HRA, HSA vs. FSA Healthcare Saving Accounts - Which is best?

Take-aways:

1. HRAs are solely funded by employers and offer tax-free reimbursements for incurred medical expenses, FSAs allow employees to contribute a portion of their regular earnings for qualified expenses, and HSAs are personal savings accounts offering tax-free benefits for current and future qualified medical and retiree health expenses.  
2. Each account type has specific rules about what qualifies as reimbursable health-related expenses; while all three cover deductibles, co-pays, prescriptions, and some over-the-counter medications, only HRAs often cover dental and vision care not covered by regular health insurance.  (Source: IRS)
3. FSA can be beneficial for those with high healthcare needs due to immediate availability of funds, HSA can be a good choice for self-employed individuals providing tax-saving benefits, and for those with a High Deductible Health Plan (HDHP), an HSA can help cover higher out-of-pocket costs with pre-tax dollars.  

Understand HRA, FSA, and HSA

According to the Internal Revenue Service (IRS), an HRA is an employer-funded plan that reimburses employees for incurred medical expenses not covered by the company's standard insurance plan. An FSA is an account that allows employees to contribute a portion of their regular earnings to pay for qualified expenses, such as medical or dependent care expenses. An HSA, on the other hand, is a personal savings account that allows individuals to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.

Key Differences Between HRA, FSA, and HSA

While these three options share the objective of helping individuals save on healthcare costs, they differ in several key aspects. Some of these differences include eligibility criteria, tax advantages, and whether the employee or the employer owns the account.

Eligibility Criteria for HRA, FSA, and HSA

Navigating the eligibility criteria for HRA, FSA, and HSA can be daunting. Below is a simplified guide:

Eligibility for HRA

To qualify for an HRA, you must be an employee of the company offering the HRA. HRAs are solely funded by the employer, which means that employees cannot contribute to them, and the reimbursement from an HRA is tax-free.

Eligibility for FSA

In order to qualify for an FSA, you must be an employee of a company that offers an FSA plan. Self-employed individuals are not eligible for FSAs. The IRS does not mandate employers to offer FSAs, so it's at their discretion whether they provide this benefit.

Eligibility for HSA

An HSA is available to taxpayers who are enrolled in a High-Deductible Health Plan (HDHP). The IRS has set specific criteria for what constitutes a high deductible plan. Unlike HRAs and FSAs, HSAs can be funded by both the employee and the employer, and the funds belong to the employee.

What does being tax-free mean?

Tax-free" refers to certain types of financial transactions, accounts, or types of income that are not subject to taxes by the government. When something is tax-free, it means you are not required to pay tax on it. So in the context of Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs), "tax-free" refers to the fact that you don't pay taxes on the money as it goes into the account, as it grows within the account, or as it comes out of the account (provided the money is used for qualified healthcare expenses in the case of HSAs and FSAs). This results in significant tax savings and is a major advantage of these types of accounts. For example, if you make $50,000 a year and decide to contribute $1000 to a health saving account, you will only be taxed on $49,000 ($50,000 - $1000).