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Lesson 22 - HSA, FSA & HRA Accounts

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HSA Account

Definition:

HSA stands for Health Saving Account. HSA is a tax-advantaged savings account for people with a High Deductible Health Plan (HDHP) to pay for qualified medical expenses now or in future. Contributions (money deposit) are made into the account by individual or employer or both and are limited to the maximum amount each year set by IRS (Internal Revenue Service).

What is HDHP?

A High Deductible Health Plan (HDHP) is a health insurance plan that has lower monthly premiums but has higher deductibles which means an individual has to pay a higher amount before insurance starts covering medical costs.

Qualified HDHP

Minimum $1,650 deductibles plan required for individuals for qualifying for HSA and $3,300 for family for the year 2025. These limits are set by the IRS, and can be increased or decreased annually accordingly.

HSA Eligibility Criteria

IRS sets standard eligibility criteria that individuals have to fulfill in order to open HSA which includes:

  1. Must have a qualified HDHP.
  2. Must have no other health coverage. (like secondary insurance)
  3. Not be enrolled in Medicare.
  4. Not be claimed as a dependent on someone else's tax return.

How it works and benefits

Any employee through an employer, or unemployed, or self-employee, or any other individual can open an HSA account through brokerages or banks such as Fidelity, Health Equity, or Lively.

  • Individual / employer put money into the account.
  • Funds can be used tax-free for qualifying medical expenses
  • After age 65 funds can be used for anything (medical = tax free and non-medical = regular tax applies)
  • Another benefit of HSA, person can invest funds fully tax-free for account growth.
  • As HSA money is yours, any unused contributions (money deposit) can be rolled over to the next year. (no payment loss at the end of the year)
  • Also, HSA is portable, meaning that if employees change or leave their jobs, they can still keep HSA with them. As HSA is forever an account for individual / account holder.

HSA Contribution Limits

IRS sets maximum contribution limits on HSA annually. According to the IRS, the maximum contribution for a HSA in 2026 is $4,400 for an individual and $8,750 for a family. The total amount contributed by employer and employee must be within the maximum annual limit set by IRS.

IRS (Internal Revenue Service)is the federal tax authority of the United States. It operates under the U.S. Department of the Treasury and is responsible for administering and enforcing federal tax laws.

Main Responsibilities of the IRS
  • Collects federal taxes from individuals and businesses.
  • Processes tax returns and issues tax refunds.
  • Enforces compliance with U.S. tax laws through audits and investigations.
  • Issues Employer Identification Numbers (EINs) for businesses.
  • Provides tax forms, publications, and guidance to taxpayers.
  • Administers certain tax credits and federal tax-related programs.
Example:

If you form a U.S. company, such as an LLC, you may need to obtain an EIN from the IRS and file annual federal tax returns, even if your business is operated from another country.

In short, the IRS is the U.S. government agency responsible for collecting federal taxes, processing tax returns, issuing refunds, and enforcing tax laws.

Investment in HSA

With HSA, patient can invest money for growth of account with triple tax free advantage

Triple Tax Free Advantage:

  1. Contribute (deposit money) free of taxes.
  2. Invest money without tax applies.
  3. Withdraw money for qualified medical expenses free of taxes.

How the investment works?

Once your HSA meets your providers minimum required cash threshold, (bank or brokerage where from you open account) which usually ranging from $1,000 to $2,000, you can invest the extra cash/funds in mutual funding, stock, EFTs, or other options offered by your bank or brokerages. This let's your HSA grow tax free over time.

Example:

You had deposit $3,500 in your HSA and your bank / brokerages has $1,500 minimum cash requirement then you can invest rest of $2,000 in various options offered by your bank / brokerage, and your money will be grow as per terms and conditions.

Qualified Medical Expense included:

IRS has listed Qualified Medical Expenses (QME) for all saving accounts including HSA, like:
PR (deductible, copy, coincidence), dental services, vision care, prescription drugs, psychiatrist, treatments, and other qualified medical expenses not covered by the health insurance plan

Note: the insurance premiums are not counted as qualified medical expenses unless the premiums are for Medicare or for Cobra.
For complete list, please review IRS Publication 502

Frequently Asked Questions

What if a person has HSA and he/she turn into 65 and becomes eligible for Medicare?

If a person becomes eligible for Medicare as he/she turn into 65, then the contribution (money deposit) to HSA stops, as one of the eligibility criteria not met. However, HSA account stays open as HSA money is your forever. After 65 a person can only use the money that he/she have in account already for paying Medicare premiums, PR, and other qualified medical expenses as well as for growing tax free. (investing).

In short, keep in mind that if the person enrolled in any Medicare part then the contributions are stopped while the other benefits remains running.

FSA Account

Definition:

FSA stands for Flexible Spending Account. FSA is an employer sponsored account that lets employees set aside pre-tax money from their paycheck to pay for certain medical expenses. Traditionally contributions (money deposit) are made by employees, however the employers can also contribute but not compulsory. FSA also known as Flexible Spending Arrangement.

What is Pre-tax money?

The pre-tax money means money is taken out of employees paycheck before the income taxes (usually SSA and Medicare taxes) are calculated. It's fruit full because you don't pay taxes on that money, you keep more of it to spend on medical costs.

Example:

You have $50,000 salary in which you set $3,000 for FSA then
Income tax supplies on $47,000
No income tax applies to $3,000.

FSA Eligibility Criteria

  1. Only available if the employer offers it to his/her employees.
  2. Self-employed or any other individual generally cannot have FSA unless their employer sponsored it.
  3. In FSA, no HDHP nor other health insurance coverage is required to use it.

How it works and Benefits

  • Employees choose how much money to put in FSA up to the limit said by the IRS.
  • Employees can use the full yearly amount immediately, even if he/she haven't contributed all of it yet (mean employee can use whole year max limit amount on first month or day and then pay accordingly in entire year).
  • Usually employees submit claims with receipts of qualified medical expenses which includes PR, vision care dental or any non-covered services by their insurance plan to get reimbursed.
  • Any unused money at the end of the plan year is usually forfeited (remaining money will be lost) as FSA follows the rule "Use it or Lose it". For this condition, your employer can offer one of the two options below:
    1. Grace Period Rules
      Up to 2.5 extra months allowed to spend remaining funds
    2. Carry Over Rule
      • Roll over up to $680 into the next plan year for 2026.
      • Or no Extension means unused funds are lost.
  • FSA funds are only used for qualified medical expenses describe in HSA section above.
  • Since an FSA is not portable like an HSA, if an employee switches jobs or leaves their employer, they lose access to the FSA, and the remaining money in the account goes back to the employer.
  • FSA has no option for investing like HSA.

Contribution Limits

According to the IRS the maximum limit on annual deposit to FSA is $3,400 per employee's paycheck deduction for year 2025.

HRA Account

HRA stands for Health Reimbursement Arrangement. HRA is an employer-funded benefit plan that reimburses employees for certain healthcare costs. Employees do not put their own money in it, only the employers can contribute. HRA also offers tax-free savings. It is also known as a Health Reimbursement Account.

Is HRA an account or a plan?

HRA is both plan and account, it's a type of employer sponsored, employer funded health benefit that provides a way for employees to be reimbursed for certain qualified medical expenses. HRA itself is a plan that outlines the rules and parameters of the reimbursement while it also functions as an account where the funds are hold and managed for those reimbursement.

HRA Eligibility Criteria

  1. Must be offered by your employer.
  2. No HDHP insurance plan required.
  3. Self-employees or any other individual person generally cannot have HRA unless their employer sponsored it.

How it works and benefits

  • As HRA is employer funded plan, so the employer can decide how much it will contribute (deposit money for per employee) to the plan per year and the employee can utilize amount for actual medical expenses incurred up to that fixed amount.
  • Employer can decide which service is covered and which is not.
  • As in HRA, employee must have to pay qualified medical expenses out of pocket first, then submit the claim / receipts to their employer or HRA administrator to get reimbursed tax-free for these services but in some cases, the patient can get reimbursement at the time of service rendered if the employer prov6ide an HRA debit card with access.
  • Unused funds, usually expire / lost at end of years (plan's ending year) unless employer allows roll over to next year

Eligible expenses for HRA

According to government rules, employer can further refine that what services are covered and what are not, however it may include:

  1. PR (deductibles, coinsurance, and copy)
  2. Health insurance premiums (depends on HRA type offered)
  3. Dental, vision, prescription drugs, medical equipment's like crutches, bandage, CPAP, machines, etc.
  4. Certain over the counter medicines

Contribution Limits

There is no limits for standard HRAs set by IRS employer can decide limits.

Some specialized HRAs (QSEHRA) have annual IRS set limits, for 2026, about $6,450 for individual / $13,100 for family amounts adjusted yearly.

Like FSA, HRA is also not portable like an HSA, if an employee switches jobs or leaves their employer, they lose access to the HRA, and the remaining money in the account goes back to the employer.

Same like FSA, HRA has no option for investing like HSA.

Can we use the full HR amount on the first day like FSA?

It depends on the plan offered and design by employer, as some have rules on spending while some have no limitations.

Types of HRA

  1. Standard HRA

    Standard HRA also known as Traditional HRA. It refers to a HRA integrated with the group health insurance plan. In this type of HRA employees must be enrolled in the employer's group health insurance plan to be eligible for get reimbursement from that HRA for qualified medical expenses.
    These expenses can include premiums for the group health plan itself, as well as PR like copay co-insurance and deductibles as well as non-covered services unless employers do not exclude it and service must be in IRS qualified medical expenses list 502.

    Contribution Limits (2026)

    No contribution limits are set by IRS, it's up to the employer to decide maximum amount.

  2. QSEHRA

    It stands for Qualified Small Employer HRA. QSEHRA is specially design for small businesses like employers having fewer than 50 employees and are not able to offer group health insurance. However, in this type of HRA, employer gives tax-free money to employees for paying their own health insurance premiums (plans bought on the marketplace) and for certain out of pocket medical expenses same as the standard HRA covers.p>

    Contribution Limits (2026)

    IRS sets limits:

    • Up to $6,450 for individual (self only coverage)
    • Up to $13,100 for family coverage (i.e. spouse, dependents)
    Note, it's compulsory that employee not be enrolled in group health plan nor employer offers it to stay eligible for QSEHRA.

  3. ICHRA

    It stands for Individual Coverage HRA. This type of HRA is suitable for any size of organizations / businesses and specially design to replace traditional health group insurance with individual health insurance system. However, in ICHRA, employer gives tax free money to employees to buy their own individual health insurance (through marketplace or directly from insurance company) and other qualified medical expense like standard HRA.

    Here are some key points:

    1. Employees must have individual coverage. Mean no group health coverage. As ICHRA only allowed to those who has no group health insurance.
    2. Employer can vary contributions by employee class i.e. full-time vs part time, salaried vs hourly.
    In short, employers of any size who want to shift away from group plans and let employees choose their own insurance.
    Contribution Limits (2026)

    No contribution limits are set by IRS, it's up to the employer to decide maximum amount.

  4. EBHRA

    EBHRA stands for Excepted Benefit HRA. EBHRA is design for covering exceptional benefits that are not usually be fully covered by group health plan such as:

    • PR (deductibles, coinsurance & copay)
    • Dental and vision coverage
    • COBRA or Medicare premiums
    • Short-term health insurance
    • Other limited-scope benefits
    Note, EBHRA is not covering all qualified medical expenses listed by IRS nor primary health insurance (group plan) premiums except COBRA and Medicare.

    In short, employers who already offer group health insurance but want to give extra funds for things the main plan doesn't’t fully cover.
    Think of it like bonus mini HRA or side money.

    Contribution Limits (2026)

    IRS sets maximum limit for EBHRA up to $2,200 per year.

  5. Retiree HRA

    It is specially designed for retired employees of the company. Normally, this type of HRA is offered by union, government job, or other high end legal entities to their employees. Usually employer puts money into the account (monthly or annually) tax free, and employee can utilized these funds for:

    • Medicare premiums (Parts B, D, Medicare Advantage)
    • Medigap (supplemental insurance) premiums (we will learn it deeper in upcoming lessons)
    • Dental, vision care, prescription drugs and other qualified medical expenses list by IRS.
    • PR (copays, coinsurance, deductibles)
    • Some long-term care insurance premiums but not covers short term insurance plan that are non-ACA compliance.
    Contribution Limits (2026)

    No contribution limits are set by IRS, it's up to the employer to decide maximum amount.

HRA Type Employer
Size		 Requires
Group Plan?		 Can Replace
Group Plan?		 Annual Limit
(2026)		 Covers
Standard HRA Any size Usually yes No No IRS limit, Employer decides Deductibles, copays, coinsurance, other qualified medical expenses listed by IRS.
QSEHRA 50 only No Yes $6,450 / $13,100 Individual insurance premiums + qualified medical expenses. Must enrolled in individual health plan nor group health plan.
ICHRA Any size No Yes No IRS limit, Employer decides Individual insurance premiums + qualified medical expenses. Must enrolled in individual health plan nor group health plan.
EBHRA Any size Yes No $2,200 Dental, vision, COBRA & Medicare premiums, short-term insurance, and other limited expenses. Not covers primary health plan (group plan) premiums.
Retiree HRA Any size (often large) No N/A No IRS limit, Employer decides Retiree medical costs, Medicare premiums. Not covers short term insurance plan's premiums.

In short,

Standard HRA → General reimbursement account, broad and flexible.
QSEHRA → For small employers, replaces group insurance.
ICHRA → For any employer, replaces group insurance with individual coverage.
EBHRA → “Extra” mini-HRA for dental/vision/COBRA on top of group insurance.
Retiree HRA → Helps retirees pay for Medicare or other health costs.

Saving Accounts Comparison

Feature HSA FSA HRA
Who contributes Individual + Employer Employee (via payroll) + Employer Employer only
Ownership You (Individual) Employer Employer
Rollover Yes, any unused funds are roll over to next year Unused funds are lost with exemption like extend 2.5 months or rollover $680 only to next year as per employer decision. Employer decides whether funds are rollover to next year or unused funds are lost
Portability Yes, it remains with individual. No, upon job switch or leave, employee loose access to FSA No, upon job switch or leave, employee loose access to HRA
Tax advantages Triple tax benefit Pre-tax contributions Tax-free reimbursements
Requires HDHP Yes No No
Annual limit (2026) $4,400 / $8,750 $3,400 Employer chooses (some types have limits set by IRS)
Lesson Discussion

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