Consumer-driven healthcare offers three popular tax-advantaged benefit accounts — the Health Savings Account (HSA), the Health Reimbursement Arrangement (HRA) and the Flexible Spending Account (FSA). Each of these three types of accounts:
- Is sponsored by the employer;
- Is designed to offset the high cost of medical care;
- Involves tax-advantaged contributions; and
- Allow individuals more control of their personal healthcare needs.
Beyond these common features, there are striking differences between HSA vs. HRA vs. FSA. Our knowledgeable agent at North Carolina Health Plans in Raleigh, North Carolina can help you determine the best way to pay for your health insurance.
Health Savings Account (HSA)
With an HSA, the employee funds and owns the account, although some employers choose to contribute. Maximum annual elections as of 2017 are $3,400 for employees with individual coverage and $6,750 for employees with family coverage.
To be eligible to contribute to an HSA, an employee must be enrolled in a qualified high-deductible health plan. Employees can use an HSA to pay for IRS-approved out-of-pocket medical expenses. They may also use the funds to pay COBRA premiums, for Medicare Parts A and B, and for long-term care.
An HSA account automatically continues at the end of the plan year, with any unused funds rolled over to the following year. As they are individually owned, HSA accounts stay with the employee for the life of account, regardless of employment status.
HSAs have triple tax advantages. Contributions are pre-tax, withdrawals are tax-free for qualified expenses, and interest on the balance and investment earnings are also tax-free.
Health Reimbursement Arrangement (HRA)
HRAs are funded and owned by the employer, and the employer receives the tax breaks. There is no limit on funding – the employer determines the amount. Employees may use an HRA for qualified out-of-pocket medical expenses. The employer determines qualified expenses. Small employers (up to 50 full-time employees) may now offer standalone HRAs that can be used to reimburse health insurance premiums.
Depending on plan parameters, unused funds roll over from year to year, either in full or up to a certain amount. HRAs are not portable. The employee loses access to the funds upon changing employers, whether involuntarily or voluntarily.
Flexible Spending Account (FSA)
Although FSAs are set up and owned by the employer, they are funded by the employee. Contributions are pre-tax. Maximum annual election as of 2017 is $2,600 for healthcare FSAs and $5,000 for Dependent Care Assistance Plans (DCAPs). These plans are frequently offered together.
Depending on which way the employer decides to go, the employee may lose all unused funds at the end of the plan year, have a 2.5-month grace period to use the funds, or carryover funds up to $500 to the following year. FSAs are not portable. The employee loses the funds upon changing employers.
FSAs are notional accounts, meaning that the employee must incur the expense before the funds are paid out. Employees may use FSA funds for a wide range of IRS-approved out-of-pocket medical expenses, including:
- Co-insurance for medical care
- Eye exams
- Glasses and contact lenses
- Dental care
- First aid supplies