What Is the Difference Between HRA and FSA?
Explore the key distinctions between Health Reimbursement Arrangements (HRA) and Flexible Spending Accounts (FSA) for managing healthcare costs.
Health spending accounts, such as Health Reimbursement Arrangements (HRAs) and Flexible Spending Accounts (FSAs), offer tax-advantaged ways to pay for qualified medical expenses. While both help manage healthcare costs, they operate under distinct rules and structures. Understanding their differences is important for maximizing benefits.
Health Reimbursement Arrangements (HRAs)
Health Reimbursement Arrangements are employer-funded plans that reimburse employees for qualified medical expenses. HRAs are not insurance policies but a mechanism for employers to help cover healthcare costs. The employer maintains ownership of the funds, and employees cannot contribute their own money.
HRA tax treatment benefits both employers and employees. Employer contributions are generally tax-deductible. For employees, reimbursements for eligible medical expenses are typically tax-free, provided they are for qualified medical expenses defined by the IRS.
Employers control HRA rules, including eligible expenses, annual contribution amounts, and carryover policies. Since the employer owns the account, HRA funds are generally not portable if an employee leaves. However, some HRA types, like QSEHRAs or ICHRAs, offer greater flexibility.
HRAs often integrate with group health plans to cover out-of-pocket costs like deductibles and co-pays. Types include Integrated HRAs, offered with a group health plan, and standalone HRAs like QSEHRAs and ICHRAs. A QSEHRA is for businesses with fewer than 50 employees and can reimburse health insurance premiums and medical expenses. An ICHRA allows employers of any size to reimburse employees for individual health insurance premiums and qualified medical expenses.
Flexible Spending Accounts (FSAs)
Flexible Spending Accounts allow employees to set aside pre-tax money from their paychecks for out-of-pocket healthcare or dependent care expenses. While employers can contribute, FSAs are primarily employee-funded through salary deferral. This pre-tax contribution reduces taxable income, leading to tax savings. Reimbursements for qualified expenses are also tax-free.
Most FSAs have a “use-it-or-lose-it” rule, meaning funds must be used by the plan year’s end or forfeited. To mitigate this, employers may offer a grace period or a limited carryover. A grace period provides an additional 2.5 months to use funds. For example, a plan ending December 31 would extend to March 15.
Some plans allow a limited amount of unused funds to be carried over. For 2025, the maximum health care FSA carryover is $660. An employer can offer either the grace period or carryover, but not both. Carried-over funds do not affect the maximum employee contribution in the new plan year.
Different FSA types address varying needs. A Health Care FSA covers eligible medical, dental, and vision expenses, including deductibles, co-payments, and prescriptions. For 2025, the IRS limit for health care FSA contributions is $3,300. A Dependent Care FSA is for employment-related dependent care expenses, such as childcare. The maximum annual contribution for a Dependent Care FSA remains $5,000 per household for 2025, or $2,500 if married and filing separately.
Key Distinctions and Shared Features
While both HRAs and FSAs offer tax advantages for healthcare expenses, they differ in funding, ownership, and flexibility of unused funds. HRAs are exclusively employer-funded, with no employee contributions. FSAs are primarily employee-funded through pre-tax payroll deductions, though employers can contribute.
HRAs are employer-owned, and funds are generally not portable if an employee leaves. FSA funds are tied to employment and subject to the “use-it-or-lose-it” rule, with limited exceptions. HRA carryover policies are employer-determined and can be more flexible, but funds remain employer-owned.
Both account types provide significant tax benefits. HRA contributions are tax-deductible for employers, and reimbursements are tax-free for employees when used for qualified medical expenses. FSA employee contributions are pre-tax, reducing taxable income, and withdrawals for qualified expenses are tax-free.
Eligible expenses for both HRAs and Health Care FSAs cover qualified medical expenses, including deductibles, co-pays, and prescriptions. FSAs also offer a Dependent Care FSA option, covering expenses like childcare, which addresses a distinct financial need beyond direct medical costs.
Contribution limits differ significantly. HRAs generally lack IRS-imposed annual limits, allowing employers to set reimbursement amounts. However, specific HRA types like QSEHRAs have IRS-set annual limits, such as $6,350 for self-only coverage and $12,800 for families in 2025. FSAs have IRS-set annual contribution limits, subject to inflation adjustments. For 2025, the Health Care FSA limit is $3,300, and the Dependent Care FSA limit is $5,000 per household.
HRAs often integrate with a group health plan or can be standalone, like QSEHRAs and ICHRAs. FSAs can be used with various health insurance plans. A “limited purpose” FSA can combine with a High-Deductible Health Plan and Health Savings Account to cover dental and vision expenses.