HRA vs. MSA: What's the difference?
3 min read •
30 sec brief
If you're looking for a tax-advantaged accounts dedicated for healthcare, there are a few options to consider. HRAs and MSAs are a couple of those accounts, but what's the difference?
It's no secret that health care is expensive. The average family spends $8,200 per year—or 11% of their income—on health care, according to the Kaiser Family Foundation. That’s a good portion of a budget for any family. But luckily, tax-advantaged health accounts may offset some of the out-of-pocket costs. Medical Savings Accounts (MSAs) and Health Reimbursement Arrangements (HRAs) are a couple of options to consider. Here's a closer look at each one—including the pros and cons of each type of account.
Medical Savings Accounts (MSAs)
The basics: Medical savings accounts (MSAs) are a type of tax-advantaged health account. There are two types of MSAs: Archer and Medicare Advantage. Archer MSAs started as a pilot program for small companies in 1996. Health savings accounts (HSAs) arrived in 2003, making MSAs obsolete. Although the MSA program ended in 2007, some companies may still offer their original MSA plans.
Medicare Advantage MSAs still exist for folks with a Medicare-approved high-deductible healthcare plan. The money may grow tax-free and you can withdraw it to pay for qualified medical expenses.
How to qualify for an Archer MSA: You must be part of a pre-2007 Archer MSA plan. You need to be self-employed or work for a small company with 50 or fewer employees with a high-deductible health insurance plan. Your spouse may qualify, too.
The benefits of an Archer MSA:
- You can claim a deduction for contributions, even if you don't itemize.
- Earnings grow tax-free.
- Withdrawals are tax-free for qualified medical expenses.
- Your balance rolls over from year to year.
- The account is portable if you decide to change jobs.
The downsides of an MSA: Since January 2008, it's not possible to establish a new MSA.
Health Reimbursement Arrangements (HRAs)
The basics: Health reimbursement arrangements (HRAs) are company-owned plans, funded only by your employer. These contributions are pre-tax, so they won’t be part of your gross income. You can use this money to reimburse yourself for qualified medical expenses. These reimbursements are tax-free. If you don’t spend the balance, you can carry it forward for the future.
How to qualify for an HRA: You may only qualify for an HRA through an employer’s plan. Self-employed folks aren’t eligible for an HRA.
The benefits of an HRA:
- Employer contributions aren't taxable income.
- Qualified reimbursements are tax-free.
- You may save the balance for the future.
The downsides of an HRA:
- Only your employer can contribute to an HRA.
- Your employer owns the HRA.
- An HRA isn’t portable if you change jobs.
Seek guidance from a tax professional
Before opening any type of tax-advantaged account, it's important to know the basics. While there may be a wealth of financial information at your fingertips, it's easy to get confused by all the rules to qualify, contribute, or withdraw—especially as the tax code changes. When in doubt, try to work with an experienced tax professional. They may be able to offer specific tips for your family’s unique tax situation. You may rest easier knowing exactly what is allowed, and what may cause trouble at tax time.
About the author
Kate Dore is a Nashville-based freelance personal finance writer and Candidate for Certified Financial Planner™ Certification. She teaches financial literacy with Junior Achievement and serves as Director of Public Relations for the Financial Planning Association of Middle Tennessee. Her work has been published in Business Insider, Financial Planning Magazine, and Simple Money Magazine.
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