HRA, HSA and Pre-Tax Benefit Plans

Section 125: the foundation

A Section 125 plan, often called a cafeteria plan, is what allows employees to pay their share of premiums with pre-tax dollars. It reduces their taxable income and reduces your payroll tax burden at the same time. It requires a written plan document, which is the part employers most often skip and most often get asked for in an audit.

If you are deducting premiums pre-tax without a current plan document on file, that is worth fixing regardless of anything else on this page.

Health Savings Accounts

An HSA is an employee-owned account paired with a qualified high-deductible health plan. Contributions go in pre-tax, grow tax-free, and come out tax-free for qualified medical expenses. The balance belongs to the employee permanently, and it follows them if they leave.

For employers, an HSA-qualified plan with a partial employer contribution is often the most efficient way to hold premium down without simply handing staff a worse plan. The employer contribution is visible, portable, and appreciated in a way that a deductible increase is not.

Health Reimbursement Arrangements

An HRA is employer-funded and employer-owned. You define what it reimburses and how much, and unused funds stay with you. That control makes HRAs useful for buying down a high deductible selectively, or for offering a defined contribution toward coverage rather than sponsoring a group plan outright.

• Integrated HRA paired with your group plan to offset deductible or out-of-pocket exposure
• QSEHRA for smaller employers reimbursing individual coverage instead of sponsoring a group plan
• ICHRA for employers who want to define a contribution by employee class and let staff choose their own plan

Flexible Spending Accounts

FSAs let employees set aside pre-tax dollars for medical or dependent care expenses. They are useful, but they carry use-it-or-lose-it rules subject to whatever carryover or grace period your plan adopts. We set the design so employees are not surprised in December.

Which one fits

These accounts interact. You cannot contribute to an HSA while covered by a general-purpose FSA, for example, and an HRA has to be structured carefully to preserve HSA eligibility. We map the combination against your plan and your workforce rather than adding accounts one at a time.