HSA vs HRA Plan: Which is Better for Individuals and Families?7 min read • October 04, 2018
Healthcare costs are on the rise. And consumer-driven health plans help soften the blow. These plans often include health reimbursement arrangements (HRA), flexible spending accounts (FSA) and health savings accounts (HSA).
So what exactly is an HRA? Or an HSA?
HRA is an IRS-approved, employer-funded, tax-advantaged health benefit that reimburses you (so long as you’re an employee) for out-of-pocket medical expenses and health insurance premiums.
While HSA is a kind of bank account to save for medical expenses and to reduce your taxable income while you’re at it. In other words, an HSA is an individually owned, tax-advantaged medical savings account.
HRA vs HSA: What’s the difference?
The key difference is how the accounts are funded. The money in an HRA is provided by your employer. HRAs are usually unfunded notional accounts with no cash value. And any unused funds go to your employer.
An HSA is a tax-advantaged account that can be used to pay for eligible expenses, including long-term care and COBRA premiums. Anyone can contribute to an HSA account, including you, a family member and even your employer.
Another important difference is that your employer owns the HRA. So if you change or lose your job, any remaining amount in an HRA returns to your employer. You, the account holder, owns the HSA account. So you can take the funds with you from job to job.
Now that you have a high-level overview, we’ll cover the important differences between health reimbursement arrangements and health savings account.
What is an HRA?
HRA stands for a health reimbursement arrangement. It’s an employer-funded plan that allows you (as an employee) to pay for out-of-pocket medical expenses and for the premiums form your insurance company.
HRAs help employees pay for healthcare expenses that are not covered by another source such as co-payments, co-insurance, deductible, dental, vision, and chiropractic care (be sure to check your HRA documents for specifics).
Although HRAs are not health insurance, you can use them alongside your plan to help offset medical costs.
HRAs offer great employee benefits:
- Work with many types of insurance plans. One reason HRAs make sense for many people is that they can be used with more types of insurance plans. The Affordable Care Act (ACA) allows HRAs to be offered as long as they are integrated with a group health plan, which opens up more ways for employers to offer this benefit.
- Employers can make unlimited contributions. While some health care spending accounts have strict contribution amount limits, HRAs don’t.
- A new type of HRA, known as the Qualified Small Employer HRA (QSEHRA), does have contribution limits. The limits are up to $5,050 for individuals and $10,250 for families.
- Self-care is encouraged through health spending. Because HRA funds don’t roll over and you stand to lose them if you leave the company, are fired, laid off or retire, some argue that HRAs promote self-care.
- Since HRA funds cannot be rolled over or kept indefinitely, it’s a good idea to use the benefit. The hope is you’ll schedule those appointments you’ve been putting off and seek the care you need rather than saving the money.
- Fewer restrictions for eligibility. Many health care saving options such as Healthcare Flexible Spending Accounts (HFSA) have several eligibility requirements. HRAs don’t have many restrictions and should be considered if you find yourself ineligible for the other options.
Next, let’s take a look at Health Savings Accounts (HSAs), which differ from Health Reimbursement Accounts (HRAs) in that they are owned by you and the funds are portable.
Is an HRA subject to Cobra?
A Healthcare Reimbursement Arrangement (HRA) is a group health plan subject to COBRA’s continuation requirements. COBRA requires that health coverage be continued for qualified beneficiaries upon the occurrence of certain specified qualifying events such as death, divorce, or termination of employment.
What benefits do HRAs have for small businesses?
As a small business owner, you get control over HRA plan design. The HRA can be integrated with an FSA, be used as an employee retention tool, and offers additional tax benefits. Employer contributions are made on a pretax basis so that employees don’t have to pay taxes on health reimbursements they receive — that includes federal, state, local and Social Security taxes. As the employer, you have the choice to allow employees to roll over unused funds from one year to the next. Since employers own the account, any unused funds are forfeited back to the employer when the employee quits or is fired.
Do I qualify for an HRA if I’m self-employed?
You may not enroll in an HRA if you’re considered self-employed. Please refer to the plan documents, including specific information on your HRA, or contact your employer for more information.
What is an HSA?
HSA stands for health savings account. It’s an individually owned, tax-advantaged medical savings account, available to those enrolled in high-deductible health plans.
HSA funds can be used to pay for qualifying medical expenses without federal tax liability or penalty. Funds deposited into an HSA are not subject to federal income tax and the unused funds stay with you year-after-year.
HSAs offer great benefits:
- Multiple sources of contributions. Your HSA can grow with help from many sources. You, your employer, relatives or anyone who would like are allowed to contribute to your HSA.
- Pre-tax contribution advantages. Payroll deposits (made by your employer) are typically made with pre-tax dollars, meaning they are not subject to federal income taxes, (most) state income taxes, and payroll taxes (FICA). If your employer makes the contributions, that money is not included in your gross income.
- Tax-deductible contributions. Any contribution made with after-tax dollars can be deducted from your gross income. For example, let’s say you make $40,000 dollars a year. If you contribute $3,000 to an HSA, you’ll be taxed as though you made $37,000 (giving you money for health care costs while simultaneously lowering your tax burden).
- Funds stay with you. One of the greatest benefits of an HSA is that the unused funds stay with you year to year. If there is money left in your HSA at the end of the year, it stays put. No worrying about finding ways to spend the money by a set date.
- Portable funds. Another fantastic benefit of an HSA is the portability factor. In today’s fluid world, knowing you can keep one fund in place and add to it can relieve some stress. Money in your HSA can be carried with you and is available even if you change health insurance plans, get a new job, or retire. Here’s an added bonus – funds left in your account grow tax-free!
Can HSA funds be invested?
Most HSAs balances can be invested in mutual funds and other investment vehicles which, through compound growth opportunities, can increase the funds employees have available to cover necessary medical expenses. Employees are typically allowed to guide these investments once HSA account balances reach a certain threshold.
Is an HSA compatible with a debit card?
An HSA debit card makes using your HSA funds for qualified out-of-pocket medical expenses convenient and easy. Just swipe your card and get on with your day. Lively will upload the transaction for you into your online dashboard. It could not be easier to add your HSA debit card to your wallet so you can use it whenever and wherever you need it.
I’m a dependent. Do I qualify for HSA?
If you are claimed as a dependent on someone else’s tax return, you don’t qualify for an HSA.
Is Medicare a high-deductible health plan?
HSA contributions are not compatible with Medicare enrollment. And be on the lookout for “retroactive” Medicare coverage. If you are retroactively covered (either for individual or family coverage), this can also negate your ability to contribute for that retroactive time period.
Are you eligible for an HRA or HSA?
W-2 employees and their qualified dependents are eligible to participate in the HRA and receive tax-free reimbursements.
You need an HSA-eligible health plan – like a high deductible health plan. That’s right. HSA eligibility is defined by the single requirement of having an HSA-eligible health plan.
Based on 2019 IRS specifications, qualifying HSA health plans must have minimum deductibles of $1,350 for individuals and $2,700 for families. In addition, qualifying plans must have maximum out-of-pocket amounts of less than $6,750 for individuals and $13,500 for families.
Is an HSA or HRA better for you
Things like your flexibility in contributing, the ability to keep your unused balance and additional tax benefits make HSAs the wisest choice.