Understanding the Differences Between HSA, HRA, and FSA: A Guide for Employers

As employers, it’s crucial to understand the various healthcare savings accounts available to your employees in order to provide the best possible benefits and encourage effective healthcare planning. The three most commonly offered types of accounts are Health Savings Accounts (HSA), Health Reimbursement Accounts (HRA), and Flexible Spending Accounts (FSA). While these accounts are designed to help employees save on healthcare costs, they each have unique features, advantages, and limitations. In this article, we’ll break down the differences between HSA, HRA, and FSA, so you can better navigate these options for your workforce.

Health Savings Account (HSA)

A Health Savings Account (HSA) is a tax-advantaged savings account available to employees who are enrolled in a high-deductible health plan (HDHP). HSAs are designed to help employees save for future medical expenses while benefiting from tax breaks. Here’s a deeper dive into HSA features:

Eligibility: To open and contribute to an HSA, employees must be enrolled in a high-deductible health plan. The IRS defines a high-deductible plan as one with a deductible of at least $1,600 for individual coverage and $3,200 for family coverage (as of 2025).

Contributions: Both employees and employers can contribute to an HSA, with annual contribution limits set by the IRS. For 2025, the contribution limit is $3,850 for individuals and $7,750 for families. Individuals aged 55 and older can contribute an additional $1,000 annually as a "catch-up" contribution.

Tax Benefits: One of the most attractive features of an HSA is its triple tax advantage. Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-free. This makes HSAs a powerful tool for long-term savings, as unused funds roll over from year to year without any penalty.

Portability: HSAs are employee-owned, which means that employees can take their account with them when they change jobs or retire. The funds remain in the account, and employees can continue to use them for eligible medical expenses.

Use of Funds: HSA funds can be used for a wide range of qualified medical expenses, such as doctor visits, prescriptions, dental care, and vision care. After age 65, funds can also be used for non-medical expenses without a penalty, though they will be subject to income tax.

Health Reimbursement Account (HRA)

A Health Reimbursement Account (HRA) is an employer-funded account that reimburses employees for out-of-pocket medical expenses and, in some cases, health insurance premiums. Unlike an HSA, an HRA is not available to employees unless the employer offers it as part of a benefits package.

Eligibility: Employees must be enrolled in a health plan provided by their employer, but there is no requirement for the plan to be a high-deductible health plan.

Contributions: HRAs are entirely funded by the employer. There is no employee contribution, and employers have the flexibility to decide how much they will contribute each year. Contribution limits are not set by the IRS, but the employer can decide on the annual reimbursement amount.

Tax Benefits: Reimbursements from an HRA are not subject to federal income tax. Additionally, employers can deduct the contributions they make to employees’ HRAs as a business expense.

Portability: HRAs are not portable. If an employee leaves the company, they lose access to the funds in the HRA. The employer owns the account, and the funds cannot be taken with the employee to a new job.

Use of Funds: HRAs can be used to reimburse employees for qualified medical expenses, such as deductibles, copayments, and prescription medications. The specific expenses eligible for reimbursement depend on the plan design chosen by the employer.

Flexibility: Employers have the flexibility to customize HRAs to suit their needs. For example, an employer may choose to offer an HRA that only reimburses certain types of medical expenses, such as dental or vision care. HRAs can also be integrated with other health plans, like FSAs or HSAs, depending on the employer's strategy.

Flexible Spending Account (FSA)

A Flexible Spending Account (FSA) is a pre-tax account that allows employees to set aside a portion of their earnings to pay for qualified medical expenses. FSAs are typically offered alongside employer-sponsored health plans.

Eligibility: FSAs are available to employees regardless of the type of health plan they have, but they are most commonly offered alongside employer-sponsored health insurance plans. Unlike HSAs, there is no requirement for an FSA to be paired with a high-deductible health plan.

Contributions: Employees can contribute up to the IRS limit for the year. For 2025, the contribution limit is $3,050. The employer may also contribute to the FSA, but it’s not required. Employee contributions are made through salary deferrals, meaning they are deducted from wages before taxes, which reduces taxable income.

Tax Benefits: FSAs offer a tax advantage for employees as contributions are made with pre-tax dollars, reducing their taxable income for the year. Qualified medical expenses can be reimbursed without any taxes applied. However, any unspent funds at the end of the plan year may be forfeited, unless the employer offers a grace period or a carryover option (up to $610 as of 2025).

Portability: FSAs are not portable. If an employee leaves the company, they lose access to the funds in the FSA, and any unspent contributions are typically forfeited.

Use of Funds: FSAs can be used to cover a wide range of medical expenses, including copays, prescriptions, over-the-counter medications, and some types of medical equipment. FSAs can also cover dependent care expenses, although that’s a separate type of FSA (Dependent Care FSA).

Each type of account — HSA, HRA, and FSA — offers unique benefits and features that can help your employees manage healthcare costs. By understanding these differences, you can make more informed decisions when selecting benefits for your workforce. HSAs offer portability and long-term savings, HRAs provide flexibility for employers to manage medical costs, and FSAs give employees the ability to use pre-tax dollars for medical and dependent care expenses.

As you consider which options to offer, it’s important to understand both the needs of your employees and the administrative requirements associated with each plan. The right combination of accounts can boost employee satisfaction, help attract top talent, and contribute to your overall benefits strategy. Learn more at https://myameriflex.com/.