If your employer offers a health reimbursement arrangement (HRA), you have access to a competitive health benefit that empowers you to make your own healthcare choices in ways a traditional group health insurance plan doesn’t.
From choosing your own individual health coverage to spending your HRA funds on the qualifying out-of-pocket expenses that make sense for you, the options an HRA offers you are above and beyond other kinds of health benefits. One important choice you’ll need to make is whether you want to combine your HRA with other account-based health plans your employer may offer, like a flexible spending account (FSA). When deciding, there are necessary regulations to keep in mind to ensure you’re coordinating the two health plans appropriately.
In this blog post, we’ll discuss in detail how HRAs and FSAs are different, why it can be beneficial to have both, and what regulations you’ll need to keep in mind to coordinate your health spending.
What is a health reimbursement arrangement?
An HRA is a formal health benefit that allows employers to reimburse their current employees for the individual health insurance premiums and qualifying medical care employees purchase with their own money.
Reimbursements made through the HRA are tax-free to the organization and can also be tax-free to you as the employee—you just need to have a health insurance policy that provides minimum essential coverage (MEC) for your reimbursements not to be considered taxable income.
HRAs are employer-owned accounts. Your employer will decide how much tax-free money they want to offer you each month to spend on healthcare items. They’ll also determine if your HRA funds can be used to reimburse you for only insurance premiums or other eligible expenses.
Unlike the popular health savings accounts (HSAs), all plan contributions are made by the employer, and any unused funds at the end of the year generally stay with the employer .
PeopleKeep offers three types of HRAs:
- Qualified small employer HRA (QSEHRA)
- A simple, controlled-cost alternative to traditional health plans for employers with fewer than 50 full-time employees. A QSEHRA can be used to reimburse employees for individual health insurance premiums, out-of-pocket expenses, or both. QSEHRAs are also subject to an annual contribution limit.
- Note: Keep in mind that if your employer offers a QSEHRA, it can't be combined with an FSA.
- Individual coverage HRA (ICHRA)
- A flexible health benefit that can be used alone or as an alternative health benefit for current employees who don’t qualify for their employer’s group health insurance plan. Like a QSEHRA, ICHRAs can reimburse employees for health insurance premiums, out-of-pocket healthcare expenses, or both.
- Integrated HRA
Similar to employee stipends, HRAs are for employers of any size and can provide you with affordable health coverage that’s more customized than the one-size-fits-all structure that traditional health plans provide. This flexibility has helped HRAs grow more prevalent in today’s workforce, especially as the cost of health insurance continues to rise.
What is a flexible spending account?
Next, let’s talk about FSAs. While the “a” in HRA stands for “arrangement,” the “a” in FSA stands for “account.” That’s because FSAs are employer-owned savings accounts that employers and employees can contribute money towards for future tax-free healthcare spending.
Like QSHERAs, FSAs have an annual contribution limit. In 2022, the annual combined limit you and your employer can contribute to your FSA is $2,850. However, your if your spouse has a separate FSA under their employer, they can make their own maximum contribution.
FSAs are tied to your employment, just like HRAs, so the account won’t be maintained if you stop working for your employer that initially offered it to you.
Also similar to HRAs, FSA funds are subject to a “use-it-or-lose-it” policy, which means that any unused funds at the end of each plan year go back to your employer. That means that any money you don’t spend by the end of your plan year won’t roll over to the next year. Therefore, it’s best to use all your available money on your out-of-pocket costs to reap your FSA’s full benefit.
Depending on the type of FSA you’re being offered (healthcare FSA, limited purpose FSA, or dependent care FSA), the medical expenses you’re eligible to purchase with your FSA dollars will vary.
For example, a limited purpose FSA only covers exempted medical expenses, such as vision and dental care, while a healthcare FSA covers a wider range of IRS-approved medical costs. A dependent care FSA covers medical expenses for children under the age of 13.
How do HRAs and FSAs work together?
If your employer is offering you both an HRA and an FSA—great! Using both is an excellent way to maximize your employer’s plan contributions to your healthcare, optimize your tax savings, and save even more on your medical services and other health expenses, such as your prescription costs.
When using both an HRA and an FSA, you’ll want to keep the following two rules in mind:
- The same eligible expense can’t be reimbursed from both accounts.
- Unless otherwise specified in your employer’s plan documents, your total HRA allowance must be used first before you can dip into your healthcare FSA.
- This makes it more likely that any unused balance in your FSA will be forfeited at the end of the year. So your employer can opt to change your plan documents to allow FSA funds to be used first on medical expenses.
The only HRA where employers can't offer an FSA in addition to their HRA is with a QSEHRA. According to the IRS1, a QSEHRA can't be combined with any other traditional health plan. In this case, an FSA is considered a group health plan.
However, if you’re using an FSA from a spouse (not one offered by your employer), you can coordinate it with your QSEHRA. Just make sure you're following your plan documents and the rules above to stay compliant.
When you look at your benefits package, you may find that you have several different types of health coverage and employee benefit plans to pick from. But it's important to know that you may not have to pick just one.
Using an HRA and an FSA together is a smart way to take advantage of the health benefits your employer offers, and it allows you to get tax-free reimbursements on the qualified expenses you incur for you, your spouse, and your children.
When considering HRAs and FSAs, understanding how they work together can get complicated. But by following the guidelines in this blog article, you’ll be ready to use both benefits like a pro!
This article was originally published on August 16, 2021. It was last updated on July 18, 2022.