Quick Answer
A Health Savings Account (HSA) belongs to an individual, a health Flexible Spending Arrangement (FSA) is part of an employer plan, and a Health Reimbursement Arrangement (HRA) is employer-funded. Each can pay eligible expenses, but ownership, contribution eligibility, tax treatment, carryover, and permitted reimbursements differ. None of these accounts creates insurance coverage.
Start with who owns the arrangement, who funds it, and whether current coverage permits the transaction.
Who Owns and Funds Each Account?
| Account | Funding | Ownership or sponsorship |
|---|---|---|
| Health Savings Account (HSA) | Eligible individual, employer, or another person | Individual account holder |
| Health Flexible Spending Arrangement (FSA) | Employee salary reduction and possibly employer funding | Employer plan |
| Health Reimbursement Arrangement (HRA) | Employer only | Employer plan |
- An HSA generally follows its owner through job changes, and unused amounts carry forward.
- An FSA follows the employer plan. The full annual elected reimbursement is available during the coverage period before all payroll deductions accumulate.
- An HRA does not accept employee salary reductions or personal deposits. Employer-approved carryforward remains plan credit, not the employee's portable cash.
Who Can Make New HSA Contributions?
Ordinary eligibility generally requires all four:
- HSA-compatible coverage, not merely a plan with a high deductible;
- no disqualifying other coverage, which can include certain FSAs or HRAs;
- no Medicare enrollment; and
- no status as another taxpayer's dependent.
Qualifying Bronze and Catastrophic plans bought as individual Marketplace coverage receive special HSA-compatible treatment under current federal rules. A Bronze group plan does not qualify merely because it is Bronze. Eligibility is generally measured monthly, and contributions from every source share the individual's limit.
How Does HSA Tax Treatment Work?
- An eligible personal contribution from after-tax funds may be deductible. Qualifying employer or cafeteria-plan funding is excluded from income and is not deducted again.
- Earnings retained in the HSA can grow without current federal income tax and do not use contribution room.
- A distribution for a qualified medical expense can be tax-free when the expense was incurred after the HSA began, was not reimbursed elsewhere, and was not also claimed as an itemized deduction.
- A nonqualified distribution is generally taxable and faces a 20% additional tax. Age 65 or disability can remove the additional tax without making nonmedical spending tax-free. Death also does not trigger the additional tax; ordinary income treatment remains separate.
- HSA funds generally cannot pay premiums. Exceptions include qualified long-term-care insurance within applicable limits, Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation, health coverage while receiving unemployment compensation, and Medicare or other health coverage when the account owner is at least 65. Medigap premiums remain excluded.
How Do FSA and HRA Reimbursements Differ?
- An FSA reimburses eligible expenses incurred during coverage. It cannot reimburse health-insurance premiums or long-term-care expenses.
- An FSA may allow either a limited carryover or a grace period, but not both. Its terms can permit later claim filing for expenses already incurred during coverage without extending the time to incur expenses.
- An HRA may reimburse eligible expenses and, if the plan allows, health-insurance premiums and long-term-care coverage.
- Account reimbursement never changes the medical policy's exclusions, cost sharing, or coverage decision.
Which Gotchas Trip Students Up?
- Employer funding does not make an HSA employer-owned.
- Keeping an old HSA open does not establish eligibility for new contributions.
- An HSA pays only from available account funds. If a bill applies to an unmet deductible and the balance is short, the insured still owes the remainder; the insurer does not automatically pay it.
- A debit-card approval or distribution report does not prove qualified medical use.
One-Breath Recap
A Health Savings Account belongs to the individual, accepts eligible funding from several sources, and carries forward. New contribution eligibility requires qualifying coverage plus no disqualifying coverage, Medicare enrollment, or dependent status. A health Flexible Spending Arrangement is an employer-plan benefit with full elected reimbursement available during coverage and plan-controlled forfeiture rules. A Health Reimbursement Arrangement is employer-funded and employer-sponsored. Qualified Health Savings Account medical distributions can be tax-free, while nonqualified spending is generally taxable and may face a 20% additional tax. An account pays from its available funds and does not change what insurance covers.
Need more than the recap? Read the full Health Accounts unit.