Health Reimbursement Arrangement (HRA) vs. Health Savings Account (HSA): Understanding the Difference

When it comes to managing healthcare expenses, two popular tools often discussed are Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs). While both aim to help individuals cover medical costs, they operate under distinct frameworks, offering unique advantages and limitations. Understanding these differences can help individuals and employers make informed decisions about which option best suits their needs.

What is a Health Reimbursement Arrangement (HRA)?

A Health Reimbursement Arrangement (HRA) is an employer-funded account designed to reimburse employees for qualifying medical expenses. HRAs are not actual accounts owned by employees but rather arrangements that allow employers to provide financial assistance for healthcare costs, such as with the Benepass HRA option. These funds are not deducted from employee paychecks; instead, the employer solely determines the amount contributed.

Key features of HRAs include:

Employer-Controlled Contributions: HRAs are funded entirely by the employer, and employees cannot contribute their own money to the arrangement. Employers decide the annual contribution limits and have flexibility in determining which expenses are reimbursable within IRS guidelines.

Tax Advantages:  Contributions to HRAs are tax-deductible for employers, and reimbursements to employees are tax-free, making HRAs a cost-effective way to provide healthcare benefits.

Portability and Ownership: HRAs are not portable. If an employee leaves the company, they typically lose access to the unused funds unless otherwise specified in the plan.

Eligible Expenses: HRAs can be used to cover a variety of medical expenses, including deductibles, copayments, prescription drugs, and, in some cases, insurance premiums. The employer decides the scope of eligible expenses.

No Requirement for a High-Deductible Health Plan (HDHP): Unlike HSAs, HRAs do not require employees to be enrolled in a high-deductible health plan. They can complement other types of insurance or serve as standalone benefits.

What is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is a tax-advantaged account available to individuals enrolled in a high-deductible health plan (HDHP). Unlike HRAs, HSAs are owned by the individual, and both employees and employers can contribute funds.

Key features of HSAs include:

Individual Ownership: HSAs are fully owned by the individual, even if the employer contributes to the account. This means the account and its funds remain with the individual if they change jobs or retire.

Triple Tax Advantage: HSAs offer three distinct tax benefits: contributions are tax-deductible, earnings on the account grow tax-free, and withdrawals for qualifying medical expenses are also tax-free.

Contribution Limits: The IRS sets annual contribution limits for HSAs. For 2024, the limits are $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution allowed for individuals aged 55 or older.

Eligible Expenses: HSA funds can be used to pay for a wide range of medical expenses, including doctor visits, prescription medications, dental and vision care, and certain over-the-counter items. Funds can also be used to pay insurance premiums in specific situations, such as COBRA coverage.

Investment Options: HSAs allow account holders to invest unused funds in mutual funds or other investment vehicles, offering the potential for long-term growth. This feature makes HSAs a unique tool for both healthcare savings and retirement planning.

HDHP Requirement: To open and contribute to an HSA, an individual must be enrolled in a high-deductible health plan. This requirement makes HSAs less accessible to individuals with more traditional insurance plans.

Choosing Between an HRA and an HSA

The decision to utilize an HRA or an HSA often depends on individual circumstances and employer offerings:

For employers, HRAs are a great way to provide targeted healthcare support without requiring employees to manage accounts. They allow for customization of benefits and cost control while offering tax advantages.

For individual employees, HSAs provide greater autonomy and long-term financial benefits, especially for those looking to save for future healthcare costs. The investment potential and portability make HSAs a versatile option for both healthcare and retirement planning.

HRAs and HSAs serve different purposes, catering to varying needs and preferences. HRAs are employer-driven and provide immediate financial relief for medical expenses, whereas HSAs empower individuals to take control of their healthcare savings with the added benefit of investment opportunities. Understanding these differences allows employers and employees to choose the most effective option to address their healthcare needs and financial goals.