Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs) are often discussed together. All three can help employees pay for healthcare expenses, and all three offer tax advantages. But despite those similarities, they are not interchangeable.

Each type of account has different rules governing who can contribute, who owns the funds, how the money can be used, what happens to unused balances, and how the account interacts with an employer's health plan. Those differences can have important implications for both employers designing benefits and employees deciding how to use them.

Understanding those distinctions is particularly important when benefit plans are designed to work together. For example, a general-purpose FSA can affect an employee's eligibility to contribute to an HSA, while an HRA can be structured in ways that provide additional support for deductibles or specific healthcare expenses.

This guide provides a practical overview of HSAs, FSAs, and HRAs, including how each works, where employers have flexibility, and some of the compliance considerations that can be easy to overlook.

Key Takeaways

• FSAs, HRAs, and HSAs are not interchangeable. Although all three are account-based benefits, they have different funding, ownership, eligibility, and usage rules.
• FSAs are generally funded through employee pre-tax contributions and are subject to rules such as the annual election requirement and the use-it-or-lose-it rule, subject to limited exceptions.
• HRAs are funded exclusively by employers and offer significant flexibility in how the benefit is designed, including what expenses are eligible and how funds are contributed.
• HSAs are owned by the employee. Funds generally remain with the employee when they leave the organization, can roll over from year to year, and may be invested.
• HSA eligibility depends heavily on the employee's health coverage. Enrollment in certain other coverage, including a general-purpose FSA, Medicare, Medicaid, or non-qualified health coverage, can make an employee ineligible to contribute.
• The details matter. Employers should avoid assuming that a rule applying to one type of account automatically applies to another.

Why Are HSAs, FSAs, and HRAs So Often Confused?

HSAs, FSAs, and HRAs are all considered account-based health plans. Unlike a traditional health plan, where there isn't necessarily a fixed amount of money allocated to each employee, these arrangements generally involve a defined amount of funds available to help pay healthcare expenses.

That common characteristic can make the three seem interchangeable. They are not.

The accounts differ in several fundamental ways:

• How they are funded
• Who owns the account
• Who is eligible to participate
• How much can be contributed
• Whether unused funds carry over
• What expenses can be reimbursed
• How the account interacts with other health coverage
• How much flexibility the employer has in designing the benefit

The important takeaway for employers is simple: do not assume that a rule that applies to an HRA, FSA, or HSA automatically applies to the others.

Flexible Spending Accounts: What Employers and Employees Should Know

A health Flexible Spending Account allows employees to set aside money on a pre-tax basis to pay for eligible healthcare expenses.

FSAs are generally designed to help employees manage out-of-pocket medical expenses such as deductibles, copayments, dental and vision expenses, and certain over-the-counter medical products.

They are primarily funded through employee payroll contributions, although employers can make contributions within certain limits.

How Does an FSA Work?

One of the defining features of an FSA is the uniform coverage rule.

An employee who elects an annual FSA contribution generally has access to the full annual election from the beginning of the plan year, even though the employee is contributing that money through payroll deductions over the course of the year.

For example, an employee who elects $3,000 for the year generally has access to the full $3,000 for eligible expenses at the beginning of the plan year.

That creates a unique risk for employers. An employee could use the entire annual election early in the year and then leave the company before contributing the full amount through payroll deductions. The employer generally absorbs that difference.

What Happens to Unused FSA Money?

FSAs generally follow a use-it-or-lose-it model. Money remaining at the end of the plan year may be forfeited, although employers can choose from limited options that provide additional flexibility.

An FSA may have either:

- A grace period allowing employees to use prior-year funds for expenses incurred during the first two and a half months of the following year, or

- A carryover allowing employees to carry forward an amount within the IRS-established limit.

The grace period and carryover are mutually exclusive. A plan generally cannot offer both.

For 2026, the maximum permitted FSA carryover is $680.

Employers should also pay attention to forfeited funds. Those funds generally must be used for permitted plan purposes rather than simply accumulated indefinitely by the employer.

Can an FSA Be Used With an HSA?

Yes, but the type of FSA matters.

A general-purpose FSA generally makes an employee ineligible to contribute to an HSA because the FSA provides access to medical expense reimbursement before the employee satisfies the requirements of a qualified high-deductible health plan.

Employers that offer both an HSA and FSA commonly use a limited-purpose FSA, which generally restricts reimbursement to eligible dental and vision expenses.

Another option is a post-deductible FSA, which does not reimburse expenses until the employee has incurred expenses equal to the applicable minimum HDHP deductible.

This is an important area where the interaction between benefits matters. Offering both accounts does not automatically mean an employee can contribute to both.

What About FSA Election Changes?

FSA elections are generally made for the plan year and cannot simply be changed whenever an employee's circumstances change.

Certain qualifying life events may permit a mid-year election change, but the rules governing FSA changes are more limited than the rules that apply to some other pre-tax benefit elections.

Even when a qualifying event occurs, the requested change must generally be consistent with the event.

For example, the birth of a child may support an increase in an FSA election because additional medical expenses are expected. It would not ordinarily support reducing the election unless there is another circumstance that makes the reduction consistent with the event.

For employers, this is an area where coordination with the plan's third-party administrator (TPA) is particularly important.

Health Reimbursement Arrangements: Flexible by Design

Unlike an FSA, an HRA is funded exclusively by the employer. Employees cannot contribute their own money directly to an HRA.

That employer funding requirement is one of the characteristics that makes HRAs particularly flexible from a plan design perspective.

Employers can generally determine:

• How much to contribute
• Which expenses are eligible
• When contributions become available
• Whether unused amounts carry over
• Whether there is a maximum account balance
• How the HRA interacts with the underlying health plan

This flexibility allows HRAs to serve a wide variety of purposes.

How Are HRAs Commonly Used?

One common approach is to use an HRA to help offset a higher deductible.

For example, an employer might select a health plan with a higher deductible but establish an HRA that reimburses some of the employee's deductible expenses. This can allow the employer to pair a higher-deductible health plan with additional financial support for employees while managing overall plan costs.

HRAs can also be used to provide supplemental benefits.

Examples discussed during the webinar included:

• Fertility or infertility treatment
• Certain specialty medications
• GLP-1 medications
• Preferred provider arrangements that reimburse certain cost-sharing expenses

In these situations, the HRA can provide benefits outside the core medical plan structure.

Who Owns the HRA?

Unlike an HSA, an HRA generally belongs to the employer rather than the employee.

That means an employee does not simply take the HRA balance with them when they leave the company. The balance generally cannot be cashed out or transferred to another type of account.

An HRA may continue to be available after termination through COBRA when applicable. Some plans may also include a spend-down provision that allows a former employee to use an existing balance until it is exhausted.

How Much Flexibility Does an Employer Have?

Considerable flexibility is one of the defining characteristics of an HRA.

An employer can structure the benefit to determine when funds become available, what expenses qualify, and whether unused amounts carry forward.

For example, an employer could make the full annual HRA amount available at the beginning of the year, contribute monthly, or contribute each pay period. A plan could also permit carryovers while placing a limit on either the amount carried over or the total account balance.

That flexibility can make HRAs useful for employers with specific benefit objectives, but it also means the plan needs to be carefully designed and administered.

Health Savings Accounts: A Different Kind of Account

HSAs share some characteristics with FSAs and HRAs, but they operate under a substantially different set of rules.

One of the biggest distinctions is ownership.

An HSA is an actual account owned by the employee. The funds belong to the employee and generally remain theirs even after they leave the employer.

That makes HSAs portable in a way that FSAs and HRAs generally are not.

What Makes an HSA Different?

Unlike an FSA, an HSA does not have a use-it-or-lose-it rule.

Unused funds remain in the account and can continue to accumulate from year to year. HSA providers may also offer investment options, allowing employees to potentially build the account over time.

As a result, an HSA can serve not only as a way to pay current medical expenses but also as a longer-term healthcare savings vehicle.

There is an annual contribution limit, but there is no maximum account balance.

Who Can Contribute to an HSA?

This is one of the most important areas for employers and employees to understand.

To contribute to an HSA, an individual generally must be enrolled in a qualifying high-deductible health plan (HDHP), and not be enrolled in other disqualifying health coverage.

HSA eligibility is evaluated based on the account holder's coverage.

Certain types of coverage can make an individual ineligible to contribute, including:

• Medicare
• Medicaid
• TRICARE
• A general-purpose FSA
• Certain non-HDHP coverage
• Certain HRAs that reimburse medical expenses before the applicable HDHP deductible is met

A spouse's coverage generally does not affect the employee's HSA eligibility in the same way, although there are special rules when spouses have family HDHP coverage.

What Happens if an Employee Becomes HSA-Ineligible?

Eligibility can change during the year.

For example, an employee who becomes enrolled in Medicare generally can no longer make or receive HSA contributions beginning with the applicable period of ineligibility.

Because HSA contribution limits can depend on the number of months an employee is eligible, contribution amounts may need to be prorated when an employee is eligible for only part of the year.

Employers are responsible for monitoring the information available to them, such as whether an employee is enrolled in the employer's HDHP or another disqualifying plan offered by the employer. They generally are not responsible for monitoring every aspect of an employee's coverage outside the employer's own plans.

Can HSA Funds Be Used for Family Members?

Yes, but there is an important distinction.

HSA funds can generally be used tax-free for eligible medical expenses incurred by the account holder, their spouse, and their tax dependents.

Simply being a child or family member does not automatically make their expenses eligible for tax-free HSA reimbursement. For example, an adult child who is no longer the employee's tax dependent may not qualify even if that child remains on the employee's health plan.

Should Employees Keep HSA Receipts?

Yes.

Unlike an FSA, employees generally do not submit every HSA expense for third-party substantiation before using the funds. That does not mean documentation is unnecessary.

Employees should retain receipts and other records showing that HSA distributions were used for qualified medical expenses. If the IRS later questions a distribution, those records may be necessary to demonstrate that the expense was eligible.

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Comparing HSAs, FSAs, and HRAs

While HSAs, FSAs, and HRAs can all help employees manage healthcare expenses, the differences in how they are funded, owned, and administered are important.

Flexible Spending Accounts (FSAs)

• Funding: Primarily funded through employee pre-tax payroll contributions, although employers may also contribute.
• Ownership: The account is part of the employer's benefit plan.
• Unused funds: Generally subject to a use-it-or-lose-it rule, although plans may allow a limited carryover or grace period.
• Portability: Generally does not follow an employee when they leave the employer.
• Health plan requirements: An FSA does not require enrollment in a high-deductible health plan.
• Employee contributions: Elections are generally made for the plan year and can only be changed in limited circumstances.
• Design flexibility: More limited than an HRA, with specific rules governing contributions and eligible expenses.

Health Reimbursement Arrangements (HRAs)

• Funding: Funded exclusively by the employer.
• Ownership: The HRA belongs to the employer, subject to the terms of the plan.
• Unused funds: Carryover rules are determined by the employer's plan design.
• Portability: Generally does not follow an employee after employment ends, although continuation requirements may apply in certain circumstances.
• Health plan requirements: Requirements vary depending on the type of HRA and how it is structured.
• Employee contributions: Employees generally do not contribute to an HRA.
• Design flexibility: Employers have significant flexibility in determining contribution amounts, eligible expenses, reimbursement timing, and carryover provisions.

Health Savings Accounts (HSAs)

• Funding: Can be funded by the employee, employer, or both.
• Ownership: The account belongs to the employee.
• Unused funds: Funds roll over from year to year and remain available to the employee.
• Portability: The account stays with the employee if they change jobs or leave the workforce.
• Health plan requirements: Employees generally must be enrolled in a qualifying high-deductible health plan and meet other HSA eligibility requirements.
• Employee contributions: Employees can generally make or change contributions during the year, subject to applicable limits and eligibility.
• Design flexibility: The employer has less control over the account itself because the HSA is owned by the employee, but employers can choose whether and how much to contribute.

The bottom line: An FSA is generally designed to help employees pay for current healthcare expenses with pre-tax dollars. An HRA gives employers greater control over how healthcare expenses are reimbursed. An HSA provides employees with a portable account that can be used for current and future qualified medical expenses.

Specific rules can vary based on the plan design and applicable IRS requirements, so employers should review the details of their benefit arrangements when deciding how these accounts should work together.

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What Should Employers Consider When Designing These Benefits?

There is no single account that works the same way for every employer or employee population. The appropriate structure depends on the employer's goals, health plan design, workforce, and desired level of flexibility.

When evaluating an account-based benefit, employers should consider:

What are we trying to accomplish?

An FSA may be appropriate when the goal is to give employees a tax-advantaged way to pay for predictable out-of-pocket expenses.

An HRA may make sense when the employer wants greater control over the benefit design or wants to provide additional funding for specific expenses.

An HSA can provide employees with a portable account that supports both current healthcare expenses and longer-term savings, but it requires a qualifying HDHP and careful attention to eligibility rules.

How will the account work with the medical plan?

This is particularly important when combining an HSA with an FSA or HRA.

A general-purpose FSA or certain HRA designs can make an employee ineligible for HSA contributions. Supplemental benefits may need to be structured so that they do not provide disqualifying coverage before the employee satisfies the applicable HDHP deductible.

Who will administer the account?

FSAs and HRAs generally require claims to be reviewed and substantiated to determine whether expenses are eligible. Employers commonly work with a third-party administrator to handle that process.

HSAs operate differently. The employee generally determines whether a distribution is for a qualified medical expense, with the responsibility to maintain appropriate records.

These differences affect both the employee experience and the employer's administrative responsibilities.

The Bottom Line

HSAs, FSAs, and HRAs may look similar on the surface, but their rules and purposes are significantly different.

FSAs generally provide employees with a tax-advantaged way to pay current healthcare expenses, while HRAs give employers considerable flexibility to structure employer-funded reimbursement benefits. HSAs combine current healthcare spending with the ability to accumulate and potentially invest funds for future healthcare needs.

For employers, the challenge is not simply choosing an account. It is understanding how the account fits into the broader benefits strategy and ensuring the plan is designed and administered according to the applicable rules.

For employees, understanding the differences can help them make better use of the benefits available to them and avoid unexpected tax or eligibility issues.

Because the rules governing these accounts can be detailed and change over time, employers should review their specific plan design and administrative practices with their benefits advisors and other appropriate professionals.

This content is provided for general informational purposes only and is not intended as insurance advice. Coverage, terms, and availability can vary by carrier and state. For guidance specific to your situation, we recommend speaking with a licensed insurance professional.