4.2 Flexible Spending Accounts & Health Reimbursement Arrangements

Flexible Spending Accounts & Health Reimbursement Arrangements

Quick Answer: FSAs and HRAs are employer-established, tax-advantaged accounts that reimburse medical expenses, but unlike HSAs they are owned by the employer and generally not portable. For 2026, the excepted-benefit HRA limit is $2,200, the health FSA salary-reduction limit is $3,400, and FSAs may preserve unused funds only through a $680 carryover or a 2.5-month grace period.

Flexible Spending Accounts (FSAs)

A Health Flexible Spending Account (FSA) is an employer-established, employer-owned benefit funded by employee salary reduction through a Section 125 cafeteria plan. Employees elect an annual contribution amount during open enrollment, and the full annual election is available on the first day of the plan year (the uniform coverage rule). Contributions are pre-tax, and reimbursements for qualified medical expenses under IRC §213(d) are tax-free.

The defining feature of an FSA is the use-it-or-lose-it rule: any balance unused at the end of the plan year is forfeited to the employer. The IRS permits an employer to adopt one of two optional relief mechanisms:

• A carryover (rollover) of up to $680 of unused funds into the next plan year, or
• A 2.5-month grace period during which remaining funds may be spent on qualified expenses.

An employer may offer either the $680 carryover or the grace period, but not both. The annual FSA contribution limit is set by the IRS and adjusts periodically; the limit is announced by the IRS for the plan year rather than fixed in this guide.

Health Reimbursement Arrangements (HRAs)

A Health Reimbursement Arrangement (HRA) is an employer-funded, employer-owned arrangement that reimburses employees for qualified medical expenses tax-advantaged. Unlike an FSA, an HRA is funded solely by the employer — employees cannot contribute — and the employer sets the reimbursement terms, eligible expenses, and whether unused balances roll forward. HRAs are not portable: when employment ends, the HRA generally terminates.

Excepted-Benefit HRA

An excepted-benefit HRA is a narrow type of HRA that may be offered alongside a traditional group health plan to reimburse excepted benefits — primarily dental and vision coverage, plus limited supplemental medical benefits. For 2026, the maximum annual excepted-benefit HRA amount is $2,200 per employee. Because it covers excepted benefits only, it does not disqualify an employee from HSA eligibility when paired with an HDHP.

Qualified Small Employer HRA (QSEHRA)

A QSEHRA allows a small employer — generally one with fewer than 50 full-time-equivalent employees (FTEs) that does not offer a group health plan — to reimburse employees tax-free for medical care, including individual health insurance premiums. Reimbursements are capped at an annual limit set by the IRS that adjusts each year, with separate limits for self-only and family coverage. Unlike a general HRA, a QSEHRA may be used to pay individual health insurance premiums, and employees who receive QSEHRA reimbursements may lose eligibility for the ACA premium tax credit for the months they are reimbursed.

HSA vs. FSA vs. HRA

The distinction that most often appears on the exam is ownership and portability: only the HSA travels with the individual. The FSA's use-it-or-lose-it rule (with its $680 carryover or 2.5-month grace period) and the HRA's employer-funded, employer-controlled nature are the recurring test points.

Limited-Purpose and Post-Deductible FSAs

A limited-purpose FSA (or limited-scope FSA) reimburses only dental and vision expenses, or only medical expenses incurred after the HDHP deductible is met (a post-deductible FSA). Because it is not first-dollar medical coverage, a limited-purpose or post-deductible FSA does not disqualify an employee from contributing to an HSA. This pairing — HDHP + HSA + limited-purpose FSA — is a common, exam-tested design that maximizes tax-advantaged spending while preserving HSA eligibility.

Dependent Care FSAs Are Different

A dependent care FSA reimburses childcare (daycare, preschool, before/after-school care) so the employee can work, and is governed by IRC §129 — it is not a health FSA and does not pay medical expenses. Do not confuse the two: only the health FSA reimburses §213(d) medical care; the dependent care FSA has a separate annual limit (set by the IRS) and different eligibility rules.

HRA Plan Design Variations

Within the employer-set HRA framework, common designs include the group-health-plan HRA (general medical reimbursement integrated with an employer plan), the excepted-benefit HRA ($2,200 in 2026 for dental/vision/supplemental), the QSEHRA for small employers, and the recently expanded Individual Coverage HRA (ICHRA) that reimburses individual-market premiums and can be offered to classes of employees. ICHRAs are an alternative to traditional group coverage but are excluded from this guide's tested facts; the recurring exam focus is the excepted-benefit HRA limit, QSEHRA eligibility, and the ownership/portability contrast with HSAs.