500 for married individuals filing separately. Eligible expenses are broad and include deductibles, co-payments, prescriptions, eyeglasses, and dental work. The IRS Publication 502 provides a comprehensive list of what constitutes a qualified medical expense.

A defining characteristic of FSAs is the “use-it-or-lose-it” rule. Funds must be used by the end of the plan year or they are forfeited back to the employer. However, employers may offer exceptions to this rule. One common exception is a grace period, which provides an extension up to 2.5 months after the plan year ends, to use remaining funds. Another option is a carryover, allowing a limited amount of unused funds to roll over into the next plan year. For plan years beginning in 2025, the maximum carryover amount is $660. Employers choose whether to offer one of these exceptions or neither.

FSAs offer a dual tax advantage. Contributions are made with pre-tax dollars, reducing an employee’s taxable income, and withdrawals for qualified expenses are tax-free. FSAs are not portable. Funds are tied to employment, and any unused amounts are forfeited if an individual leaves their job, unless a grace period applies or COBRA continuation is offered for health FSAs.

Understanding Health Reimbursement Arrangements

A Health Reimbursement Arrangement (HRA) is an employer-funded account designed to reimburse employees for eligible healthcare expenses. Only the employer contributes funds; employees cannot contribute to an HRA. The employer determines the amount they will contribute annually to each employee’s HRA.

HRAs are often integrated with a specific health plan, such as a high-deductible health plan, but this is not always a requirement. Employees access funds by submitting claims for reimbursement after an expense has been incurred. The employer defines which expenses are eligible for reimbursement, which can include deductibles, co-payments, or premiums, in addition to other IRS-approved medical expenses. The scope of eligible expenses can vary significantly depending on the employer’s plan.

Unused funds often carry over from year to year if the employer allows, which is a significant difference from FSAs. Reimbursements from an HRA for qualified medical expenses are tax-free to the employee.

HRAs are not portable. Since the funds belong to the employer, access to these funds ceases when an employee leaves their job. There are various models of HRAs designed for specific purposes, such as the Qualified Small Employer HRA (QSEHRA) for small businesses or the Individual Coverage HRA (ICHRA) that allows reimbursement for individual health insurance premiums.

Comparing FSAs and HRAs

Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs) both help manage healthcare costs, but they differ fundamentally in several aspects. The most significant distinction lies in their funding source: FSAs are primarily funded by employee pre-tax contributions, while HRAs are exclusively employer-funded. This difference means FSA funds are for employee use within the plan year, whereas HRA funds belong to the employer and are used for employee reimbursement.

Contribution limits also vary. FSAs are subject to annual IRS limits, such as $3,300 for health care FSAs in 2025. In contrast, HRA limits are determined by the employer, and some types of HRAs, like the ICHRA, have no IRS-imposed contribution caps. The “use-it-or-lose-it” rule is a strict constraint for FSAs, meaning unused funds are forfeited at year-end, though employers may offer a grace period or a limited carryover. For HRAs, carryover of unused funds from year to year is a common employer-determined feature.

Both account types offer tax advantages. FSA contributions are pre-tax, and withdrawals for qualified expenses are tax-free. Employer contributions to HRAs and subsequent reimbursements for qualified medical expenses are also tax-free. The scope of eligible expenses can differ. FSAs cover a broad range of IRS-defined medical and dependent care expenses. For HRAs, the employer defines which expenses are eligible for reimbursement, which can be more restrictive or specific to the plan’s design.

Neither FSAs nor HRAs are portable upon leaving employment. Funds are tied to the employer’s plan and are not transferable to a new employer. Their integration with health plans varies. FSAs can be offered independently or alongside any health plan. HRAs are often integrated with specific health plans, such as high-deductible health plans, or can be used to reimburse individual insurance premiums, depending on the HRA model.