Medical savings accounts are essential tools that provide tax advantages for covering out-of-pocket medical expenses. There are three primary types: Health Savings Accounts (HSAs), Health Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs). While all offer tax benefits, they each have distinct rules, ownership structures, and advantages for both employers and employees. This article outlines the key features and differences among these accounts to help employers choose the best fit for their workforce.
- General Rules
- Contributions
- Spending Rules
- Additional Compliance
General Rules For (HSAs), (FSAs) and (HRAs)
Account Types and Ownership
- HSA: An HSA is an individually owned account set up with an HSA trustee or custodian.
- Health FSA: This is an employer-sponsored, self-funded health plan.
- HRA: Also an employer-sponsored, self-funded health plan.
Group Health Plan Requirements
- HSA: Must be paired with a high deductible health plan (HDHP) that meets specific annual deductible and out-of-pocket maximum requirements.
- Health FSA: Can be offered with any group health plan.
- HRA: Can also be offered with any group health plan.
- HSA: Ideal for employers comfortable offering HDHPs with minimal employer involvement due to individual account ownership.
- Health FSA: Suitable for employers looking to provide tax-free medical savings opportunities without requiring HDHP enrollment, though more employer involvement is needed.
- HRA: Best for employers wanting to assist employees with out-of-pocket expenses on a tax-free basis, requiring significant employer involvement.
Eligibility for Employees
- HSA: Employees must be covered under an HDHP, not have other conflicting health coverage, not be enrolled in Medicare, and not be eligible to be claimed as a tax dependent.
- Health FSA: Generally available to employees eligible for the employer’s group health plan, with additional eligibility requirements subject to nondiscrimination rules.
- HRA: Only reimburses medical expenses for employees and dependents enrolled in the non-HRA group health plan coverage, with additional eligibility requirements also subject to nondiscrimination rules.
Eligibility and Account Types:
- HSA: Individuals who are covered by health FSAs and HRAs are not eligible for HSA contributions. However, there are special types of health FSA and HRA designs that preserve HSA eligibility, such as health FSAs/HRAs that only reimburse vision and dental expenses or health FSAs/HRAs that only reimburse medical expenses incurred after the minimum HDHP deductible has been reached.
- Health FSA:? An employee who is covered by an HRA may also participate in a health FSA. However, a health FSA cannot reimburse medical expenses that have been reimbursed by the HRA.
- HRA: An employee who is covered by an HRA may also participate in a health FSA. However, a health FSA cannot reimburse medical expenses that have been reimbursed by the HRA.
- HSA: Anyone can make contributions to an individual’s HSA, including the HSA owner and their employer. Employers may allow employees to make pre-tax contributions through a Section 125 cafeteria plan.
- Health FSA: Typically funded with employee pre-tax contributions through a Section 125 cafeteria plan. Employers may also contribute.
- HRA: Only employers may contribute. Employee contributions are not allowed.
- HSA: HSAs are nonforfeitable and portable, which means the employee keeps their HSA account upon termination of employment.
- Health FSA: The account is forfeited unless COBRA applies.
- HRA: The account is forfeited unless it includes a spend-down feature. COBRA may also apply.
Rolling Over Unused Funds:
- HSA: Yes. There is no deadline for using HSA funds.
- Health FSA: No, with two limited exceptions. A health FSA may include a grace period of 2.5 months after the end of the plan year. Alternatively, a health FSA may allow employees to carry over up to $500 (as adjusted for inflation) is unused funds into the next plan year. The carryover limit for plan years beginning in 2024 is $640.
- HRA: Yes, as a plan design option, HRAs may permit unused amounts to be carried over to subsequent years.
Contributions For (HSAs), (FSAs) and (HRAs)
- HSA: Contributions can be made by anyone, including the account owner and employer. Pre-tax contributions via a Section 125 cafeteria plan are allowed.
- Health FSA: Typically funded with employee pre-tax contributions through a Section 125 cafeteria plan, though employers may also contribute.
- HRA: Funded solely by employers; employee contributions are not permitted.
Annual Contribution Limits
- HSA: For 2024, the limit is $4,150 for self-only coverage and $8,300 for family coverage, with a catch-up contribution of $1,000 for individuals aged 55 or older. These limits increase slightly for 2025.
- Health FSA: Employee contributions cannot exceed $3,200 for plan years beginning in 2024. Employers may set lower limits.
- HRA: No statutory limit on employer contributions; employers can decide the contribution amount each year.
- HSA: Employees can change pre-tax contributions at any time during the plan year, effective prospectively.
- Health FSA: Generally, employees cannot change contributions mid-year unless specific IRS-recognized midyear election events occur.
- HRA: Employee contributions are not allowed, so this is not applicable.
Spending Rules For (HSAs), (FSAs) and (HRAs)
- HSA: Can reimburse unreimbursed medical expenses for the account owner, spouse, and dependents, excluding most insurance premiums.
- Health FSA: Can pay for unreimbursed medical expenses for the employee, spouse, children up to age 26, and tax dependents, excluding insurance premiums.
- HRA: Can reimburse similar medical expenses and some insurance premiums, excluding individual health insurance premiums.
- HSA: The account owner is responsible for maintaining records.
- Health FSA: Claims must be substantiated by the employer or a third party.
- HRA: Similar substantiation requirements as FSAs.
- HSA: Can be used for nonmedical expenses, but amounts withdrawn are taxed as income and subject to a 20% penalty unless the owner is over 65, disabled, or deceased.
- Health FSA: Cannot be used for nonmedical expenses.
- HRA: Also cannot be used for nonmedical expenses.
Additional Compliance
- HSA: Not subject to ERISA, COBRA does not apply, and HIPAA's privacy rules do not apply.
- Health FSA: Generally subject to ERISA, COBRA applies under specific conditions, and HIPAA's privacy rules apply unless the plan has fewer than 50 participants and is self-administered.
- HRA: Also subject to ERISA and COBRA, with similar HIPAA privacy rule applications as FSAs.
Understanding these differences can help employers decide which type of medical savings account aligns best with their goals and the needs of their employees. Each account offers unique benefits and requirements, making it crucial to evaluate them thoroughly before making a decision.
As an employee benefits consultant, I understand the complexities of choosing the right medical savings account for your workforce. Whether it's the tax advantages of HSAs, the flexibility of FSAs, or the comprehensive coverage of HRAs, the decision can significantly impact both your employees and your bottom line.
If you need further assistance navigating the difficulties of HSAs, FSAs, and HRAs, or if you're ready to implement a tailored solution for your organization, don't hesitate to reach out. I'm here to provide expert guidance and support every step of the way.
