FSAs, HSAs, or HRAs: What's Best for Your Business?

There are several options for managing benefit costs, including health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs). When it comes to HRA vs. HSA vs. FSA, what are the best options for your business?

Understanding Your Health Benefit Account Options

Although there may be similarities between them, HSAs, FSAs, and HRAs are different from one another, and each one has distinct benefits for you and your employees. Understanding the differences can help you determine which type of benefit account arrangement is the best solution for your HR needs and save you valuable time and money.

Health Savings Accounts (HSAs)

Before deciding whether to offer an HSA, it’s important to understand what it is and how it works.

What Is a Health Savings Account?

HSAs are an elective benefit that an employer can offer as a way for employees to set aside tax-advantaged medical savings to pay for copays, deductibles, and other qualified medical expenses. But there's a catch: Only individuals who (1) are covered by a qualified high-deductible health plan (HDHP) (and have no other disqualifying health coverage), as determined by the IRS, (2) are not enrolled in Medicare, and (3) are not claimed as a tax dependent by someone else are eligible for an HSA.

Contributions are made into the account by the employee and/or the employer up to a maximum amount each year. For 2025, that amount is $4,300 for individual coverage and $8,550 for family coverage. Individuals aged 55 and older can make an additional $1,000 catch-up contribution to their HSA.

An HSA works much like a standard checking account (often including a debit card), and it's up to the employee to track their contributions, expenses, and reimbursements. HSAs also provide the option for employees to invest their money in mutual funds.

Who Is an HSA For?

HSAs are a suitable option for healthy employees who generally receive medical care for predictable, annual checkups and have infrequent medical needs. Employees covered by Medicare are not eligible to contribute to an HSA. However, HSA funds that have accrued when an employee was eligible for the HSA arrangement can be used to pay Medicare premiums when the employee turns 65.

Whatever employees save in HSAs can be kept, grow tax-free, and then withdrawn, even years later. Withdrawals are still tax-free as long as the money is spent on qualified medical expenses. Additionally, at age 65, withdrawals can be made penalty-free (still taxed as ordinary income) for any purpose.

Who Owns the Account?

HSAs are owned by the individual employee and follow the individual even if that person resigns, retires, or is terminated. This portability is a key difference from HRAs, which are typically employer-owned.

What Expenses Are Covered by a Health Savings Account?

Qualified medical expenses include most medical care, such as dental, vision, and IRS-eligible over-the-counter drugs. A few examples of expenses are:

• Office visit copays
• Health insurance deductibles
• Dental expenses (tooth extraction, fillings, etc.)
• Vision care (eye exams and eyeglasses)
• Prescription drugs and insulin
• Medicare premiums
• A portion of the premiums for a tax-qualified, long-term care insurance policy
• Hearing aids
• Imaging (X-rays, MRIs)
• Wheelchairs, walkers, and crutches

IRS Publication 502 provides a detailed list of covered medical and dental expenses.

Paychex also partners with the HSA Store, which offers an extensive selection of HSA-eligible items and provides employees with a convenient way to use their funds.

How To Use an HSA to Your Advantage

A high-deductible health plan with an HSA  can save a business money because HDHP premiums generally are lower than traditional plans.can save a business money because HDHP premiums generally are lower than traditional plans.

There are employer tax benefits as well. Reducing an employee's taxable income decreases your tax liability. The lower an employee's Federal Insurance Contributions Act (FICA) tax liability, the less you're required to pay. However, this does not apply to PEO employer clients that are under the PEO Section 125 (S125) Plans.

Flexible Spending Accounts (FSAs)

To understand how FSAs can benefit both your business and your employees, let’s start with the basics.

What Is a Flexible Spending Account?

FSA is an umbrella for both the Healthcare FSA UME sometimes referred to as the Unreimbursed Medical Expenses or UME account) and the Dependent Care Account (DCA). The Healthcare FSA is used for eligible medical, dental, and vision expenses, while the DCA covers dependent care expenses such as childcare.

Both of these options allow contributions to be deducted from an employee’s paycheck before federal income tax; FICA tax, and (in most states) state income tax are applied, resulting in tax savings. Both employers and employees can contribute to the FSA. To use the UME, employees will receive an FSA debit card that can be used at the point of sale, or they can file claims for reimbursement for eligible medical, dental and visions expenses while all DCA usage will be done in the form of reimbursement. There is a yearly cap on the amount that can be contributed to an FSA, with the current cap being $3,300.00 for individual UME and $5,000.00 per household for DCA. The UME cap has shown a trend of increasing annually.

Who Is an FSA For?

A medical FSA is a good choice for employees who expect to have out-of-pocket medical care costs and wish to pay for those expenses with pretax funds. Additionally, employees with a medical FSA have immediate access to the full amount they elected to contribute for the tax year, making it a good option for those who have medical expenses early in the plan year. FSAs cannot be used to pay for Medicare premiums.

A Dependent Care Flexible Spending Account is a good choice for employees who expect to have out-of-pocket childcare or elder care costs and wish to pay for those expenses with pretax funds. DCFSA funds are made available for reimbursement only as they are contributed to the account through payroll deductions.

Who Owns the Account?

The employer owns the FSA. Once an employee terminates employment, he or she is generally no longer eligible to participate in the medical FSA (unless he or she elects continuation coverage) and will forfeit any unreimbursed contributions left unclaimed. Employees are given 90 days following their end date with the company to file any claims for services that took place while they were active and eligible for that calendar year. Further, depending on the employer's election, unused contributions for active employees are either forfeited or a portion can be carried over to the next plan year:

• Grace period. You can elect to offer a 2.5-month grace period after the plan year ends for enrolled employees to continue to use the prior year FSA or DCFSA funds. If you offer the grace period, any unclaimed contributions remaining after the grace period are forfeited. The remaining money stays with the employer. The grace period is not an option if you offer the carryover option.
• Carryover. Alternatively, you can elect to allow employees to carry over up to $660 from 2025 into 2026 (you determine the limit up to this amount) of unspent UME funds to next year's plan. Unspent UME funds over this limit are forfeited to the employer. Carryover is not available if your FSA offers the grace period, and carryover is not an option for DCFSA plans.
• Forfeiture. If you do not choose either the grace period or the carryover options, all contributions that are unclaimed by the annual deadline are forfeited. The deadline to file claims against prior year funds is March 31. Any funds remaining in the account following this date are subject to forfeiture.

What Expenses Are Covered by a Flexible Spending Account?

Except for Medicare premiums, an FSA covers many of the same qualified medical and dental expenses as an HSA. For a detailed list of what is and isn't covered, review IRS Publication 502.

Paychex partners with the FSA Store, which offers an expansive list of FSA-eligible items and allows employees to use their funds.

With a Flexible Spending Account (FSA), Are Over-the-Counter Medications Eligible for Reimbursement?

Under the CARES Act law, a section of the Affordable Care Act that prohibited FSAs, Health Savings Accounts (HSA), and Health Reimbursement Agreements (HRA) from reimbursing expenses for over-the-counter (OTC) medical products was reversed. Any OTC medical products purchased after Dec. 31, 2019, no longer require a prescription to be eligible for reimbursement. The CARES Act also expanded eligibility to include menstrual care products, such as tampons, pads, sponges, and similar products purchased after Dec. 31, 2019, as qualified medical expenses.

How To Use an FSA to Your Advantage

Employee contributions to a medical FSA are made on a pretax basis. Pretax contributions from the employee reduce the employee's taxable income and tax liability. Employers are not required to pay the employer portion of the Social Security tax on the contributions employees make to their FSAs. Employees who have an HDHP paired with an HSA are only allowed to utilize a certain type of FSA; special conditions and restrictions generally apply.

In 2025, an employee can carry over up to $660 of unused health FSA funds into the next plan year. However, for PEO clients under PEO S125 Plans, the maximum carryover amount is limited to $550. Any unused funds above the applicable limit will be forfeited to the plan, in accordance with the IRS “use-it-or-lose-it” rule.

Health Reimbursement Arrangements (HRAs)

HRAs offer employers a flexible way to support their employees’ healthcare needs — here’s how they work.

What Is a Health Reimbursement Arrangement?

A health reimbursement arrangement is an employer-funded plan that supplements health insurance benefits and covers a range of medical expenses not covered by insurance. HRAs are among the most flexible types of employee benefits plans. Unlike an HSA or FSA, employees cannot contribute to an HRA.

Who Is an HRA For?

An HRA can be advantageous for all employees. HRAs can reimburse a wide range of qualified medical expenses, including Medicare premiums, and can be used to cover costs for the employee, their spouse, and dependents. Among tax-advantaged health accounts, the HRA is one of the most flexible options.

There's also another HRA option available for businesses with 50 or fewer full-time employees (including full-time-equivalent employees) during the preceding year. This is the qualified small employer health reimbursement arrangement (QSEHRA), which can be used to reimburse eligible employees for qualified medical expenses. The cost of their premiums can be tax-free when the employer does not provide medical insurance. The maximum amount available under a QSEHRA for any year cannot exceed the specified dollar limits. For 2025, those limits are $6,350 for self-only coverage and $12,800 for family coverage. The discussion below pertains to general HRAs, not QSEHRAs.

Who Owns the Account?

HRAs are owned and funded entirely by the employer. This attribute is the biggest difference between HRA and HSA benefits. There are no limits to how much an employer can contribute. Employers can roll over unused funds into the next year or set a maximum rollover limit.

What Expenses Are Covered by an HRA?

An HRA, like a medical FSA, may reimburse only qualified medical expenses. Reimbursements from an HRA may be tax-free if they are used for qualified medical expenses established by the employer. For a detailed list of qualifying expenses, review IRS Publication 502.

However, unlike a traditional medical FSA, an HRA may also be able to reimburse health insurance premiums for current employees, retirees, and COBRA-qualified beneficiaries. Some restrictions may apply.

How to Use an HRA to Your Advantage

For starters, subject to certain conditions and limitations, contributions to an HRA are 100 percent tax-deductible. Because the employer fully funds the plans, the company can make a knowledgeable estimate of its maximum expense for health benefits for the year. Additionally, reimbursements are tax-free for employees up to the maximum amount for that coverage year. Finally, HRAs are not a "use it or lose it" account, where any balance expires at the end of each plan year. Employers can choose to carry over a set amount of unused funds into the next year. This feature results in employers typically incurring a financial responsibility that's less than the total value of an employee's HRA.

HRA vs. HSA vs. FSA Comparison Chart

The comparison chart below outlines the main differences between HRAs, HSAs, and FSAs for a simplified, at-a-glance comparison.

Benefits of HSAs, HRAs, and FSAs

Health reimbursement arrangements, health savings accounts, and flexible spending accounts all offer employees simplified, tax-advantaged ways to save money, manage healthcare costs, and improve their overall financial well-being. These accounts not only reduce out-of-pocket expenses and tax liability but also reflect an employer’s investment in employee health, creating a ripple effect across the organization.

Each account type offers unique advantages for both employees and employers. Some benefits are immediately visible, while others — like long-term savings or improved employee engagement — may be less obvious but equally impactful.

HRAs

HRAs can also be an attractive option to consider with the following benefits:

• No IRS Contribution Limit: The IRS does not impose an annual contribution cap on HRAs, meaning employers can contribute more.
• Potential for Cost Recovery: Employers may recoup unused funds. At the end of each plan year, these funds are forfeited to the plan's sponsor.
• Optional Fund Rollover: Employers can choose to allow a portion of unused funds to roll over into the next plan year.
• Funds Return Upon Employee Departure: If an employee leaves the company, any remaining HRA balance will be returned to the employer.
• Flexible Eligibility: Eligibility is not as restricted with an HRA and can be integrated with a wider array of healthcare plans.

HSAs

Health savings accounts offer a range of benefits for both employers and employees. Here’s how they can work to your advantage:

• Automatic Savings: HSAs make savings automatic for employees by giving them the option to have a certain amount deducted directly from each paycheck.
• Lower Premiums with HDHPs: Qualified high-deductible health plans, which are a requirement for an HSA, typically have lower premiums for both the policyholder and the employer.
• No “Use-It-or-Lose-It” Rule: Unlike FSAs or some HRAs, HSA funds never expire. Employees never have to worry about forfeiting any unused funds at the end of each plan year.
• Investment Potential: HSAs are investment vehicles that can enjoy compound growth.
• Triple Tax Advantage: HSAs offer three key tax benefits. Employees do not pay taxes on contributions, investment earnings are non-taxable, and employees do not pay taxes on withdrawals for qualified medical expenses.
• Employer Tax Savings: Employers save money by deducting employee contributions from payroll on a pre-tax basis.
• Simple Administration: HSAs are easy to administer, saving employers time and money by eliminating the need to track reimbursement claims.
• Encourages Smart Healthcare Spending: When employees manage their own funds, they tend to become more engaged and informed healthcare consumers, often making more cost-conscious decisions.

FSAs

From dependent care to medical costs, FSAs help employees stretch their dollars further with these advantages:

• Covers Dependent Care Expenses: FSAs can be structured to cover eligible dependent care expenses, offering broader savings potential.
• Flexible Use-It-or-Lose-It Options: While FSAs generally follow a use-it-or-lose-it model, many employers allow a limited carryover or a short grace period, helping employees maximize their benefits.
• Tax Savings for Employees: Funded primarily through employee pretax deductions, FSAs reduce taxable income, increasing take-home pay.
• Covers a Wide Range of Medical Expenses: Employees can use Health FSA funds to cover a wide range of qualified medical expenses, including:
  • Deductibles and copayments
  • Prescription medications
  • Over-the-counter (OTC) medications
  • Insulin and diabetes-related supplies

Challenges of HRAs, HSAs, and FSAs

For all their advantages, HRAs, HSAs, and FSAs come with tradeoffs. A feature that benefits one group may pose a challenge for another. Understanding the limitations of each option helps employers choose the right benefits mix and ensures employees can use their accounts effectively.

HRAs

HRAs can be helpful, but they have a few drawbacks — especially from the employee’s perspective:

• Employer-Funded Only: Workers are not permitted to contribute to their available funds and must rely on employers to make contributions.
• Forfeiture of Unused Funds: Unused funds are forfeited. Any remaining funds in the account after the plan year ends or when an employee leaves the organization are returned to the employer — unless the employee elects COBRA coverage.
• No Investment Growth: HRAs are not investment accounts and will not grow or enjoy the benefit of compounding interest.

HSAs

While HSAs offer many advantages, there are a few important limitations to consider:

• IRS Contribution Limits: An HSA has annual contribution limits set by the IRS. These limits may not be an issue for some employees and employers, while others may be looking for a vehicle that allows for contributions on a larger scale.
• Limited Investment Options: HSAs can include investment accounts, and those options can be limited. Some investment firms may only offer one type of HSA, while others provide a small handful. In either scenario, it's a narrow selection.
• Eligibility Requirements: An HSA is not an option if an employee does not have a qualified HDHP.

FSAs

While FSAs offer valuable tax savings, they also come with certain restrictions that can make them challenging for employees to manage:

• Specific Eligible Expenses and Substantiation Requirements: Due to strict rules and limited flexibility, FSAs can be difficult for employees to manage.
• Use-It-or-Lose-It Provision: The biggest concern is the use-it-or-lose-it provision — unless the employer offers a grace period or a small carryover amount, unused funds are forfeited at the end of the year.
• Lower Contribution Limits: Contribution limits are lower than HSAs and are subject to annual IRS adjustments.
• Lack of Portability: FSAs are employer-owned and cannot be opened independently, which limits portability.
• Complex Reimbursement Process: Navigating eligible expenses and reimbursement procedures can be confusing, which sometimes results in the underutilization of available funds.

Can You Use an HSA, HRA, and FSA Together?

While HSAs, HRAs, and FSAs each offer standalone benefits, certain situations allow them to be combined if specific rules are followed. The key lies in understanding how each account interacts with the others and how eligibility is determined based on IRS guidelines and plan design.

For example, you can't put money into an HSA if you're also using another health account that pays for medical expenses right away — like a regular Health FSA or HRA — unless that account is set up to work with an HSA. To preserve HSA eligibility, employers may offer a limited-purpose FSA or limited-purpose HRA, which can be used only for qualified dental and vision expenses. These accounts allow employees to take advantage of multiple savings vehicles without disqualifying them from contributing to their HSAs.

Some employers also offer post-deductible HRAs or suspended HRAs, which delay reimbursements for general medical expenses until the minimum deductible of the high-deductible health plan (HDHP) is met. These designs help maintain HSA eligibility while still offering additional financial support.

For employees, strategically using these accounts together can help stretch healthcare dollars. For instance, dental and vision costs can be paid from a limited-purpose FSA or HRA, while preserving HSA funds for future medical needs, or even retirement. Employers also benefit by offering layered benefits that promote flexibility, tax savings, and informed healthcare spending across their workforce.

Which Tax-Advantaged Health Account Is Right for You?

HSA, FSA, or HRA — figuring out which account (or combination) is best for your business isn't always straightforward. Even after comparing the basic features, factors like rollover rules, contribution limits, reimbursement methods, and tax advantages can make the decision feel overwhelming. Add in variables like employee satisfaction, retention concerns, or short-term financial pressures, and the picture becomes even more complex.

Each account type has its strengths. HSAs are ideal for long-term savings and flexibility — especially if you're offering a qualified high-deductible health plan. They offer triple tax savings and allow funds to grow year after year. But they require employees to meet eligibility rules and may not be the right fit if your team prefers low-deductible plans.

HRAs give employers the most control. You decide how much to contribute, what expenses are eligible, and whether unused funds carry over. That flexibility can be valuable — especially for smaller businesses that want to help employees with out-of-pocket costs but keep control of overall healthcare spending.

FSAs are a good middle ground. They're easy to set up and allow employees to save pre-tax dollars for everyday health expenses. But they come with more restrictions — including lower contribution limits and the risk of forfeiting unused funds. FSAs may be especially appealing if you're looking for a budget-friendly option that supports your team without long-term account growth.