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Consumer-directed health accounts: FSA, HDHP/HSA, and HRA

Consumer-directed health accounts: FSA, HDHP/HSA, and HRA

Consumer-directed arrangements pair a health plan with a tax-advantaged spending account. The insured, rather than the insurer, decides how to spend the account dollars on qualified medical expenses, so cost-consciousness is the design goal. For the exam, you are almost always being tested on four facts about each account: who owns it, who may fund it, what happens to unused money, and whether it travels with the employee.

A three-column comparison chart titled Consumer-Directed Health Accounts, with the subtitle: who owns it, who funds it, what rolls over, and is it portable. The left column, labeled F S A, says: owner is the employer's plan; funded by employee pre-tax salary reduction, with the employer allowed to add; rollover is use-or-lose with only a limited carryover or grace period; portable, no. A footnote adds that a general-purpose F S A blocks H S A funding. The middle column, labeled H D H P plus H S A, says: requires a qualifying high-deductible health plan; owner is the individual; funded by the employee, the employer, or others; rollover means the balance carries forward every year; portable, yes. A footnote adds that Medicare enrollment ends contribution eligibility. The right column, labeled H R A, says: owner is the employer; funded by the employer only, with no employee deferrals; it reimburses substantiated medical expenses; rollover is the employer's decision; portable, generally no. A footnote adds that some designs reimburse individual plan premiums. A banner across the bottom states that the underlying accident and health policy, including a high-deductible health plan, still must satisfy Texas policy provision and coverage requirements under Texas Insurance Code Chapter 1201 and Title 8.
FSA, HDHP/HSA, and HRA compared by ownership, funding, rollover, and portability.

Flexible Spending Account (FSA)

An FSA is an employer-sponsored account funded primarily by the employee's pre-tax salary reduction; the employer may also contribute. The employee elects an annual amount at enrollment and draws on it for qualified medical, dental, and vision expenses.

  • Money is set aside before income and payroll taxes, and reimbursements are tax-free.
  • The classic feature is "use-or-lose": amounts not spent by the end of the plan year are generally forfeited, unless the plan adopts a permitted grace period or a limited carryover.
  • The account is not portable — it exists only as part of the employer's plan.
  • An FSA does not require any particular type of medical plan, but a general-purpose health FSA is disqualifying "other coverage" that blocks HSA contributions.

High-deductible health plan (HDHP) with a Health Savings Account (HSA)

An HDHP is an insured or self-funded medical plan with a deductible and out-of-pocket maximum that fall inside federally prescribed ranges that are indexed each year. Most services apply to the deductible first, although preventive care may be covered before the deductible is met.

An HSA is the savings vehicle that only an HDHP enrollee may fund. Key points:

  • The account is a trust or custodial account owned by the individual, not the employer.
  • Eligibility requires coverage under a qualifying HDHP and no disqualifying other coverage; enrollment in Medicare ends contribution eligibility.
  • Contributions may come from the employee, the employer, or a family member, up to an annual federal limit, and are tax-favored; earnings grow tax-deferred.
  • Distributions for qualified medical expenses are tax-free. Non-qualified withdrawals are taxable and, before the statutory age, subject to an additional penalty tax.
  • Unused balances roll over indefinitely and are fully portable at job change or retirement.

Health Reimbursement Arrangement (HRA)

An HRA is funded solely by the employer — employees may never make salary-reduction contributions. It is typically a notional account: the employer reimburses substantiated medical expenses tax-free rather than handing over cash. The employer's plan document controls the annual amount, the eligible expense list, and whether unused amounts carry forward. HRAs are generally not portable, though an employer may permit access after termination or retirement, and some HRA designs may reimburse individual health insurance premiums.

Texas context

These are account designs layered on top of insurance. The underlying accident and health policy — including an HDHP — remains subject to the policy provision, form, and disclosure requirements for accident and health insurance in Texas (Tex. Ins. Code ch. 1201) and to the coverage requirements of Title 8, Health Insurance and Other Health Coverages (Tex. Ins. Code Title 8). A high deductible does not excuse an insurer from mandated benefits or required contract provisions.

Sample questions

Which consumer-directed health account is a trust or custodial account owned by the individual, with unused balances that roll over indefinitely?

  • A health flexible spending account (FSA)
  • A health reimbursement arrangement (HRA)
  • A health FSA that has adopted a permitted grace period
  • A health savings account (HSA)
Preview

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