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HRA, HSA, FSA, SDHP - What's the Difference?

By Compuquotes Team on April 19th, 2008

Health Insurance

HRAs, HSAs, FSAs, and SDHPs are all means of covering the costs of healthcare that isn't covered by general healthcare plans. These different types of health-related accounts are commonly offered by employer groups. However, while the acronyms all sound similar, each type of account works quite differently.

Flexible Spending Accounts (FSAs)

Medical FSAs are usually offered alongside traditional managed healthcare plans. These are most commonly used for the purpose of paying for medical expenses that aren't covered by the standard plan, such as co-payments, co-insurance, and deductibles. Services that aren't covered by the plan, such as dental, vision, and prescription services, may also be covered by an FSA. However, a medical FSA cannot cover an employee's health insurance premiums, any procedures or prescriptions used for cosmetic purposes, or items for 'general health' improvement, such as non-prescription vitamins. All items covered must be for the treatment of a specific medical condition.

Employers can choose to set an annual cap for a medical FSA. The IRS sets a default cap of $5,000, which the employer can modify to a lower figure if they wish to minimize the risk they incur by pre-funding the account.
Health Reimbursement Accounts (HRAs)

Also known as Health Reimbursement Arrangements, these allow an employer to reimburse certain types of medical expenses of participating employees. Generally an HRA reimburses expenses that aren't covered by the company's general managed care plan. For example, co-pays, co-insurance, deductibles, and non-eligible services (such as dental or vision) may be reimbursed by the HRA.
The HRA must set out qualified expenses at its inception. However, employers do have plenty of flexibility in deciding what types of expenses can be included, and may also decide other aspects such as whether or not funds can roll over from one year to the next. Although the name suggests a fund must be set up for reimbursing expenses, this is not necessarily the case. Instead, the employer can reimburse claims as they arise. Reimbursement of claims is tax-destructible for the employer as long as those claims qualify.
Health Savings Accounts (HSAs)

HSAs combine a savings account with a high-deductible health plan. Funds in the savings account are used to pay healthcare expenses that aren't covered by the HDHP, such as deductible and co-payment requirements. In addition, HSAs can cover a large range of medical expenses such as alternative treatments such as homeopathy, non-prescription medications, and even travel expenses relating to healthcare visits.

HSA owners have the additional benefit of being able to contribute before-tax dollars to the account, meaning that the money they spend on healthcare expenses stretches further. In addition, the HSA can function as an investment account in the same way as an IRA can, with similar restrictions and benefits. For example, investment earnings are tax-free, as long as they remain in the account or are used only for medical expenses.

Self-Directed Health Plans

SDHPs focus on the provision of preventative healthcare. The owner of an SDHP has access to a savings account that their insurer contributes to each quarter, and the funds in the account are used to cover the costs of preventative healthcare such as physical exams and check-ups, diagnostic and screening services, immunizations, and home visits.

These plans have low monthly premiums, but have a high deductible that applies to non-preventative healthcare services. In addition, co-pays are required for non-preventative services and visits.

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