Offsetting Rising Healthcare Costs
Understanding how an HRA, FSA or HSA can work for your organization.
When it comes to health care costs, it seems the only way is up. Over the last two decades, costs have continued to rise sharply in the United States with no signs of slowing down. This rise is putting more pressure on employers who not only have to reign in increasing health care costs and keep employee coverage affordable, but also remain attractive to current and prospective talent despite their shrinking budgets. According to the Centers for Medicare and Medicaid Services (CMS), the U.S. spent $4.5 trillion on health care in 2022, and costs are projected to reach $6.2 trillion, or 19.7% of GDP, by the year 2028. So, what can employers do to meet the challenge of rising medical expenses, remain attractive to talent prospects and keep their organizational costs low?
HRA vs. HSA vs. FSA: Understanding the Differences
Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs), and Flexible Spending Accounts (FSAs) are valuable tools for employers looking to manage rising healthcare costs while making their overall benefits package more appealing to current employees and talent prospects. All three benefits work to offset eligible medical expenses in a tax-free way for both the employer and the employee. Despite their similarities, there are key differences when you look more closely at the details.
Below is a comparison chart to help you understand the differences between HRAs, HSAs, and FSAs—and which option could work best for your organization and your employees:
| FSA | HRA | HSA | |
| What is it? | An account to help employees pay for eligible medical expenses tax-free. | An account to help employees pay for eligible medical expenses tax-free. | A personal bank account to help employees save and pay for qualified medical expenses tax-free. |
| How does an employee get it? | Enrollment is through the employer. There is no need to enroll in a health plan. | The HRA is usually connected to a health plan. If offered, enrollment is automatic when signing up for the health plan. | Requires enrollment in a high-deductible health plan that meets a deductible amount set by the Internal Revenue Service (IRS). |
| Who contributes to it? | The employee. The employer can also contribute if they choose to. | The employer. Employee contributions are not permitted. | The employee, their family, the employer, and anyone else that chooses to. |
| Can the employee keep the money if they leave your organization? | No. The employer keeps the money. | This depends upon plan setup. If the plan has a forfeiture clause, the funds will go back to the employer if the participant leaves. If there is no forfeiture requirement, the participant can retire or separate from service and keep using their HRA funds until they are gone. | Yes. The employee owns the account. |
| Does the employee pay taxes on the money? | No | No | No |
| What can the employee pay for with it? | Medical expenses that are determined by the IRS and the employer. This includes dental, vision, and many other health care services and supplies as listed under Section 213(d) of the Internal Revenue Code. | Medical expenses that are determined by the IRS and the employer. The employer may only allow the HRA to pay for services covered by your health plan. Some HRAs can be used to pay for dental, vision, and other services/supplies listed under Section 213(d) of the Internal Revenue Code. | Qualified medical expenses, including services covered by a health plan as well as expenses listed under Section 213(d) of the Internal Revenue Code. |
There are many similarities between the three types of plans, but there are also some distinct differences, particularly in expense eligibility, participation eligibility, design flexibility, and what becomes of unused funds. While HRAs permit reimbursement for health insurance premiums, HSAs and FSAs generally do not. FSAs and HRAs are open to all participants and retirees, but HSAs must meet certain IRS-defined eligibility requirements—in addition to enrollment in a high-deductible health plan. And finally, unused FSA funds, and unused funds in HRAs that have a forfeiture clause, will revert to the employer, but HSA funds are completely portable, meaning the employer cannot benefit from unused funds if an employee leaves the company.
While health insurance premiums will continue to rise, employers have options to potentially reduce escalating costs while still providing a valuable benefit to their employees and encouraging employees to become more invested in their own health care.