If you ever explored tax-favored health plans, you probably got your fill of acronyms – HRA, HSA, FSA, and the Archer MSA. Isn’t it amazing how a few strategically placed letters make the meaning so different?
We tackled a comparison of Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). The next comparison in our acronym hit parade looks at HSAs and HRAs (Health Reimbursement Arrangements). HRAs and HSAs are like siblings. They have similar features but each has its unique traits.
HRAs are the big brother of the two. Although the arrangements existed informally, the IRS officially defined HRAs in 2002. HSAs arrived on the legislative scene in 2003. Their purpose in life is similar – help individuals pay for medical expenses.
Both push individuals (in a non-bullying way) to take charge of their health care decisions. You know, that whole smart healthcare consumer thing. Both allow you to use funds for qualified medical expenses, including items like deductibles and copays.
Employer contributions are tax-deductible for both the HRA and HSA. Employee contributions to an HSA are also tax-free, provided the HSA has a qualified High-Deductible Health Plan (HDHP).
The major differences between the two center on who owns the account, who can fund the account, and what kind of health plans you can have with the accounts. The graphic below will give you a birds-eye view of the similarities and differences.
Which is Better?
As you probably guessed, the answer to that is – it depends. The answer may change based on your current needs and comfort level. The following are a few factors that may influence your selection.
- If you are self-employed, an HRA is not an option for you.
- If your employer offers one or the other, do they contribute to the funds?
- If an HRA, how does your employer-sponsored health plan compare to available HDHPs attached to HSAs? (Think deductible, out-of-pocket expenses, premiums).
- If you are 55 or older, an HSA allows “catch-up” contributions where you can contribute more than the annual limit
- Your employer sets their contribution limit for HRAs and decides what medical expenses are eligible for reimbursement from HRA funds. Compare that to an HSA’s eligible medical and dental expenses (set by the IRS).
In certain circumstances, you can make contributions to an HSA while covered under an HDHP and an HRA. However, the arrangements of the HRA must fall into one or more of the following categories.
- Limited purpose HRA
- Suspended HRA
- Post-deductible HRA
- Retirement HRA
We will cover these in more detail in a future post. We recommend you speak with your employer, tax advisor, and refer to IRS Publication 969.
A lot to consider but so worth the effort. Invest in your health. Explore this site for more information and resources. In future posts, we’ll look at stand-alone HRAs for small employers and employer options when considering what’s best for their business.