Considering a FSA, HSA or HRA? Learn how the employer plans differ

As employees wade through health insurance options for 2020, some are finding an alphabet soup of health savings plans: HSAs, HRAs and FSAs.

Each is for out-of-pocket health care expenses and has advantages and limitations. Some companies offer only one savings plan option; others have multiple options or do not offer the plans.

What are the main differences between the plans?

HSA stands for health savings account. They are tax-free and can only be used with high-deductible health insurance plans. For 2020, individual plans must have a deductible of at least $1,400, and family plans must have a minimum $2,800 deductible, according to the U.S. Department of Health and Human Services. Employers may or may not contribute money to an HSA.

An HRA is a health reimbursement arrangement or account. Only an employer can put money in an HRA, which is not limited to high-deductible plans. There is no minimum or maximum amount an employer can contribute, said Paul Fronstin, director of the health research and education program of the Washington, D.C.-based Employee Benefit Research Institute.

FSA stands for flexible savings account or arrangement. Employers may or may not contribute to FSAs. A key limitation of the tax-free FSAs is that some employers do not allow employees to carry over FSA funds to the next year; for those that do, there is a $500 carry-over limit, Fronstin said. Like HRAs, they are not limited to high-deductible plans.

Why should you consider a health savings plan?

“If you can pay for your medical expenses in a pretax mode, you should do it,” said Susan Null, a principal at Systemedic Inc., a New City, N.Y.-based company that helps people manage medical expenses. “If you know you will see so many doctors in a given year and you know you’re going to have copays for those visits and you take certain medications, and you know that you spend $500 a year on those expenses, you might as well spend that $500 pretax versus post-tax.”

If I have a choice, which should I choose?

“It’s so dependent on individual situations,” said Dr. Norman Edelman, a professor in Stony Brook University’s Renaissance School of Medicine and a core faculty member in the public health program.

In general, though, “If you choose a high deductible plan, an HSA is the way to go. The HRA is probably good if the employer is being generous. The FSA kind of covers everybody else.”

Can I combine savings plans?

You can, Fronstin said. For example, if you contribute the maximum amount to your HSA, you can also use an FSA — although only for dental and vision expenses, he said.

What’s the history behind the plans?

FSAs are the oldest of the three options and date back more than 40 years, Fronstin said. But “people were conservative in whether they participated and how much they put in because of the use-it-or-lose-it rule.”

HSAs and HRAs date to the early 2000s, he said.

Who owns my HSA, HRA or FSA and what sort of flexibility do I have with them?

Your company owns the HRA and FSA. Any money in an FSA that can’t be carried over to the following year goes to the company, Fronstin said.

You own your HSA, and it can be taken to another job, he said. You can build up the amount of money in the HSA so that, even if you have minimal out-of-pocket health expenses one year, you will have money for large expenses another year, he said.

There are limits, though. You cannot contribute more than $3,550 to an HSA in 2020 for an individual plan, according to the Department of Health and Human Services. The limit is $7,100 for a family plan.

HSAs also can be good investment tools, because they are tax-free, Fronstin said. There is a 20% penalty if you use HSA money on a nonmedical expense, but that penalty goes away once you turn 65, although you still would have to pay income taxes on nonmedical expenses, according to WageWorks, one of the companies that administer HSAs.

What will happen in the future?

Fronstin said HSAs likely will grow in popularity as more employers switch to high-deductible plans to save money. The percentage of Americans with private insurance who have a high-deductible plan rose from 19.3% in 2008 to 46% in 2018, according to federal data analyzed by the Employee Benefit Research Institute.

An HSA is a way to “ease the blow” for employees confronted with higher deductibles, said Davin Laurino, assistant vice president of commercial sales and broker services at Manhattan-based Healthfirst, a nonprofit health insurance company.

“By contributing to the employee’s account, you’re essentially reducing some of their upfront risk with the high deductible,” he said.