Understanding the Difference Between FSA, HRA, and HSA Accounts

When it comes to health care benefits, employees often hear terms like FSA, HRA, and HSA. While all three are designed to help manage health care expenses, they each work differently. Understanding these accounts can help employees make the most of their benefits and choose the options that best suit their needs.

Flexible Spending Account (FSA)

A Flexible Spending Account (FSA) is an employer-sponsored account that allows employees to set aside pre-tax dollars for eligible health care expenses. FSAs can be used for medical, dental, vision, and prescription costs, including copays, deductibles, and many over-the-counter items.

Key Features of an FSA:

• Funded by employee payroll deductions on a pre-tax basis
• Funds are available at the start of the plan year
• "Use-it-or-lose-it" rule applies—any unused funds may be forfeited at the end of the plan year, though some plans offer a short grace period or limited carryover
• Typically available with most types of health plans, but employees must enroll during open enrollment or after a qualifying life event

FSAs are a popular way to lower taxable income while budgeting for expected health care costs.

Health Reimbursement Arrangement (HRA)

A Health Reimbursement Arrangement (HRA) is funded entirely by the employer to reimburse employees for eligible health care expenses. Employees cannot contribute to an HRA, but they can use employer-provided funds to cover medical expenses based on plan rules.

Key Features of an HRA:

• Funded only by the employer
• Reimbursement can cover deductibles, copays, and other eligible expenses
• Unused funds may roll over, depending on employer design
• Often paired with high-deductible health plans, but can be designed to work with other types of plans

Because employers control the funding and rules for HRAs, benefits can vary by company. Employees should review their specific plan details.

Health Savings Account (HSA)

A Health Savings Account (HSA) is a personal savings account that allows employees to set aside pre-tax dollars for eligible medical expenses. To contribute to an HSA, employees must be enrolled in a qualified high-deductible health plan (HDHP).

Key Features of an HSA:

• Funded by employees, employers, or both
• Contributions are pre-tax, and funds grow tax-free
• Funds roll over year to year—there's no "use-it-or-lose-it" rule
• HSAs are portable, meaning the account stays with the employee, even if they leave their job
• Funds can be used for medical expenses now or saved for future health care needs, including retirement

HSAs offer triple tax advantages—contributions, earnings, and withdrawals for qualified expenses are all tax-free.

What HR Needs to Know

For HR professionals, understanding the distinctions between FSAs, HRAs, and HSAs is essential for benefits administration and employee education. Each account type has different eligibility rules, funding structures, and compliance requirements:

• FSAs require clear communication about the "use-it-or-lose-it" rule, enrollment deadlines, and eligible expenses. HR must coordinate payroll deductions and ensure employees understand how funds are accessed.
• HRAs are entirely employer-funded, giving organizations flexibility in plan design. HR teams should work closely with vendors to define reimbursement rules, manage rollovers (if applicable), and ensure accurate claims processing.
• HSAs come with strict eligibility requirements, including enrollment in a qualified high-deductible health plan. HR plays a key role in verifying eligibility, facilitating contributions, and providing resources to help employees understand HSA tax benefits and long-term savings potential.

Effective administration starts with educating employees, maintaining compliance with IRS rules, and partnering with trusted vendors to manage these accounts. A well-run benefits program helps employees make informed decisions while supporting organizational goals related to cost management and employee satisfaction.

Benefit Allocation Systems (BAS) provides best-in-class, online solutions for: Employee Benefits Enrollment; COBRA; Flexible Spending Accounts (FSAs); Health Reimbursement Accounts (HRAs); Leave of Absence Premium Billing (LOA); Affordable Care Act Record Keeping, Compliance & IRS Reporting (ACA); Group Insurance Premium Billing; Property & Casualty Premium Billing; and Payroll Integration.

MyEnroll360 can Integrate with any insurance carrier for enrollment eligibility management (e.g., Blue Cross, Blue Shield, Aetna, United Health Care, Kaiser, CIGNA and many others), and integrate with any payroll system for enrollment deduction management (e.g., Workday, ADP, Paylocity, PayCor, UKG, and many others).

This article is for informational purposes only and is not intended as legal, tax, or benefits advice. Readers should not rely on this information for taking (or not taking) any action relating to employment, compliance, or benefits. Always consult with a qualified professional before making decisions based on this content.