Navigating HSAs, HRAs and FSAs

March 02, 2017
Depending on a client’s health care coverage source and plan, he or she may be faced with choosing whether to enroll in a Health Savings Accounts (HSA), Health Reimbursement Arrangement (HRA) or Flexible Spending Account (FSA). Following is an explanation of how each works.
Health Savings Accounts (HSAs) allow individuals covered by high-deductible health plans to contribute money, which can be done on a pre-tax or tax-refund basis, to an account that can be used tax-free to pay for qualified unreimbursed medical expenses. Some employers may also contribute to the account. Unused balances can be carried over from year to year and belong to the individual even if he or she leaves employment. Any money not used for qualified medical expenses can be withdrawn without penalty (ordinary income taxes will apply) for non-medical-related expenses after age 65. Nonqualified withdrawals are subject to ordinary income taxes and a penalty. Summary:
  • Must be paired with a high-deductible plan
  • Funded by individual although employer may contribute
  • Completely portable
  • Rolls over from year to year
  • May be invested
Health Reimbursement Arrangements (HRAs) are employer-funded accounts used to reimburse employees on a tax-free basis for qualified unreimbursed medical expenses. The plans may allow carryover of unused funds from year-to-year but are not portable if the employee leaves. HRAs are administered by a health plan but do not need to be paired with a particular type of health insurance policy. Summary:
  • Not portable
  • Funded by employer
  • Balance may or may not roll over, depending on plan
  • Cannot be invested
Flexible Spending Accounts (FSAs) are funded with pre-tax contributions by employees and are not linked to a particular type of health insurance. The money may be used to pay for uncovered medical expenses. FSAs are subject to a “use it or lose it” rule, so that any unused money in the account at the end of the plan year (or end of the grace period following the plan year) is forfeited by the employee. Summary:
  • Not portable
  • Funded by employee
  • No roll over
  • Cannot be invested
Small business clients may want to explore the costs of various health plans and the advantages and disadvantages of each. Compare small group plans with the Small Business Plan Finder.