What Is a Reimbursement Account? FSA, HRA, and HSA Compared

A reimbursement account is an employer-linked arrangement that lets you pay for medical or dependent care costs with money that is never taxed, or taxed far less than your regular paycheck. Three types exist: the Flexible Spending Arrangement (FSA), the Health Reimbursement Arrangement (HRA), and the Health Savings Account (HSA). They differ on who puts money in, who owns it, and what happens to whatever you don’t spend. For 2026, contribution limits rose across all three, and the One, Big, Beautiful Bill Act changed who can open an HSA and how much households can set aside for dependent care.

Flexible Spending Arrangements

An FSA is funded by salary reduction. You pick an annual amount at open enrollment, your employer withholds it from each paycheck before federal income tax, Social Security tax, and (in most states) state income tax, then reimburses you as you incur eligible expenses. FSAs sit inside what the IRS calls a cafeteria plan under Section 125 of the Internal Revenue Code.¹ There are two flavors most workers encounter: the Health FSA and the Dependent Care FSA.

Health FSA

A Health FSA covers out-of-pocket medical costs your insurance doesn’t fully pay, such as copayments, deductibles, prescription drugs, dental work, and vision expenses. For the 2026 plan year, you can contribute up to $3,400 through salary reduction.² Your employer can add money too, but only your contribution counts against that cap.

The main drawback is the use-it-or-lose-it rule. Whatever sits in the account when the plan year ends is generally forfeited. Employers can soften this in one of two ways, but not both: a grace period of up to two and a half months after year-end to incur new expenses, or a carryover of up to $680 of unused funds into the next plan year.² Some plans offer neither, so check your plan documents.

If you leave your job mid-year, Health FSA coverage generally ends on your termination date or at the end of that month, and any remaining balance is forfeited. If you’ve already spent more than you’ve contributed, though, the employer cannot recover the difference from you.

Dependent Care FSA

A Dependent Care FSA covers care expenses for a qualifying person that let you work or look for work: a child under 13, a spouse who can’t care for themselves, or another dependent physically or mentally unable to self-care who lives with you more than half the year.³ Daycare, preschool, before-and-after-school programs, and adult day care all qualify.

Starting with the 2026 tax year, the annual exclusion limit rose to $7,500 per household ($3,750 if married filing separately), up from the longstanding $5,000 cap.⁴ The increase came out of the One, Big, Beautiful Bill Act. Use-it-or-lose-it still applies, and the $680 carryover available to Health FSAs does not extend to Dependent Care FSAs.

Health Reimbursement Arrangements

An HRA is funded entirely by the employer. You cannot contribute your own money. The employer decides how much to put in each year, and the funds reimburse you tax-free for eligible medical expenses.⁵ Because the employer owns the funds, you generally can’t take the balance with you when you leave. That lack of portability is the biggest single difference between an HRA and an HSA.

There’s no IRS cap on how much an employer can put into a standard HRA, and the plan document controls whether unused funds roll over. Two variants come up often enough to know by name.

QSEHRA

A Qualified Small Employer HRA is designed for businesses with fewer than 50 full-time employees that don’t offer group health insurance.⁶ Instead of a group plan, the employer reimburses individual health insurance premiums and other medical costs. For 2026, the maximum annual reimbursement is $6,450 for self-only coverage and $13,100 for family coverage.²

ICHRA

An Individual Coverage HRA lets employers of any size reimburse employees for individual-market health insurance premiums and qualified medical expenses without offering a traditional group plan.⁷ The employee must be enrolled in individual health coverage to receive reimbursements. There’s no statutory cap on how much an employer can contribute.

Health Savings Accounts

An HSA combines a tax-advantaged spending account with a long-term savings and investment vehicle. You own the account outright, it’s fully portable if you change jobs, and the balance rolls over indefinitely with no forfeiture. That ownership is what sets HSAs apart from FSAs and HRAs.

The HDHP Requirement

To contribute to an HSA, you generally must be enrolled in a High Deductible Health Plan. For 2026, an HDHP must carry a minimum annual deductible of $1,700 for self-only coverage or $3,400 for family coverage, and total out-of-pocket costs (excluding premiums) cannot exceed $8,500 for self-only or $17,000 for family coverage.⁸

Starting January 1, 2026, the One, Big, Beautiful Bill Act expanded HSA eligibility in two ways. Bronze-level and catastrophic health plans now count as HSA-compatible regardless of whether they hit the standard HDHP deductible and out-of-pocket thresholds, and they don’t have to be purchased through a marketplace exchange.⁹ Second, people in a direct primary care arrangement can now contribute to an HSA, and HSA funds can pay the periodic fees tax-free, as long as monthly fees don’t exceed $150 per individual or $300 for arrangements covering more than one person.¹⁰ The same law made permanent a safe harbor allowing telehealth and other remote care services before you meet the HDHP deductible without losing HSA eligibility.

Triple Tax Benefit and 2026 Limits

The HSA is the only account available to individuals with all three of these benefits at once: contributions reduce your taxable income, money grows tax-free inside the account, and withdrawals for qualified medical expenses are tax-free.

You and your employer together can contribute up to $4,400 for 2026 self-only HDHP coverage or $8,750 for family coverage.⁸ If you’re 55 or older and not yet enrolled in Medicare, you can add another $1,000 as a catch-up contribution.¹¹

Once your cash balance clears a threshold set by your HSA custodian, often around $1,000 to $2,000, you can invest the rest in mutual funds and other vehicles. After you turn 65, you can withdraw HSA funds for any purpose without penalty; non-medical withdrawals at that point are taxed as ordinary income, similar to a traditional 401(k) or IRA distribution.¹²

How to Choose Between an FSA, HRA, and HSA

The choice usually comes down to which health plan you enroll in and what your employer offers.

If you have access to an HSA-compatible plan, the HSA is generally the strongest option. The triple tax benefit is unique, the balance is yours forever, and it can be invested for the long term. The tradeoff is the HDHP itself: higher upfront costs in any year you have significant medical bills.

A Health FSA fits better if you’re on a traditional health plan with a lower deductible and you have fairly predictable annual out-of-pocket costs. You lower your tax bill on that spending, but you have to estimate reasonably well because leftover funds are lost.

An HRA is entirely an employer decision. The question isn’t whether to sign up but whether your employer offers one, how much they fund it, and what it covers. If your employer offers a QSEHRA or an ICHRA in lieu of group insurance, the reimbursement pays part of the individual policy you buy on your own.

A Dependent Care FSA is a separate decision from the medical choice above. If you pay for daycare, preschool, or adult day care so you can work, use it to shelter up to $7,500 per household from income tax.⁴

Pitfalls to Watch

The 20% HSA Penalty

Withdraw HSA funds for anything other than qualified medical expenses before age 65 and you owe income tax on the amount plus a 20% additional tax.¹¹ On a $1,000 non-medical withdrawal in the 22% bracket, that’s $220 in income tax and another $200 in penalty. The 20% add-on disappears at age 65, or if you become disabled or die, but income tax still applies to non-medical withdrawals.¹²

The Medicare Trap

Once you enroll in Medicare Part A or Part B, your HSA contribution limit drops to zero.¹³ The money already in the account remains yours to spend tax-free on medical expenses, but you can’t add more. The trap: Part A is often retroactively effective up to six months when you enroll after age 65. Contributions made during that retroactive window become excess contributions and trigger a 6% annual excise tax until removed.¹⁴ If you’re delaying Medicare to keep funding an HSA, stop contributing at least six months before you eventually sign up.

When You Have More Than One Account

A general-purpose Health FSA or standard HRA is treated as non-HDHP coverage, and either one will disqualify you from HSA contributions. This bites most often when one spouse has an HSA and the other has a Health FSA through a different employer, because the FSA can reach the HSA-holder’s expenses too.

Employers can structure things so both work together. A Limited-Purpose FSA, restricted to dental and vision expenses, is compatible with an HSA and shares the same $3,400 cap for 2026.² On the HRA side, a limited-purpose HRA (dental, vision, and preventive care only), a post-deductible HRA that pays nothing until you’ve met the HDHP deductible, or a suspended HRA that pauses reimbursements while you’re HSA-eligible all preserve HSA eligibility. Ask your benefits team which variant applies before you contribute to an HSA.

HSA Reporting

Every year you contribute to, distribute from, or own an HSA, you file Form 8889 with your federal tax return to report contributions, calculate your deduction, and account for distributions.¹⁵ FSA and HRA amounts, by contrast, flow through your employer’s payroll and appear on your W-2 without a separate form from you.

1
Internal Revenue Service. FAQs for Government Entities Regarding Cafeteria Plans
2
Internal Revenue Service. Revenue Procedure 2025-32
3
Internal Revenue Service. Publication 503 – Child and Dependent Care Expenses
4
Office of the Law Revision Counsel. 26 US Code 129 – Dependent Care Assistance Programs
5
Internal Revenue Service. Health Reimbursement Arrangements (HRAs)
6
HealthCare.gov. Health Reimbursement Arrangements for Small Employers
7
HealthCare.gov. Individual Coverage Health Reimbursement Arrangements
8
Internal Revenue Service. Revenue Procedure 2025-19
9
Internal Revenue Service. Treasury, IRS Provide Guidance on New Tax Benefits for Health Savings Account Participants Under the One Big Beautiful Bill
10
Internal Revenue Service. IRS Notice 2026-5 – Expanded Availability of Health Savings Accounts Under the One Big Beautiful Bill Act
11
Office of the Law Revision Counsel. 26 US Code 223 – Health Savings Accounts
12
Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
13
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
14
Office of the Law Revision Counsel. 26 US Code 4973 – Tax on Excess Contributions to Certain Tax-Favored Accounts and Annuities
15
Internal Revenue Service. About Form 8889, Health Savings Accounts (HSAs)