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HSA, HRA and FSA Differences

When I first started working several years ago, I was amazed at the idea of a Flexible Spending Account (FSA). I could make tax-deductible contributions and they could be withdrawn tax free for qualified medical expenses and over the counter products. Since then, I’ve become aware of two other types of accounts: Health Savings Accounts (HSA) and Health Reimbursement Accounts (HRA). Each have their benefits and drawbacks and not every employer offers those program so it mostly depends on your luck. In the two employers I’ve had, I’ve only ever had access to the FSA. So, let’s talk about the differences between each of the programs.

Flexible Spending Accounts

Both the employer and employee can make tax-deductible contributions through paycheck deductions and there is no limit to how much one can contribute to the FSA. You are either issued a debit card linked to that account or you submit receipts of service or products for reimbursement after the fact. The primary downside to an FSA is that the funds are forfeited each year so it’s a “spend it, or lose it” account. If you leave your job mid-year, you lose the funds too (but you pay monthly so the loss is only what you actually paid in).

One loophole with an FSA is that you can spend the full year’s value before you’ve made the contributions. So if you put $1200 into your FSA, or $100 per month, you can spend all $1200 in the first month. What this means is that you can leave in month two and not repay the FSA value. This is usually mitigated by the fact that the funds are forfeited if they are not spent.

Health Savings Accounts

These are actually investment accounts and both the employer and employee can make tax-deductible contributions subject to federal limits. The earnings of the account are tax free and the withdrawals are tax free if used to pay for qualified medical expenses. The funds are linked to the employee and not the employer-employee relationship so it follows the employee even if they leave a company. Another added benefit is that the funds accumulate over the years, as opposed to an FSA where they are forfeited.

Health Reimbursement Accounts

I’ve seen the least of these and they are usually set up by your employer as part of your benefits package. Employees cannot make contributions and an employer’s contributions are not considered income for you and are also not subject to limitations. I know the least about these types of programs as they are not as popular as FSAs and HSAs.

If you’d like to learn more about these plans (and a few others), the IRS has a detailed Publication 969 [3] governing them. I think I’ve captured the important details but they do a much more detailed and dryer job. 🙂