Frequently asked questions
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Do you want your employees to be able to roll over unused dollars from year to year?
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Do you want the annual limit of this account to be available to participants when they need it?
By moving to a qualified High-Deductible Health Plan (HDHP), do you want to allocate a portion of the premiums you will be saving into a health care account for each employee?
YES Means the employer is ready to talk about all available options: HRA, FSA, and HSA. Employers may allocate dollars to any of these accounts. NO Eliminates the HRA because only the employer can fund an HRA. However, an FSA and HSA could be made available for employees that want to make voluntary pre-tax contributions to pay for expenses not covered by their health plan.
If you contribute money to a health care account for your employees, do you want to designate how the funds are spent?
YES Means an HRA is the only choice. For example, you’re offering a qualified HDHP. To soften the impact of the higher deductible, you also provide each employee an HRA to pay, for example, the first $750 of prescriptions and other qualified expenses that fall below the deductible. NO Means an employer is not concerned about restricting which health care expenses an employee pays with the health care account. This leaves the door open to an FSA or HSA. For example, an employee can use FSA or HSA dollars to pay over-the-counter medicines or big ticket items like LASIK eye-surgery and orthodontia. However, unlike payments from an HRA or FSA, which require third-party verification, payments from an HSA are not subject to third-party approval. Subject to IRS penalties and interest, contributions to an HSA may be withdrawn and used to purchase “non-health care” items.
Do you want employees to be able to make pre-tax contributions to a health account to cover out-of-pocket expenses?
YES Means an FSA or HSA is an option. Only the employer can fund an HRA. NO Means only HRA funds would be an option to help employees alleviate increased health care costs.
Do you want your employees to be able to roll over unused dollars from year to year?
YES Signifies the desire to give employees the choice to use unused account dollars in the future. And, to different extents, all three accounts can or do have a rollover feature. The HSA belongs to the participant and accumulated funds automatically roll forward from year to year. With an HRA, the employer decides how much, if any, of the participant’s account balance will roll forward from one plan year to the next. The FSA may permit participants a 2-½ month grace period in which to spend leftover funds from the previous plan year. NO Illustrates that this employer would prefer an HRA plan design that does not accumulate funds for participants from year-to-year, or an FSA where leftover funds are forfeited at the end of the plan year.
Do you want the annual limit of this account to be available to participants when they need it?
YES Denotes a preference towards an FSA and/or an HRA. HSA dollars are only available to participant as they are contributed into the account.
The employer can design the HRA to make the annual election available to participants on the first day of the plan year, or at different intervals – like monthly or bi-weekly. FSAs give the participant access to the entire amount of their annual election on the first day of the plan year, The FSA allows them to pay medical expenses early in the year when they need it most to help cover co-pays and out-of-pocket expenses not covered by their health plan, while contributing a set amount to their FSA each pay period, over a 12-month period. And remember, employers can also contribute to an FSA.NO Implies that this employer would prefer an employer-funded HRA that would make the annual election available only as funds are deposited into the participant’s account. An HSA would also work for this employer. The HSA only pays out what has been contributed to date. For participants who live on a tight budget, or need immediate access to their side account, the HSA isn’t the plan for them.
If the employer answered “YES” to most of these questions, then an HRA and/or FSA would fit seamlessly alongside a qualified HDHP. This type of consumer directed health plan combines the most sought-after CDHP attributes for employers and their employees.
View a side-by-side benefits comparison of the FSA, HSA and HRA
Why employers favor FSAs and HRAs
Both the employee and the employer can share in the financial responsibility of the HDHP. With an HRA, employers decide if the funds, or a portion of the funds, will be available when the employee needs them the most, e.g., early in the plan year when it is needed to cover deductibles. Of course, FSA dollars are always available on the first day of the plan year. HSA dollars are available only as they are contributed into the account. Both the FSA and HRA eliminate the possibility of funds being used for non-medical expenses, because all payments must be verified by a third party. In contrast, third-party verification is not required with an HSA. FSAs and HRAs are easier to set up because a separate custodial bank account is not required for each participant. HSAs require a separate custodial bank account be set up. With an HRA, the employee can also have a full FSA without the hassle of using a “limited FSA” to cover dental and vision expenses, as is required with an HSA account. With an HRA or FSA, there are no extra IRS forms to be filled out by participants when filing their tax return.
So, when you’re helping your employers work through the dilemma of how best to deal with the rising costs of health care, remember FSAs and HRAs can be paired as a “side account” with any health plan, including an IRS qualified HDHP, and might just be a better option, for everyone.