Understanding Different Types of Health Savings Accounts

Comparison and Qualification Guidelines for HSAs, FSAs, and HRAs

Patient discussing with nurse if it is possible to have an HSA without insurance
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Health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs) are designed to pay for or reimburse medical expenses that your health insurance coverage typically doesn't cover. Each of these plans works a bit differently. Learn more about health savings account definitions and how each plan works so you can choose the right plan for you.

Key Takeaways

  • There are three types of tax-advantaged health savings accounts available to supplement health insurance coverage: HSAs, FSAs, and HRAs.
  • HSAs are available if you have a high-deductible health plan; you own the HSA, and unused funds roll over from year to year.
  • FSAs and HRAs are set up by your employer; one difference between them is that only employers can contribute to HRAs.
  • The best health savings plan depends on your situation and any options your employer offers for health insurance and health savings accounts. 

Health Savings Account Options: HSA, FSA, and HRA

There are three types of tax-advantaged health savings accounts available to supplement health insurance coverage. You can deduct your contributions to these accounts on your taxes.

An HSA is an account you own, and unused funds roll over from year to year. An FSA is an account you open through an employer, and some of the funds can be rolled over from year to year if your plan allows. HRAs are employer-funded accounts, and the funds may be rolled over from year to year if your employer allows.

Here's more on how the plans compare.

HSA vs. FSA vs. HRA
HSA FSA HRA
Who owns the account? You You Your employer
Who can contribute to the account? You, your employer, family You, your employer Your employer
What's the contribution limit? $3,600 if you have an individual health insurance plan, $7,200 if you have a family plan $2,750 Varies by employer
Will the balance carry over?  Yes Up to $550 or you have a 2.5-month grace period to spend any unused funds from the previous year if your employer allows. Special rules allow all contributions from 2020 and 2021 to be carried over to 2021 and 2022, respectively. Varies by employer
Can the money earn interest?  Yes No No

How an HSA Works

You are only eligible for an HSA if you are enrolled in a high-deductible health plan (HDHP), one in which your deductibles are higher than in traditional plans. Your deductible is the amount you pay for services covered under your health plan before your insurance starts paying.

HDHPs are defined as plans with a minimum deductible of $1,400 for individuals or $2,800 for a family. The total out-of-pocket expenses for an HDHP are limited to $7,000 for individuals or $14,000 for families (for in-network services).

You and your employer have the ability to contribute money into your HSA. The account can be set up through your employer as a benefit or you can set up an account through an insurance company or an IRS-approved trustee. HSAs have an annual contribution limit. In 2021, the maximum you can contribute to an HSA is $3,600 for an individual plan or $7,200 for a family plan. The account acts as a bank account except the money is placed there pre-tax, can earn interest, and will not be taxed upon withdrawal for qualified medical expenses.

Your plan may provide you with a debit card to enable you to access your HSA funds to pay for qualified medical expenses like prescriptions, dental check-ups, and co-pays. If you pay qualified expenses out of pocket, your plan may require you to send a copy of the receipt to receive a reimbursement.

How an FSA Works

FSAs are used in conjunction with an employer-established health insurance plan. These plans allow you to contribute tax-free through a payroll deduction to an account, which is then used to reimburse you for qualified medical expenses. Employers are allowed to contribute to the plan as well.

FSAs are set up by your employer, and both you and your employer may contribute funds into the account pre-tax. FSAs have a limited amount that can be stored—$2,750 per year per employer as of 2021. This means married people can each have $2,750 in an FSA.

When it comes to an FSA versus an HSA, one of the biggest differences is that there's no limit to the amount of money you can carry over in an HSA. With an FSA, some employers may allow you to carry over as much as $550 in unused funds from year to year. Employers may also allow you a 2.5-month grace period at the beginning of the next year to spend unused funds from the previous year.

The Consolidated Appropriations Act, 2021 granted employers the ability to carry over unused FSA funds from the 2020 and 2021 plan years because of the pandemic. They may also extend the permissible period for incurring claims for FSA plan years ending in 2020 and 2021, permit post-termination reimbursements for FSA plans, and allow mid-year election changes for FSA plans during 2021.

You can use your money anytime for qualified medical expenses. Insurance premiums are not considered qualified medical expenses, but prescription medications and over-the-counter medicines obtained with a prescription are.

One other disadvantage of an FSA is that you do not keep the FSA or the money in it once you leave your employer. The employer is also not required to keep the FSA active, so if you leave and are re-hired, your account starts over again.

FSAs cannot be used in conjunction with a health insurance plan from the Marketplace, but they can be used with a plan from an employer.

With an FSA, it's crucial to plan your contributions so they line up with your annual medical expenses.

How an HRA Works

HRAs are available to anyone who has an employer that provides one. HRAs are accounts that an employer sets up for their employees to help them pay for out-of-pocket health-related expenses. This type of account is designed for an employer to help offset health care costs for their employees, up to a fixed amount per year.

Contributions for an HRA are made by the employer only and have no limit on the amount that may be contributed. Employers are not allowed to deduct from employees' wages and salaries for the HRA. This plan is used to reimburse employees for qualified medical expenses.

The HRA is an employer established plan, meaning that you cannot have an HRA through a Marketplace plan or one from a private provider.

It is up to your employer if an HRA plan will roll unused funds into the following period. The money is allowed to stay in your plan for reimbursement use, but employers cannot give their employees any remaining balances.

Because of the pandemic, FSAs and HRAs may reimburse expenses for menstrual care products and over-the-counter drugs without prescriptions incurred for any period beginning on or after Jan. 1, 2020.

Which Type of Health Savings Plan Is Best?

The best health savings plan depends on your situation. If you're enrolled in health insurance through your employer, your options depend on what your employer offers. For example, if your employer offers an HDHP, you could have an HSA. Or your employer may offer an FSA or HRA. If you're unsure what your employer offers, talk to your human resources department.

If you've purchased your health insurance through your state's Marketplace, you can contribute to an HSA only if you've purchased an HDHP.

HSAs offer flexibility, given that you own the account and the funds roll over from year to year. FSAs and HRAs also provide tax advantages and help with funding medical expenses. The right plan for you depends on what you have access to, whether you want to contribute to your plan, and the amount you plan to contribute.