HSAs, FSAs, and HRAs

Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs) are three types of tax-advantaged accounts designed to help people cover out-of-pocket healthcare costs. Each works differently, has different eligibility rules, and suits different situations. Understanding the differences helps you choose and use the right account.

Health Savings Accounts (HSAs)

An HSA is a personal savings account that you own and that can be used for qualified medical expenses. The defining requirement is that you must be enrolled in a High-Deductible Health Plan (HDHP) to contribute to an HSA.

What is an HDHP? The IRS sets minimum deductible thresholds and maximum out-of-pocket limits that a plan must meet to qualify as an HDHP. These thresholds are adjusted annually — check IRS Publication 969 or the IRS website for current figures. HDHPs typically have lower monthly premiums than standard plans, with higher initial out-of-pocket costs.

HSA tax advantages — triple benefit:

1. Contributions to your HSA are tax-deductible (if you make them yourself) or pre-tax (if made through payroll deduction)
2. Money in the HSA grows tax-free — interest, dividends, and investment gains are not taxed
3. Withdrawals for qualified medical expenses are entirely tax-free

This triple tax advantage makes the HSA particularly valuable for people who can afford to pay some current medical expenses out of pocket while letting their HSA balance grow.

Contributions: Annual contribution limits are set by the IRS and adjusted for inflation each year. There are separate limits for self-only and family HDHP coverage, and a higher catch-up contribution limit for individuals aged 55 and older. Check the current-year limits at irs.gov before contributing.

Rollover: HSA funds roll over from year to year without limit. There is no use-it-or-lose-it deadline. This means you can accumulate a substantial balance over years of contributions and invest it — many HSA providers allow account holders to invest balances in mutual funds or ETFs once the balance exceeds a threshold.

After age 65: Once you enroll in Medicare, you can no longer make new HSA contributions. However, you can continue to use accumulated HSA funds for qualified medical expenses tax-free. After age 65, you can withdraw funds for any purpose without the 20% penalty that applies to non-medical withdrawals before 65 — though the withdrawal will be subject to ordinary income tax.

Account ownership: The HSA belongs to you, not your employer. If you change jobs, your HSA stays with you.

Flexible Spending Accounts (FSAs)

An FSA is an employer-established benefit account that allows you to set aside a portion of your paycheck before taxes to pay for qualified medical expenses. Key features:

No HDHP requirement: Unlike HSAs, you do not need to be enrolled in an HDHP to use an FSA. You can have an FSA with any employer-sponsored health plan.

Employer-controlled: FSAs are set up and administered by your employer. When you leave a job, you typically lose access to any unused FSA balance (your employer retains it). The annual contribution amount is set when you elect the benefit during open enrollment and generally cannot be changed mid-year except following a qualifying life event.

Use-it-or-lose-it: This is the most significant limitation of FSAs. Money you contribute that is not spent on qualified expenses by the end of the plan year is generally forfeited. Employers have the option to offer one of two accommodations:

• A grace period of up to a certain number of months after the plan year ends
• A limited carryover of a specified amount (set by the IRS) to the next plan year

Not all employers offer either option — ask your benefits administrator whether your FSA has a grace period, carryover, or neither.

Dental and vision FSAs: Some employers offer standalone dental or vision FSAs, or allow FSA funds to be used for dental and vision in addition to medical expenses. These work similarly to general purpose FSAs.

Dependent care FSAs: A separate type of FSA for daycare, preschool, and other dependent care expenses — not for medical expenses. Different annual limits apply.

Health Reimbursement Arrangements (HRAs)

An HRA is an employer-funded account used to reimburse employees for qualified medical expenses and sometimes insurance premiums. Key features:

Entirely employer-funded: Employees cannot contribute to an HRA — it is funded entirely by the employer.

Several types exist:

• Integrated HRAs: Used alongside a group health plan, reimbursing out-of-pocket expenses
• Individual Coverage HRA (ICHRA): Employers reimburse employees for premiums and qualified expenses on individual health plans purchased on the Marketplace — allows employers to offer tax-advantaged health benefits without sponsoring a group plan
• Excepted Benefit HRA (EBHRA): A small employer-funded account for limited expenses like dental, vision, or COBRA premiums

Reimbursement, not an account: HRA funds do not accumulate in an account you own — you submit receipts or claims for reimbursement from the employer’s HRA. Unused funds typically revert to the employer at year-end unless the employer specifically allows rollover.

Choosing between them

If your employer offers a choice, key considerations:

Feature	HSA	FSA	HRA
Requires HDHP	Yes	No	No
Who funds it	You + employer	You	Employer only
Rollover	Unlimited	Limited	Employer decides
Portable on job change	Yes (you own it)	No	No
Investment option	Often yes	No	No

If you are enrolled in an HDHP and can afford to pay some expenses out of pocket in the short term, an HSA with investment of accumulated funds is often the most advantageous long-term tool. If you are not enrolled in an HDHP or want to set aside predictable amounts for expected expenses, an FSA may be the right fit.