FSA vs HSA vs HRA
Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), and Health Reimbursement Accounts (HRAs) are three types of tax-advantaged accounts that help with healthcare expenses.
Each of the three has unique features, benefits, and limitations.
Here’s a detailed comparison to help you understand the differences and determine which is best for your family’s finances:
1. Flexible Spending Account (FSA)
Overview:
Type: Employer-sponsored benefit.
Purpose: Allows employees to set aside pre-tax money for qualified medical expenses.
Key Features:
Contribution Limits: For 2024, the limit is $3,050 per year.
Use-It-or-Lose-It Rule: Funds generally must be used by the end of the plan year or within a short grace period (up to 2.5 months) or they are forfeited, though some plans offer a carryover of up to $610.
Tax Benefits: Contributions are made with pre-tax dollars, reducing taxable income. Withdrawals for qualified expenses are tax-free.
Eligibility: Available to employees through their employer. Not available for self-employed individuals.
Qualified Expenses: Includes a broad range of medical, dental, and vision expenses.
Pros:
Reduces taxable income.
Immediate availability of funds, even if they haven’t been fully contributed.
Can be used for a wide range of expenses.
Cons:
Funds are subject to the use-it-or-lose-it rule.
Must be offered by an employer; not available to self-employed individuals.
2. Health Savings Account (HSA)
Overview:
Type: Individual account linked to a high-deductible health plan (HDHP).
Purpose: Allows individuals to save money tax-free for qualified medical expenses.
Key Features:
Contribution Limits: For 2024, $4,150 for individuals and $8,300 for families. An additional $1,000 catch-up contribution is allowed for those age 55 or older.
Rollover: Funds roll over from year to year; no use-it-or-lose-it rule.
Tax Benefits: Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.
Eligibility: Must be enrolled in an HDHP and meet other eligibility requirements.
Qualified Expenses: Includes a broad range of medical expenses similar to those covered by an FSA.
Pros:
Triple tax advantage (contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified expenses are tax-free).
Funds roll over from year to year.
Can be used to save for future medical expenses or retirement.
Cons:
Must be enrolled in an HDHP to qualify.
Annual contribution limits may be lower than the cost of medical expenses.
3. Health Reimbursement Account (HRA)
Overview:
Type: Employer-sponsored benefit.
Purpose: Allows employers to reimburse employees for qualified medical expenses on a tax-free basis.
Key Features:
Contribution Limits: No set contribution limits; determined by the employer.
Rollover: Employers can decide whether unused funds roll over to the next year.
Tax Benefits: Reimbursements are tax-free for employees and tax-deductible for employers.
Eligibility: Offered by employers; not available for self-employed individuals.
Qualified Expenses: Varies by plan but generally includes medical, dental, and vision expenses.
Pros:
Flexible design, with employers able to set the terms.
Contributions and reimbursements are tax-free.
Can complement other health benefits.
Cons:
Not available to self-employed individuals.
Employer determines whether unused funds roll over or are forfeited.
Employee cannot contribute to the account; it’s solely funded by the employer.
Comparison Summary
Ownership:
FSA: Employer-sponsored, funds owned by the employee while employed.
HSA: Individually owned, portable if you change jobs or retire.
HRA: Employer-sponsored, funds owned by the employer.
Contribution Limits:
FSA: $3,050 per year (2024).
HSA: $4,150 (individual) or $8,300 (family) plus catch-up contributions (2024).
HRA: No set limit; determined by the employer.
Rollover:
FSA: Limited rollover or use-it-or-lose-it rule.
HSA: Funds roll over indefinitely.
HRA: Rollover rules vary by employer.
Eligibility:
FSA: Available through employers.
HSA: Must be enrolled in an HDHP.
HRA: Offered by employers.
Tax Advantages:
FSA: Pre-tax contributions and tax-free withdrawals for qualified expenses.
HSA: Triple tax advantage (deductible contributions, tax-free growth, and withdrawals).
HRA: Tax-free reimbursements and employer tax deductions.