Confused about flexible spending accounts? You’re not alone. While all three account types help employees pay for qualified health-related expenses, each one has unique features. Below is a quick primer.
FSA
An FSA is a Flexible Spending Account, a type of employer-established benefit plan. It is owned by the employer, not the employee, but both the employer and the employee can make contributions. Self-employed individuals cannot use FSAs.
Employees typically fund the account through voluntary salary deductions that are not subject to employment or federal income taxes. FSAs do not need to be reported when filing income taxes.
For 2017, the individual contribution limit is $2,600. For 2018, the individual contribution limit is increasing to $2,650.
HSA
HSA stands for Health Savings Account. It is a tax-exempt custodial account owned by the employee. It is a portable account, meaning the employee can keep it after leaving the employer. Both the employer and the employee can contribute to an HSA.
The employee must be enrolled in a high-deductible health plan to qualify for an HSA. For 2017, the HSA annual contribution limit is $3,400 for self-only coverage and $6,750 for family coverage. For 2018, the HSA annual contribution limit is increasing to $3,450 for self-only coverage and $6,900 for family coverage.
Funds in an HSA can be used for non-qualified expenses. However, there is a 20 percent penalty for doing so before turning 65 years old. HSAs must be reported on Form 1040 when filing income taxes.
HRA
HRA stands for Health Reimbursement Account, also called a Health Reimbursement Arrangement. Like an FSA, an HRA is owned by the employer, not the employee. Unlike an FSA, however, only the employer can contribute to it. Employees cannot make contributions through voluntary salary deductions, and self-employed individuals cannot use HRAs. HRAs are not included in the employee’s income and do not need to be reported when filing income taxes.
If money remains in the account at the end of the year, it can be rolled over to the next year. It cannot be refunded to the employee.
For more information on rules for HSAs, HRAs and FSAs, read IRS Publication 969.
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