With the various types of employer-sponsored and employee-owned reimbursement accounts available – from Health Savings Accounts (HSAs) to Flexible Spending Accounts (FSAs), Dependent Care Reimbursement Accounts (DCRAs) and Health Reimbursement Arrangements (HRAs) – it can be confusing to know the differences or benefits of each.
Each of these reimbursement accounts serves a different purpose, and give employers the opportunity to offer different types of tax-advantaged accounts. They also encourage greater employee engagement in their own financial wellness.
High Deductible Health Plan (HDHP)
An HDHP is a plan with a higher deductible than a traditional insurance plan, which generally has a relatively lower premium than other types of health plans. Because the deductible is higher, and coverage doesn’t begin until the member’s out-of-pocket costs reach the high deductible, the high HDHP can be combined with a health savings account (HSA), allowing you to pay for certain medical expenses with money free from federal taxes.
For 2019, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $6,750 for an individual or $13,500 for a family. (This limit doesn’t apply to out-of-network services.)
For 2020, those amounts will be a deductible of at least $1,400 (individual) or $2,800 (family); the yearly out-of-pocket maximums will be $6,900 (individual) or $13,800 (family).
Health Savings Account (HSA)
An HSA is a savings tool that that not only helps HDHP members cover the cost of plan deductibles, it also empowers them to plan for future health care expenses. Employees’ contributions, withdrawals for eligible expenses and interest earnings are all tax-free. Plus, unspent HSA funds roll over year to year. As a result, employees can build funds to cover any eligible expenses they incur until reaching their deductible. Not everyone is eligible to have an HSA: only members of qualified HDHPs may have such an account.
HSAs are very beneficial to people who want to use them as savings vehicles. After retirement, HSA funds may be used for any reason without penalties (but the funds for non-health expenses after retirement will be taxed as income like an IRA of 401k.
Flexible Spending Account (FSA)
An FSA is an employer-sponsored benefits program that enables employees to deduct pre-tax dollars from their paychecks to pay for qualified medical expenses for themselves, their spouses, and their dependents. At the beginning of each plan year, employees can elect to have a certain portion of their pre-tax income contributed to fund their FSA. Because FSAs are employer-sponsored, an employee has access to the entire year’s funds on the first day of the year. Employees must use FSA funds within the plan year because they do not roll over year to year. However, the plan can provide for either a grace period or a carryover up to $500. Any unused funds are returned to the employer at the end of the year.
Contributions to an FSA are limited by the IRS to $2,650 per year. If an employee is married, each spouse may contribute up to $2,650 to his or her own FSA, even if both participate in the same FSA sponsored by the same employer. An employer’s plan may further limit the contributions into an FSA.
Health Reimbursement Arrangement (HRA)
HRAs are employer-owned accounts that are used by employees for specific medical expenses, such as deductibles, copayments, coinsurance, dental or vision. Contributions are made solely by the employer and unused funds are returned to the employer at the end of the plan year or may be rolled over to a subsequent plan year at the employer’s discretion.
The amount available in an HRA is set by the employer. There is no minimum or maximum amount. The employer also gets to decide whether any unused funds roll-over from year to year or whether they expire at the end of the plan period.
Dependent Care Reimbursement Account (DCRA)
With a DCRA, employees are able to make pre-tax payroll contributions to pay for dependent care expenses. To qualify, the dependent care must be essential for the employee and a spouse (if applicable) to work, look for work or attend school full-time.
The maximum annual DCRA contribution allowed is $5,000 per household. Unlike medical flexible spending accounts, annual DCRA funds are not available up front. Funds are only accessible as they are deposited with each payroll deduction. Employees pay for dependent care costs out-of-pocket then submit documentation for reimbursement.
This high-level summary is not an endorsement of any of these plans and is not investment advice. It doesn’t include all of the details and eligibility rules may apply. In addition, the benefits of the types of each plan may vary by employer group, the plan offering it and the individual’s own circumstances.