What’s the Difference Between an HRA, HSA & FSA?

In the health insurance and medical benefits realms, there are countless benefits structure options for businesses. We’ve talked about insurance terms and definitions before to help sort through the various supplemental platforms and features. Today, we’ll offer an extension on that conversation and dive into the differences and similarities between the Health Reimbursement Arrangement(HRA,) the Health Spending Account (HAS,) and the Flexible Spending Account (FSA.)

All three of these types of accounts are sponsored by the employer and designed to offset any higher costs of healthcare for individuals. They each put the control of personal healthcare back into the hands of the employee and can be essential for a business looking to control costs. If you have any of these types of benefits, understanding how they work and how they differ will help you allocate every dollar available and save money while offering a valuable benefits product.

Health Reimbursement Arrangement (HRA)

The Health Reimbursement Arrangement (HRA) is a reimbursement benefit made available to cover certain out-of-pocket medical costs. It operates as a supplemental benefit to an individually secured health insurance plan. The HRA is not only sponsored by the employer, but it’s owned and funded by the employer, as well. Here’s what you should know about an HRA if you decide to explore offering one for your employees.

The Framework of an HRA
HRAs are becoming more popular among small and large companies. There aren’t any government limits on funding, and the business can determine the reimbursement amounts and policies for its employees. From an HRA user’s perspective, the out-of-pocket medical costs can be reimbursed on a visit-by-visit basis. You’ll need to make sure you outline what expenses qualify with the terms along with the necessary steps for submissions. But in many instances, these reimbursements can offset your employees’ spending on doctors’ visits, specialist visits, and even health insurance monthly premiums. From a bottom-line standpoint, the HRA solution is attractive because it allows the employer to control the guidelines and funding entirely.

How the HRA Works
An HRA is not a health insurance product. And unlike a Health Spending Account or a Flexible Spending Account, what expenses are eligible for reimbursement is determined solely by the employer. Every business can offer its own version of an HRA program. Your Human Resources contact or dedicated HRA administrator can walk your teams through the specific process for qualifying and submitting receipts for reimbursement. And those can be paid differently by the company, too. Depending on the rules you determine with your HRA, you can also offer a rollover of unused reimbursement funds year after year.

Important Guidelines for the HRA
There are a few standard aspects to the HRA. For example, the HRA is not portable should your employees experience an employment status change. Since the company owns and pays for the funds in the HRA, any unused reimbursement amounts remaining when an employee quits, resigns, or retires, cannot transfer to another company. It’s also important to know that in order to participate in an HRA, the employee will have to purchase health insurance independently. Also, reimbursements are based on actual incurred expenses, with qualifying proof of the expense.

Health Savings Account (HSA)

The Health Savings Account is another popular benefit to offer among employers. The HSA account is entirely controlled by the individual, although many employers opt to contribute. Here’s what you should know if you think an HSA account is right for your business structure.

The Framework of an HSA
Unlike the HRA, an HSA has an annual limitation for contributions set by the IRS. For 2021, self-only contributors can set aside up to $3,600, and family coverage is $7,200. These amounts are an increase from 2020’s benchmarks by about 1.5%. In order to be eligible to use an HSA contribution platform, a participant needs to have a pretty high deductible health plan of at least $1,400 for self-coverage and $2,800 for family.

How an HSA Works
The Health Savings Account operates much like a personal bank account. Employees can set aside pre-tax dollars for use in covering eligible, out-of-pocket healthcare costs. New HSA qualified expenses include allergy medications, acne treatment, and even cough and flu medication. But the IRS also approves other expenses including, COBRA, Medicare Parts A & B, and long-term care premiums.

Important Guidelines for the HSA
There are tax advantages for those participating in an HSA, as well. Contributions are tax-free, but so are withdrawals for expenses, interest, and investment earnings. Come the end of the year, your employees’ unused funds roll over for future use, too. Once participants reach a minimum threshold, they can invest their HSA dollars. And since the HSA stays with the individual for the duration of the account, the employees can build on it and take it with them should they leave the company. And upon retirement, remaining funds can be withdrawn as income, applicable for taxes, but without penalty. This is the major differentiating factor between the HSA, HRA, and FSA models.

Flexible Spending Account (FSA)

The Flexible Spending Account (FSA) is set up and owned by the employing business. Employees enjoy having a dedicated account for them, and you, as the employer, can opt to contribute to those accounts. These are popular choices from the company and employee perspective both.

The Framework of an FSA
There are pre-tax contributions to an FSA, ultimately reducing an individual’s tax liability. For 2021, employee contributions can be made through salary or paycheck deductions, up to $2,750. Employees enjoy having these types of accounts to offset medical and dental expenses that fall beyond their traditional health insurance coverages.

How an FSA Works
Applicable expenses that can be paid out of an FSA include prescriptions, eye exams, dental care, and even first aid supplies. Any unused funds can be set up for one of three options. An FSA can be set up with a use-it-or-lose-it year-end guideline, a $500 maximum carryover, or a two-and-a-half-month grace period for individuals to use the remaining funds.

Important Guidelines for an FSA
Similar to an HRA, the FSA is owned and set up by you, the employer. So there aren’t portability options for any remaining funds. FSAs are also considered to be notional accounts, meaning the employee can only be reimbursed after the qualified expense is incurred and proven. Employees like that their FSA funds are available on day one, and they don’t have to wait and accrue dollars, like in other plans.

If you’re trying to decide which account type or benefits platform is best for your business, your budget, and your employees, let W3LL help you. From outline to execution, we can assist your business and employees in carving out a new offering.