Who doesn’t love talking about spending money on medical expenses? Well, we don’t think anyone likes thinking about medical expenses, but, in any case, they’re just one of those things that, like it or not, will be something you’ll need to think about. Given the nature of these expenses, it’s likely that, when the time comes when you have to think about paying for any sort of medical expenses, you’ll probably have a whole host of other things to stress about in terms of the medical situation that originated these expenses. For a business owner, you’re not only concerned with your own personal situation when it comes to unexpected expenses, but also your employees. You want to ensure that the benefits your business provides are able to cover employees during times when they need to take full advantage of them. Of course, this can be easier said than done: with a seemingly endless list of options and possible solutions, as well as the factor of cost, finding that right combination of benefits to support your employees through unexpected events can be easier said than done.
At Payday HCM, we’re very familiar with both the stress and importance of creating a comprehensive benefits package that fits the needs of your employees. We’ve received a number of questions from clients looking for advice on the kinds of options available to them, whether they be the kinds of group health insurance plans they can offer or other ancillary benefits that might help to support a larger benefits package. One question that comes up when it comes to covering unexpected medical costs is the difference between Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs)—they all seem to do the same thing, so what sets them apart, and which one is best for your business?
In this article, we’ll be looking at the differences between an HSA, an FSA, and an HRA to help you determine which might be the best fit for you and your business. We’ll look at what each one is, as well as the kinds of benefits and potential drawbacks that come with offering each one. By the end of this article, you’ll have a better understanding of the differences between these three spending accounts and reimbursement arrangements, which will help you get one step closer to creating a benefits package designed to help your employees when they need it.
In this article, you will learn:
- What are Health Savings Accounts (HSAs)?
- What are Flexible Spending Accounts (FSAs)?
- What are Health Reimbursement Arrangements (HRAs)?
What are Health Savings Accounts (HSAs)?
First up on the list: Health Savings Accounts, or HSAs. We’ll go into what an HSA is, as well as the kinds of benefits an HSA can provide.
What is an HSA?
A Health Savings Account (HSA) is a personal savings account that allows those with a qualifying high-deductible health plan (HDHP) to set aside pre-tax dollars for qualifying medical expenses. Withdrawals made from an HSA are also tax-free, meaning you can use these tax-free funds as a way to offset any unexpected medical expenses.
Now, while there’s a small amount of emphasis on the “qualifying” element of the medical expenses that can be covered using HSA funds, it’s not a big emphasis, as the list of qualifying HSA expenses covers a wide range of expenses, from bandages to x-rays. HSA-eligible plans also have a set minimum deductible and maximum out-of-pocket cost.
What Are the Benefits and Drawbacks of an HSA?
There are a number of benefits to having an HSA. Firstly, an HSA has a “triple tax advantage,” meaning the contributions are made pre-tax or are tax-deductible, investment growth is tax-free, and withdrawals for qualified medical expenses are also tax-free. There’s also no use-it-or-lose-it setup, meaning HSA funds can compound year-over-year with no obligation to spend them. Employers can also make contributions to your HSA.
On the flip side, HSAs are not accessible to everyone: you need a qualifying HDHP in order to be eligible for an HSA. With HDHPs, you’ll typically pay a lower monthly premium, but your deductible will typically be higher, meaning you’ll pay more for health care expenses before your insurance kicks in. Of course, the HSA is designed to offset this, providing you with funds to cover those higher deductibles.
Flexible Spending Accounts (FSAs)
Next, we’ll get into what an FSA is and the benefits and drawbacks that come with having an FSA.
What is an FSA?
A Flexible Spending Account (FSA) is similar to an HSA, as it’s an account that allows employees to set aside pre-tax dollars to pay for eligible healthcare expenses. Also like HSAs, FSAs are funded primarily by the employee, but allow for employers to contribute as well. An FSA has a similarly expansive list of qualifying expenses.
Now, unlike HSAs, FSAs are tied to your employer, meaning FSAs aren’t portable. FSA funds, unlike HSA funds, can’t be invested and accrue interest. FSAs also must be used within a given period of time, typically by the end of the year. Some employers may offer grace periods, either by providing two and a half months of additional time to use FSA funds or allowing for some funds to rollover (capped at $660).
What Are the Benefits and Drawbacks of an FSA?
There are a number of benefits to having access to an FSA. Firstly, you may have more immediate access to funds, as your full annual election amount is available for use from the first day of the plan year. This differs from an HSA, which is dependent on accumulating contributions. FSAs also have similar tax benefits to HSAs and allow for employer contributions.
However, since FSAs are offered by an employer, the funds aren’t portable. In addition to this, your employer would need to offer an FSA in order for you to have the ability to start an FSA (unlike an HSA, which only requires you to be enrolled in a qualifying HDHP). The use-it-or-lose-it setup of an FSA can also be a potential limitation.
What are Health Reimbursement Arrangements (HRAs)?
Finally, now that we understand both HSAs and FSAs, we can dive into HRAs—what they are and how they differ from HSAs and FSAs.
What is an HRA?
A Health Reimbursement Arrangement (HRA) is sort of like the secret third option when it comes to savings or spending accounts. In fact, it’s actually neither of those, as it’s an employer-funded program that reimburses employees for qualified medical expenses. So, instead of employees contributing money to an account to cover medical expenses, an HRA allows an employer to reimburse employees for qualifying expenses.
There are a few different kinds of HRAs: a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is designed for employers with 50 or fewer employees and allows employers to reimburse their employees for things like premiums, prescriptions, or other qualifying expenses. An Individual Coverage Health Reimbursement Arrangement (ICHRA) is essentially the same thing, but with no employer size requirement and no reimbursement limits.
Is an HRA the Same as an FSA or HSA?
Now, the big asterisk here with HRAs and why they don’t neatly compare to something like an HSA or FSA is that they don’t work in conjunction with a group health insurance plan. A QSEHRA or an ICHRA is a good alternative for businesses that don’t offer group health insurance or, in the case of an ICHRA, want to offer group health insurance to full-time employees but something else to part-time employees.
That being said, taken in isolation, an HRA can still have its benefits—mainly, HRAs are very cost-effective for employers as they operate as reimbursements without required premiums. You’ll also only have to reimburse for the amount spent on qualifying expenses, which may not always be the reimbursement limit.
Understanding the Differences Between an FSA, HSA, and HRA
Unexpected medical costs, or even expected medical costs, can be extraordinarily stressful. Without the right benefits package, employees may feel out of luck when it comes to paying for medical expenses. For employers, this can result not only in low morale amongst those within your organization, but, most importantly, mean that your employees’ needs aren’t being met. By offering something like an FSA or HSA in addition to a group health plan—or, for employers who might not be able to afford a group health plan, offering an HRA—can help you more adequately meet your employees' needs and help them reduce the amount of stress in their lives.
Deciding whether an HSA, FSA, or HRA makes the most sense for your employees is only one decision of many you’ll need to make when creating a benefits package. Looking specifically at group health insurance plans, there are a number of decisions you’ll need to make before you land on the solution that is best for your organization. One of these decisions includes choosing whether to work with a Health Maintenance Organization (HMO) or a Preferred Provider Organization (PPO). Check out our article on the differences between an HMO and a PPO to determine which is a better fit for your business.
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