Can I have an HRA and an FSA at the same time?

Navigating employee benefits can often feel like piecing together a complex puzzle, especially when it comes to healthcare accounts. A common question for both employees and employers is: can I have an HRA and an FSA at the same time? The answer is nuanced, but understanding the rules can unlock significant savings and flexibility in how you manage healthcare costs. For businesses, offering the right combination of these accounts can be a game changer for attracting and retaining top talent, while for employees, it's about making the most of their tax-advantaged dollars. This guide will walk you through the possibilities of using an HRA and FSA together, ensuring you can make informed decisions for your financial well-being.

Can You Have Both HRA and FSA at the Same Time?

Generally, the Internal Revenue Service (IRS) does not permit you to have a general-purpose Health Reimbursement Arrangement (HRA) and a standard Health Flexible Spending Account (FSA) at the same time from the same employer. The primary reason for this restriction is to prevent "double-dipping," which means using tax-advantaged funds from two sources to reimburse the same medical expense. Both HRAs and FSAs allow you to pay for qualified medical expenses with pre-tax money, and the government has rules in place to ensure this benefit isn't improperly used.

However, this general rule has several important exceptions. The ability to combine these accounts depends on the specific types of HRA and FSA being offered. For instance, certain HRAs are designed to be compatible with other health accounts, and some FSAs are limited in scope, which allows them to be paired with an HRA. Understanding these specific combinations is the key to leveraging both an HRA and FSA together for maximum benefit.

Which HRA and FSA Combinations Are Allowed by Law?

While a standard HRA and a general-purpose FSA are typically not compatible, the IRS allows for specific pairings that offer employees greater flexibility. The most common and permissible combinations involve a Limited-Purpose FSA (LP-FSA). An LP-FSA can be paired with most types of HRAs, including a standard HRA, an Individual Coverage HRA (ICHRA), and a Group Coverage HRA (GCHRA).

Here are the primary combinations allowed:

HRA with a Limited-Purpose FSA (LP-FSA): An LP-FSA restricts reimbursements to qualifying dental and vision expenses. Because it doesn't cover general medical expenses, it doesn't conflict with a general-purpose HRA. This allows an employee to use their HRA for medical costs and their LP-FSA for dental and vision services, preserving the HRA funds for other out-of-pocket needs.

ICHRA with a Medical FSA: You can use an Individual Coverage HRA (ICHRA) and a medical FSA together, but you must follow specific coordination rules to avoid double-dipping. Typically, the HRA funds must be used before the FSA funds, unless your employer's plan documents state otherwise.

HRA and a Dependent Care FSA (DC-FSA): A Dependent Care FSA is used for child and adult care expenses, not medical costs. Therefore, it can always be offered alongside any type of HRA without any conflict.

It is important to note that a Qualified Small Employer HRA (QSEHRA) cannot be paired with any type of FSA from the same employer, including a limited-purpose one.

How HRA and FSA Work Together for Maximum Benefits

When you have both an HRA and a compatible FSA, it's essential to understand the coordination of benefits rules to use them effectively. The IRS has set a default "ordering" rule for reimbursements. Unless your employer's plan documents specify otherwise, you must exhaust the funds in your HRA before you can tap into your FSA for the same type of expense.

For example, if you have a $500 medical bill and have funds available in both your HRA and a compatible medical FSA, the HRA must be the first payer. If your HRA covers the full amount, you cannot seek reimbursement from your FSA. However, if your HRA only covers $300 of the bill, you could then use your FSA to cover the remaining $200. Some employers may design their plans to allow the FSA to be used first, which can be advantageous since FSA funds are often "use-it-or-lose-it" at the end of the year. Strategic planning is crucial to maximize your healthcare savings with both accounts.

What Happens When Your Employer Offers Both Options?

If your employer offers both an HRA and a compatible FSA, you have a valuable opportunity to enhance your healthcare savings. The decision-making process should begin with a clear understanding of your anticipated medical needs for the upcoming year. Consider your regular prescriptions, planned procedures, and dental or vision needs.

Employers are required to provide clear communication and plan documents that outline how the accounts can be used together, including the order of reimbursement. A common misconception is that you can pick and choose which account to use for any given expense, but the plan's rules must be followed to remain compliant. Carefully review these documents and consult with your HR department to clarify any questions. This will help you avoid any compliance issues and make the most of the benefits your employer provides.

HRA vs. FSA: Which Should You Choose for Your Needs?

If you have to choose between an HRA and an FSA, the best option depends on your personal circumstances, such as your expected healthcare expenses, your desire for flexibility, and your employer's contribution strategy. An HRA is entirely funded by the employer, which means you receive a healthcare allowance without any impact on your salary. The funds are owned by the employer, and unused amounts may or may not roll over, depending on the plan design.

Conversely, an FSA is funded by you, the employee, through pre-tax payroll deductions, though employers can also contribute. This allows you to set aside money for predictable expenses, but the funds are typically subject to a "use-it-or-lose-it" rule at the end of the plan year, though some employers may offer a carryover option or grace period. When making your choice, consider your family's health needs and your financial situation. If your employer offers a generous HRA contribution, it might be the more valuable option, especially if the funds roll over. However, if you have predictable, high out-of-pocket costs, an FSA may provide more direct control and savings.

Can You Use HRA and FSA for the Same Medical Expense?

No, you cannot use funds from both an HRA and an FSA to reimburse the same medical expense. This practice, known as "double-dipping," is prohibited by the IRS. When you submit a claim for reimbursement from either account, you typically must certify that the expense has not been reimbursed from any other source.

Proper documentation is key to ensuring compliance. Keep detailed records of your medical expenses and which account was used to pay for them. If you accidentally receive reimbursement from both accounts for the same expense, you should notify your benefits administrator immediately to correct the error. Failure to do so can lead to tax penalties and other compliance issues.

How to Maximize Your Healthcare Savings with Both Accounts

To maximize your savings when you have access to both an HRA and a compatible FSA, strategic expense planning is essential. Start by allocating your expected expenses to the appropriate account. For example, if you have a Limited-Purpose FSA, designate it for your anticipated dental and vision costs for the year. This frees up your HRA funds for general medical expenses, co-pays, and deductibles.

Modern benefits solutions, like Individual Coverage HRAs (ICHRAs), offer even greater flexibility and can be a powerful tool for optimizing health benefits. An ICHRA provides employees with tax-free funds to purchase their own health insurance plan, offering a level of choice and personalization that traditional group plans often lack. When paired with the right decision-support tools, an ICHRA can help employees find the perfect coverage for their needs while allowing employers to control costs and simplify administration.

At Venteur, we specialize in making benefits like ICHRAs simple and accessible. Our platform is designed to help both employers and employees navigate the complexities of health benefits with ease. We believe that everyone deserves to have control over their health and financial well-being, and our solutions are built to empower you to make the best choices for your unique needs. With Venteur, you can be confident that you're getting the most out of your health benefits, today and in the future.