Understanding Your Insurance Better
What is an HSA, HRA, or FSA? How do they work?
While all three serve a similar function – to help cover health care expenses – they are a bit different and easily confused.
Before we get started, let’s get a few terms out of the way that will help us understand the defining characteristics of each.
HDHP – High Deductible Health Plan is an insurance policy with an individual deductible (defined in blog #1) of at least $1,350 or a family deductible of at least $2,700.
COBRA – Consolidated Omnibus Budget Reconciliation Act is a law that was put into place to protect you and your family if you lose your employer sponsored health benefits, although you may be required to pay up to 102% of the premiums, which includes your portion and the portion the employer was sponsoring on your behalf.
Eligible Healthcare Expenses – Defined by the IRS to include health plan deductibles, copayments, coinsurance, dental work, orthodontia, eyeglasses, contact lenses and prescriptions. Some plans will cover over the counter medications and supplies but you should check with the plan prior to assuming it is covered.
A few of the more defining characteristics are who owns the account, what qualifications are needed for each, portability, the allowed usage and requirements needed to use the account, tax benefits, COBRA allowances and the substantiation of expenses.
| Health Savings Account (HSA) | Flexible Spending Account (FSA) | Health Reimbursement Account (HRA) | |
| Account owner | Employee | Employer | Employer |
| Account funding | Employee, employer and others | Employee primarily, although the employer may contribute. | Employer |
| Allowable Health Plans | High deductible health plan (HDHP) | All plans and often used in conjunction with an H.S.A. | All plans |
| Carry-over of unused funds | Yes, the funds are that of the account owner regardless of who funded it. | Possibly, but by plan design. Up to $500 may carry forward to future years but if there is no carry-over, the remaining balance is forfeited at the end of the plan year. | Determined by the employer, but is not required. |
| Portability between employers | Yes – take this with you anywhere, it’s yours. | No, the owner of the account is the employer. | No, it is owned by the employer, although the employer may allow you to use their funds if COBRA is elected. |
| Interest accrual | Possibly, depending upon the type of deposit account and custodian. | No. | No. |
| Tax benefits | May be funded with a pre-tax salary deduction or tax deduction. | May be funded with a pre-tax salary deduction or tax deduction. | Because it is employer funded, there are no tax benefits to the employee. |
| 2019 Contribution limitations | Up to $3,500 per individual or $6,850 per family. | No limitations. | Up to $2,700 per person. |
| Healthcare expenses | Qualified medical expenses but some exceptions for health insurance premiums may apply. | Qualified medical expenses but some exceptions for health insurance premiums may apply. | Any eligible healthcare expense including long term care and health insurance premiums. |
| Non-healthcare expenses | Subject to gross income and a 20% penalty tax, although the 20% tax is waived if they are qualifying expenses for a deceased covered person. | Must be used for eligible health care expenses only. | Must be used for eligible health care expenses only. |
| Cobra integrations | This account is not a health benefit plan subject to continuation. | COBRA rights apply. | COBRA rights apply. |
| Substantiation of expenses | No, but if audited by the IRS, be prepared to show that the funds were used only for qualified medical expenses. | Yes, each request must be substantiated before it can be reimbursed. | Yes, each request must be substantiated before it can be reimbursed. |
In our Insurance Basics Blog, we discussed low deductible/high out of pocket expense plans are a great option for those who are generally healthy and want to keep expenses to a minimum. If you are good at budgeting your finances and understand the expenses of your care needs, it could also be a great option for those who are not generally healthy and opt to use the HDHP in conjunction with an HSA and/or HRA. Since you understand that the expense will be a necessity, regardless of the plan, and the premiums could prove to be more costly than that of your contributions to an HSA, which also carry the benefit of the pre-tax salary deductions or tax deductions, interest and capital gains on your investments.
Employers are not required to participate or contribute to these plans, but may elect to do so. Some may contribute for the employee only while others will contribute for each covered person on the employer-sponsored health plan coverage. The amounts they fund have limitations for maximums, but since it is not a requirement, there are no minimum contribution limitations.
With an HSA, funds are available for use as soon the contributions are made whereas with an HRA, funds may be credited in a lump sum or as deposits are made and with an FSA accounts the full annual election is made available on the first day of coverage.