The Difference between HSAs, HRAs, and FSAs
During the past few years, the federal govt. has made changes to tax laws that have made the types of funding and reimbursement arrangements found in consumer directed healthcare concepts possible. The most common of these arrangements are a health savings account called an HSA and a Health Reimbursement Arrangement referred to as an HRA.
Another useful arrangement that has been around for many years is called a Flexible Spending Account or FSA. HSAs and HRAs are simply ways to fund medical expenses that encourage members or plan participants to share the financial responsibility associated with purchasing and paying for healthcare. FSAs are a way to avoid paying taxes on healthcare and other allowable expenses. Each of these plan types operate differently and have different requirements. Click which plan type you would like to learn more about or click here to view and print a plan comparison chart.
Health Savings Account (HSA):
A health savings account is also a tax exempt account that allows the employee to set aside pre-taxed dollars for future medical, retirement, or long-term care premium expenses. The HSA funds are held in an IRA like account for the exclusive use of the participant so they are fully portable. Money can be deposited into this account by the employee or the employer. When the employee terminates, they take their unused HSA funds with them. The employee can invest these funds as they wish within a broad range of choices and then use them for qualified expenses. The unused HSA funds can roll over from year to year.
An HSA must be set up in conjunction with a specific type of high deductible health plan referred to as an HDHP. The HDHP must have a deductible of at least $1,200 with an out-of-pocket limit not greater than $6,050 in 2012 (out-of-pocket limit $5,950 in 2011). For family coverage, it must have an annual deductible of at least $2,400 and an out-of-pocket limit not greater than $12,100 in 2012 (out-of-pocket limit of 11,900 in 2011). Deductibles are not required for preventive care and out of pocket maximums must be higher for out-of-network care. Deductibles and out-of-pocket maximums are adjusted each year by in the US Treasury's HSA Information.
HSAs do not require employer involvement. They can be funded entirely by the employee or by a combination of employer and employee dollars. HSAs contributions may be made by employees on a pre-taxed basis through a section 125 plan or may be made directly by eligible individuals and deducted by gross income. Earnings and amounts held in an HSA accrue tax free. One of the primary differences between and HSA and an FSA is that unused HSA funds are allowed to roll over tax free at year end whereas unused FSA funds are generally forfeited if not used by year end or in some cases, within 75 days following the end of the plan year.
Health Reimbursement Arrangement (HRA):
A health reimbursement arrangement or HRA is an employer funded account that reimburses employees for qualified medical expenses typically combined with a high deductible health plan. An HRA can be used with any medical plan that must be established and funded solely with employer dollars. At the employer’s discretion, an HRA may allow employees to rollover unused funds from year to year, or allow terminated employees to spend their unused balances. The main difference between an HRA and an HSA is that HRA funds are provided only by an employer for an employee and do not follow an employee to a new employer. An HRA is COBRA eligible. Employer contributions to HRAs are not subject to income, FICA, Medicare, or FUTA taxes.
Flexible Spending Account (FSA):
A flexible spending account or FSA is a type of cafeteria plan. This allows employees to set aside a predetermined amount of money they estimate they will need for out of pocket expenses throughout the year, not covered by their health benefit plan. This money is deducted from their income before it is taxed thereby reducing the employee’s overall taxable earnings and lowering the amount of income taxes.
The list of qualified expenses under an FSA is extensive but generally covers most healthcare related experiences not covered by their insurance including their insurance premiums, office visit co-pays, non-covered medications, and other medical equipment and supplies. When an employee’s taxable income is reduced, the employer’s obligation for Medicare and FICA taxes is also reduced and the savings can be significant.