What Is an HSA?

To improve recruitment and retention, employers often offer fringe benefits like HSAs and FSAs during open enrollment. These benefits can help employees save significantly on qualified medical expenses not covered by their health insurance.

So, here’s what you need to know about HSAs, including how they differ from FSAs and HRAs.

What Is an HSA?

A Health Savings Account (HSA) is a personal bank account that allows employees to set aside pre-tax dollars for qualified medical expenses. HSAs must be paired with eligible high deductible health plans (HDHPs).

Both employees and their employers can contribute to an HSA, but the IRS does limit total contributions to any individual account each year. In other words, the more an employee contributes, the less the employer can, and vice versa. The IRS typically increases the HSA contribution limit and HDHP minimum deductible threshold each year.

HSAs are portable, which means an employee can take their funds with them when they leave employment. Also, HSAs roll over from year to year, making them an excellent investment for younger, healthier employees who may not need to pay as much for healthcare now as later.

Speaking of investments, employees can invest their HSA funds in interest-bearing accounts for qualified medical expenses in the future. Individuals should keep in mind, however, that most banks who manage HSAs require a minimum investment, usually $1000.

The tax-free advantage of HSAs is another reason why they are such a popular benefit. It essentially means that employees can save about 30% on qualified medical expenses, such as copays, prescription medications, physical therapy, and certain healthcare products. For a complete list of qualified medical expenses, check out the IRS’s Publication 502.

What’s the Difference Between an HSA and an FSA?

HSAs are often confused with FSAs (Flexible Spending Accounts), but there are some key differences:

1. While both FSAs and HSAs allow employers and employees to contribute before taxes, the IRS sets a higher limit on HSA contributions.
2. HSAs rollover from one plan year to the next while FSAs typically do not rollover. For FSAs, employers have options to allow up to $550 per year to rollover and to extend a grace period of up to two-and-a-half months.
3. FSAs are owned by employers, which means that individuals cannot set one up independently and that individuals cannot take their funds with them when they leave employment. HSAs, on the other hand, are owned by the individual and are portable.
4. HSAs must be paired with a HDHP, but FSAs have no such requirement.

For these reasons, you may be wondering if an employee can have both an HSA and an FSA at the same time. Yes, but only under limited circumstances. According to the IRS, health FSAs are considered “other health coverage,” which makes them incompatible with an HSA. However, limited purpose, dependent care, and commuter benefit may be paired with an HSA.

What’s the Difference Between an HSA and an HRA?

Similarly, HSAs are sometimes confused with HRAs (Health Reimbursement Arrangements), but they also differ in important ways:

1. Again, HSAs must be paired with an HDHP, but HRAs have no such requirement. In fact, an HRA may be the employer’s only health plan. 
2. Unlike HRAs, HSA funds cannot be used to pay for health insurance premiums.
3. Unused HRA funds usually rollover from year to year but the rollover amount can be limited by the employer who owns it. HSAs, however, do not have a rollover amount limit.
4. Finally, HRAs are not portable, but HSAs are owned by the individual, who can use those funds even after they’ve left employment.

Again, you may be wondering if an employee can have an HRA and an HSA at the same time. Under certain circumstances, the answer is yes, but the HRA must be “HSA-qualified.” This means the HRA does not provide coverage below the IRS-mandated deductible level for HSAs—which is $1400 for individual coverage and $2800 for family coverage in 2022. 

Additional Resources

You can stay informed, educated, and up-to-date with important HR topics using BerniePortal’s comprehensive resources:

• BerniePortal Blog—a one-stop-shop for HR industry news
• HR Glossary—featuring the most common HR terms, acronyms, and compliance
• HR Guides—essential pillars, covering an extensive list of comprehensive HR topics
• BernieU—free online HR courses, approved for SHRM and HRCI recertification credit
• HR Party of One—our popular YouTube series and podcast, covering emerging HR trends and enduring HR topics