HRAs and HSAs Can Be a Match Made in Heaven

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With HSA's, the assumption is that you can only have one kind of health savings account. If following the rules closely, you'll see that there are ways to take advantage of accounts, like HSAs and HRAs, together.

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HRAs and HSAs are both great benefits that employers can offer their employees to help them pay for their health insurance and medical care costs. They can be used together as long as you follow the regulations set by the IRS.  

How HSAs and HRAs are Similar

  1. Contributions are tax-deductible and funds are tax-free to use as long as you follow the rules.
  2. They can be part of a comprehensive retirement plan.
  3. The IRS has rules for who qualifies and how the money is used.

How HSAs and HRAs are Different

There are many differences between HRAs and HSAs but here are the important ones for our discussion:

  1. HSAs have annual contribution limits for individuals and families, HRAs have no contribution limits.
  2. Employees own the money in their HSAs whereas employers own the money in the HRAs they offer.
  3. There are many different types of HRAs that can be used to pay for a variety of different healthcare costs, including, but not limited to, premiums for individual, dental and vision plans.  The IRS doesn’t allow employees to use HSA money to pay for healthcare premiums.
  4. To contribute to an HSA, an employee must also be enrolled in a High Deductible Health Plan (HDHP).  An HRA is compatible with a variety of plans.

How to Get the Best of Both Worlds

If you have an existing HSA and you’re eligible to receive an HRA from your current employer, you can:

  1. Stop contributing to your HSA, or
  2. Suspend access to your HRA for all medical expenses other than dental, vision and preventative care costs (like mammograms, checkups, etc.)

If you’re an employer who wants to offer both an HRA and a group HDHP with an HSA, you can do the following:

  1. Offer a Limited Purpose HRA. This can be used for healthcare costs excluded from the HDHP like dental, vision and long-term care premiums.
  2. Offer a Post-Deductible HRA. This type of HRA allows you to give employees access to money once the minimum deductible level for an HDHP has been met. Different HDHPs have different deductibles depending on the plan, but in 2019, the minimum deductible was $1,350 for an individual and $2,700 for a family. That means if the deductible for your HDHP plan is more than that (let’s say it’s $5,000 for an individual), you can set up a Post-Deductible HRA that kicks in once the employee spends $1,350 out of pocket, thus allowing them to use their HRA money for the remaining $3,650 of their deductible.
  3. Offer a Retirement HRA. An employee doesn’t have access to the money in this type of HRA until they retire, but it can still be an attractive benefit.
  4. Offer the group plan and HRA to different classes of employees.  For example, you can offer the HDHP group plan plus HSA to your full-time or salaried employees and offer an HRA to part-time or hourly employees. Just make sure you follow the IRS rules on employee classes.

Even though an employee is restricted from contributing to an HSA while he or she has access to a traditional HRA, he or she can still use his or her HSA money at any time. That money is his or hers to use for any out-of-pocket medical expenses except for insurance premiums.

As you can see, whether you’re an employee who wants to take advantage of both an HSA and HRA, or you’re an employer who wants to offer both, there are ways to do it. Make sure to follow the rules, otherwise, you could end up paying taxes on your HSA contributions.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.