HSA, FSA or HRA: Which Account Fits Your Health Plan?

Three accounts, three different jobs

HSAs, FSAs and HRAs get lumped together because they all help employees pay medical costs. But they differ on who owns the money, who puts it in, and which health plan has to sit underneath. Mixing them up is how employers end up with a plan design that does not work, or an employee who accidentally loses eligibility for an account.

Here is the short version before we go account by account.

• HSA (health savings account): belongs to the employee, requires a qualifying high deductible health plan, and the balance rolls over and goes with the employee.
• FSA (flexible spending account): set up by the employer, funded by employee payroll elections, and usually built around a use-it-or-lose-it design.
• HRA (health reimbursement arrangement): funded only by the employer, with the employer deciding what it reimburses. It comes in several versions.

HSA: the employee-owned account

An HSA is only available to someone enrolled in an HSA-eligible high deductible health plan. The IRS sets the minimum deductible and the maximum out-of-pocket limit for those plans, and the figures are adjusted each year. Not every plan with a high deductible qualifies, so confirm eligibility with your plan administrator before you promise anything to employees.

The employee owns the account. Unused money rolls over from year to year, and the account stays with the employee after they leave your company. Both the employee and the employer can contribute, and the contribution limits are set each year, so check the current figures. If you contribute, federal comparability rules generally apply, so ask an advisor how to structure it.

Eligibility has edges. Employees generally cannot contribute if they are enrolled in Medicare or covered by other non-qualifying health coverage, which can include a general-purpose health FSA, even one through a spouse. Employees need to understand this before they enroll.

One California-specific point: the state does not follow the federal tax treatment of HSAs in the same way. Confirm how this affects your payroll and your employees with a tax professional.

Your role is fairly light. You choose how the accounts are held, set up payroll deposits, and explain to employees how the account works.

FSA: the use-it-or-lose-it account

A health FSA is set up by the employer, usually through a cafeteria plan with a written plan document. Employees choose an annual amount at enrollment, and it comes out of their paychecks before tax. In general, they cannot change that amount midyear unless they have a qualifying life event.

Here is the part employers often miss. Under the uniform coverage rule, the full elected amount is generally available to the employee from the first day of the plan year, even though the money arrives paycheck by paycheck. That means the employer carries some risk if someone spends the full amount and then leaves.

Unused money is generally forfeited at year end. The employer may choose to allow either a short grace period or a limited carryover, but not both, or neither. The annual limit on employee elections is set each year, so check the current figure.

An FSA is not tied to a particular type of medical plan, so it can sit beside most group plans. The exception is the HSA. A general-purpose health FSA generally makes an employee ineligible to contribute to an HSA. A limited-purpose FSA, which covers only dental and vision expenses, can be paired with an HSA. A dependent care FSA is a separate account for child or adult care costs, and it follows its own rules.

HRA: the employer-funded account

Only the employer funds an HRA. Employees cannot add their own money through salary reduction. You decide the amount, which eligible expenses you reimburse, and whether unused amounts roll over. The employer owns the arrangement, and the money generally does not follow the employee out the door.

There are three versions worth knowing:

• Integrated HRA: sits alongside your group health plan and is often used to help employees with deductibles or other out-of-pocket costs. Employees generally must be enrolled in the group plan.
• QSEHRA (qualified small employer HRA): for employers with fewer than 50 full-time equivalent employees that do not offer a group health plan. It reimburses employees for individual coverage and medical costs, with annual limits set each year.
• ICHRA (individual coverage HRA): available to employers of any size. It reimburses employees for individual market coverage and can be set up by employee classes. Affordability rules can matter if you are an ACA applicable large employer.

Which account goes with which plan

Start with the medical plan, because it drives what is allowed. Here is how the pairings generally work:

• HSA-eligible high deductible plan: pairs with an HSA. You can add a limited-purpose FSA or certain HRA designs, such as a limited-purpose or post-deductible HRA, without breaking HSA eligibility.
• Traditional PPO or HMO with a lower deductible: pairs with a health FSA or an integrated HRA, but not an HSA.
• No group plan and fewer than 50 full-time equivalent employees: a QSEHRA may be an option.
• Individual coverage for your team, at any size: an ICHRA may be an option.

What to do this month

You do not need to add an account to benefit from understanding them. A few steps will keep you out of trouble and help you decide whether a change makes sense.

Remember that a high deductible plan asks employees to carry more cost up front, which matters for hourly teams living paycheck to paycheck. An employer contribution, or an HRA, can change that picture, but it also changes your budget.

• Ask your plan administrator whether your current medical plan is HSA-eligible.
• If you already offer an FSA, pull the plan document and check whether it allows a grace period, a carryover, or neither.
• Make sure employees know that a general-purpose FSA and an HSA generally cannot be combined.
• Decide whether you want to put employer money into any account, and what you can sustain each year.
• Plan simple explanations in English and Spanish, with examples of eligible expenses.
• Confirm the legal and tax details with a licensed advisor or tax professional. A benefits review with an advisor is one option if you want a second set of eyes on your plan design.

This article is general education for employers, not legal, tax or plan advice. Benefit rules and options depend on your group size, location and plan, so talk with a licensed advisor before making changes. Sixth Man Employer & Insurance Services, CA Insurance License #0I01929.