Flexible spending accounts (FSAs) and health reimbursement arrangements (HRA) can both help you cover qualified medical expenses. But they differ in some ways.
An FSA is an employer-sponsored savings account that you can contribute toward in order to save for healthcare costs. You can use an FSA debit card, write a check, or send funds directly to a provider to pay for these medical expenses.
An HRA is an employer-owned plan or arrangement that allows your company to reimburse you for medical expenses you already paid for on your own.
FSA vs HRA: key differences
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One main difference between an HRA and FSA is in how contributions work. With an FSA, you can contribute on a pre-tax basis toward the account up to certain contribution limits set by the IRS each year.
For the 2024 health plan year, the FSA contribution limit is $3,200.
But when it comes to an HRA, you can’t contribute to the plan. Only your employer can make contributions.
Another point to consider is tax treatment. Your contributions made to an FSA are done on a pre-tax basis. This means they’re deducted directly from your paycheck before it’s taxed and thus lower your taxable income for the year. Therefore, your contributions could lower your tax liability. And withdrawals are tax-free as long as they cover qualified medical expenses.
Money that’s reimbursed to you through an HRA is also tax free if used on qualified medical expenses.
Luckily, qualified healthcare costs cover a large range of medical, dental, and prescription costs. For the latest details, check out the most recent version of IRS Publication 502.
FSA vs HRA: Similarities
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When it comes to portability, an FSA takes a “use it or lose it” approach. This means unused funds in your FSA expire at the end of the health plan year and they don’t rollover into the next.
With an HRA, your employer may or may not allow plan funds to rollover after the end of the benefit year.
Moreover, you’d lose your HRA funds if you leave the company for any reason. This is also the case for FSAs unless you opt in for COBRA coverage for your FSA. However, you won’t be able to use FSA funds to cover COBRA premiums.
Health savings accounts (HSAs)
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Another way you may be able to sock away money for future medical expenses is through a health savings account (HSA).
If you have an eligible high-deductible health plan (HDHP), you can open an HSA through some employers and various financial services institutions like brokerages and banks.
HSAs are known for their triple-tax advantage.
- Contributions are tax-free
- Money grows tax free with compound interest
- Withdrawals for qualified medical expenses are tax-free
Moreover, some HSA providers let you invest HSA dollars in a variety of securities like mutual funds and exchange-traded funds (ETFs). Many financial advisors recommend you build a sizable portion of your HSA funds with interest-bearing cash, however, before beginning to invest it in the stock market.
Additionally, HSAs can be effective long-term retirement savings vehicles that can support your individual retirement account (IRA), Roth IRA, 401(k), and any Social Security benefits in retirement.
Once you reach age 65, you can withdraw money form an HSA for any reason penalty-free. But you’d still owe ordinary income taxes on the withdrawal.
And keep in mind that withdrawing HSA funds before age 65 for anything that’s not a qualified medical expense would trigger a 20% tax penalty in addition to ordinary income taxes on the distribution.
Why we covered this
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FSAs and HRAs are both designed to help you pay for healthcare costs. But there are some important differences to consider before deciding to enroll in one if offered by your employer. Additionally, you could also consider an HSA if you’re eligible. To help you understand these three medical expense savings vehicles, we developed this comparison overview.
If you want to learn more about HSAs, check out our regularly-updated HSA main page for the latest coverage.
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