Employers struggling to offer the health and welfare benefits employees prefer may find that certain options do not mix well. In fact, employers may wonder if simultaneous sponsorship of an FSA, HRA, and HSA is possible or even preferable. The first and most important decision to make is whether it is possible to supplement health insurance with FSAs, HRAs, and HSAs under current laws. Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, as published by the Internal Revenue Service (IRS) may provide some answers.
Three Options That Supplement Health Insurance Plans
Employees may have the option of choosing one of the following:
Flexible Spending Account (FSA) – An employer must sponsor this account. In addition to the most common FSA, employees may choose from (1) a limited purpose health FSA, or (2) a post deductible health FSA.
Health Reimbursement Arrangement (HRA) – This tax-advantaged account is employer funded (employee contributions are not permitted).
Health Savings Account (HSA) – This account, which must be paired with a high deductible health insurance (HDHI) plan. To qualify, you must:
- Have coverage under a High Deductible Health Plan
- Have only health coverage that is permitted under “Other Health Coverage”
- Not be enrolled in Medicare
- Not be claimed as a dependent on another taxpayer’s return
Combining FSA, HRA, and HSA
Certain types of HRAs may be used simultaneously with an HSA as noted on Form 969:
- Limited Purpose HRA (i.e., reimbursement for dental or vision expenses only)
- Suspended HRA
- Post Deductible HRA
- Retirement HRA
An FSA is considered “other health coverage” according to Form 969.
Generally, you cannot contribute to an HSA if you have an HDHP and either an FSA or an HRA. Some exceptions to this appear on IRS Form 969 (and as described above).
So, you can have an HSA and an FSA if the FSA is, for example, either a limited-purpose health FSA or a post deductible health FSA.
HRA and FSA
If a participant is covered by an HRA and an FSA, the IRS has established coordination rules which provide that amounts credited to the HRA must be used first before the FSA can pay or reimburse eligible health care expenses. If an employer wants to reverse this default rule as a matter of plan design, an explicit provision to that effect is required in the HRA and health FSA plan documents (see IRS Notice 2002-45).