When it comes to offering benefits to your employees, health-related financial support can make a big difference. If you run a small business, you may have heard terms like FSA, HSA, and HRA. These are different types of accounts that help employees save money on healthcare expenses. Each has its own rules, benefits, and requirements. Understanding them can help you make the right choice for your business and your employees.
Let’s break down what FSAs, HSAs, and HRAs are, how they work, and how they can benefit your small business.
What is an FSA (Flexible Spending Account)?
A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to set aside pre-tax money to pay for qualified medical expenses. This includes things like doctor visits, prescription drugs, over-the-counter medications, and even some dental and vision care.
One of the biggest advantages of an FSA is the tax benefit. Since the money comes out of the employee’s paycheck before taxes, it reduces their taxable income. That means they end up paying less in income taxes, and your business may save on payroll taxes as well.
However, FSAs come with some restrictions. One major limitation is the “use it or lose it” rule. Typically, any money left in the FSA at the end of the plan year is forfeited. Some plans may allow a short grace period or carryover of a small amount (usually up to $640 in 2024), but this depends on how the plan is set up.
FSAs are owned by the employer, not the employee. If the employee leaves the company, they generally lose access to the funds.
What is an HSA (Health Savings Account)?
A Health Savings Account (HSA) is a tax-advantaged account available to people who have a High-Deductible Health Plan (HDHP). HSAs can be funded by the employee, the employer, or both. The money in the account can be used for qualified medical expenses, similar to an FSA.
HSAs have three major tax advantages:
- Contributions are made pre-tax or are tax-deductible.
- The money grows tax-free.
- Withdrawals for qualified medical expenses are also tax-free.
Unlike FSAs, the money in an HSA rolls over year after year, and the account is owned by the employee. That means the funds stay with them even if they leave your company. This makes HSAs an attractive option for employees who want long-term savings for healthcare costs.
In 2025, the contribution limit for HSAs is $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution allowed for people over 55. To be eligible, the employee must be enrolled in a qualifying HDHP and not have other disqualifying health coverage.
What is an HRA (Health Reimbursement Arrangement)?
A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses. Unlike an HSA or FSA, only the employer contributes to the HRA. Employees do not put any of their own money into it.
HRAs are very flexible and can be designed in various ways. Employers can decide how much to contribute, what expenses are eligible for reimbursement, and whether unused funds roll over. HRAs are often used to cover deductibles, co-pays, or other out-of-pocket costs.
One of the newer types of HRAs is the Qualified Small Employer HRA (QSEHRA), which is specifically designed for businesses with fewer than 50 full-time employees. With a QSEHRA, employers can reimburse employees for individual health insurance premiums and other medical expenses, up to a set annual limit. This can be a great alternative for small businesses that cannot afford to offer group health insurance.
Another option is the Individual Coverage HRA (ICHRA), which is more flexible and can be used by businesses of any size. ICHRAs let employers offer different benefits to different classes of employees, such as full-time vs part-time.
HRAs are owned by the employer, so if an employee leaves the company, they typically lose access to the funds unless otherwise specified.
Key Differences Between FSA, HSA, and HRA
While all three accounts help employees with healthcare expenses and provide tax advantages, they differ in several important ways.
Ownership and Portability: HSAs are owned by the employee and go with them if they leave the company. FSAs and HRAs are owned by the employer, and unused funds are usually lost when employment ends.
Contribution Rules: FSAs and HSAs allow employees to contribute pre-tax money. HRAs are funded solely by the employer. HSAs have annual contribution limits set by the IRS, while HRAs have employer-defined limits (within certain rules).
Rollover: HSA funds always roll over from year to year. FSAs may allow limited rollovers or grace periods, but usually, the money must be used by year-end. HRAs may allow rollover, depending on the plan design.
Eligibility Requirements: HSAs require enrollment in a high-deductible health plan. FSAs and HRAs do not have that requirement, although some types of HRAs (like QSEHRAs) have other eligibility rules.
How These Benefits Help Your Small Business
Offering FSAs, HSAs, or HRAs can provide several advantages for your small business. First, they can make your benefits package more attractive to current and potential employees. In today’s competitive job market, employees are looking for more than just a paycheck—they want benefits that help them manage real-life expenses like healthcare.
Second, these accounts offer tax savings. Employee contributions to FSAs and HSAs are pre-tax, which reduces payroll taxes. Employer contributions to HRAs and HSAs are generally tax-deductible as a business expense.
Third, these options provide cost control. If you can’t afford to offer a full group health insurance plan, a QSEHRA or an ICHRA may be a cost-effective alternative. These arrangements let you set a fixed budget for healthcare benefits without the rising costs and administrative burden of traditional health insurance.
Finally, offering these accounts can lead to a healthier and more productive workforce. When employees have financial support for medical expenses, they are more likely to get the care they need, stay healthy, and miss fewer days of work.
Which One Should You Choose
The right choice depends on your business size, your budget, and the needs of your employees.
- If you already offer a group health plan and want to give employees a way to pay out-of-pocket costs with pre-tax dollars, an FSA can be a good fit.
- If you offer a high-deductible health plan, setting up an HSA adds valuable tax benefits and gives employees long-term savings options.
- If you want more control over spending and don’t offer traditional group insurance, a QSEHRA or ICHRA might be ideal.
In some cases, you can even combine certain accounts. For example, you can offer an HSA alongside a limited-purpose FSA (used only for dental and vision care) to provide even more savings.
Final Thoughts for Understanding FSA, HSA, And HRA
Understanding the differences between FSAs, HSAs, and HRAs can help you make smarter decisions for your small business. These accounts not only support your employees’ health needs but also offer tax advantages and cost savings for your business.
As healthcare costs continue to rise, small businesses need flexible and affordable ways to support their teams. By offering one or more of these health benefit accounts, you’re showing that you care about your employees’ well-being, and that can make your business stronger in the long run.
If you’re unsure where to start, consider speaking with a benefits consultant or financial advisor who specializes in small business healthcare plans. They can help you design a program that fits your budget and meets your employees’ needs.
