Health care flexible spending arrangements (FSAs) and health reimbursement arrangements (HRAs) are similar to Health Savings Accounts (HSAs) in some ways but very different in other ways. For example, FSAs and HRAs are only available when offered by a company to its employees, so employees that don’t work for an employer that offers an FSA or HRA cannot take advantage of them. On the other hand, HSAs are available to any eligible individual whether or not their employer offers an HSA program.
Employers that offer FSAs and/or HRAs must follow broad federal rules, but they have a lot of flexibility in how their plan is designed and how it is administered. Both FSAs and HRAs can also be paired with any type of health insurance offered by the employer (e.g., HMO, PPO, high deductible plan), and often employees are able to participate in the FSA or HRA plan even if they decline the employer’s group health coverage.
On the other hand, HSAs have a more rigid set of rules that must be followed. One of the more significant rules is that eligible individuals cannot have any other coverage that pays for first dollar medical expenses before the plan deductible is met.
HRAs and health care FSAs are not HSA-qualified insurance plans. As a result, FSAs and HRAs can create eligibility issues when individuals are enrolled in HSA-qualified high deductible health plans. Individuals enrolled in HSA-qualified health plans also need to be careful when their spouse participates in an FSA or HRA through his/her employer.
Unless specifically stated otherwise in the spouse’s employer’s FSA or HRA plan documents, the IRS will assume that medical expenses incurred by all family members may be reimbursed under the plan, thereby creating a “first dollar coverage” eligibility problem for family members covered by an HSA-qualified health plan.
It is not good enough for an employee to state that they will never use their spouse’s FSA or HRA to pay for their medical expenses. The spouse’s FSA or HRA plan must not allow the non-employee spouse’s expenses to be paid or reimbursed, such as by limiting payment or reimbursement only to eligible expenses incurred by employees.
This does not mean that all FSA and HRA programs are problematic with HSAs. In fact, the IRS allows certain types of FSAs and HRAs to be compatible with an HSA. The following types of FSAs/HRAs that will not cause HSA eligibility problems are:
- “Limited purpose” FSAs or HRAs. These types of arrangements may only reimburse dental, vision, and/or preventive care expenses. First dollar coverage for these types of expenses is explicitly permitted in the HSA law.
- “Post-deductible” FSAs or HRAs. These types of arrangements may only reimburse medical expenses (other than dental, vision, and/or preventive care expenses) after the individual or family spends at least an amount equal to the minimum deductible required for HSA-qualified plans. For 2021 and 2022, this amount is $1,400 for single individuals and $2,800 for families. Employers may impose higher limits before the FSA or HRA is available to reimburse medical expenses, but they may not impose lower limits. For example, an employer could make reimbursement available under its post-deductible HRA plan after a single individual incurs $1,500 of medical expenses but cannot offer a plan that only requires $1,000 of medical expenses to be incurred.
- Combination “Limited purpose/Post-deductible” FSAs or HRAs. These arrangements offer the advantages of both types through the same plan, providing additional flexibility to plan participants beyond what each type can offer separately.
- Retiree medical HRAs. These types of arrangements set aside funds to be used at a later date for medical expenses incurred by employees that have retired from the company. If the retired individual is still enrolled in an HSA-qualified plan, the HRA will create an eligibility problem at that time but does not create an eligibility problem while the employee is still working.
These issues are described in IRS Revenue Ruling 2004-45 and IRS Notice 2008-59 (available online at www.irs.gov).
Why Might Employers Want to Offer FSAs/HRAs With HSAs?
“Limited purpose” FSAs and HRAs are desirable for employees because they offer another tax-preferred way of paying for dental, vision, and/or preventive care expenses without using HSA funds. These expenses are often routine and predictable so the risk of “losing” unspent FSA funds is low.
“Post-deductible” FSAs and HRAs are often desirable for employees because they lessen the “sting” of higher deductibles. From the employer’s perspective, they offer employers a no-cost (FSA)/low-cost (HRA) way of providing additional “security” to employees concerned about the possibility of incurring a lot of medical expenses. Since most employees don’t incur high medical claims, the employer’s cost for HRA reimbursements is typically low, and under the FSA it’s the employee’s contributions that are at risk. Because FSA funds are often “use or lose” every year, post-deductible FSAs may have more limited appeal to employees.