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Small Business Employee Benefits and HR Blog

HSAs vs HRAs (Savings Accounts vs Reimbursement Arrangements)

February 4, 2016

Which is better: A Health Reimbursement Arrangement (HRA) or a Health Savings Accounthra vs hsa (HSA)? The answer depends on what you are trying to accomplish and whether you are an employer or an employee.

Note: Legislation passed in December 2016 established a new form of Health Reimbursement Arrangement, the qualified small employer health reimbursement arrangement (QSEHRA). The following blog post compares the benefits of a QSEHRA to an HSA.

What is a Health Reimbursement Arrangement (HRA)?

A Health Reimbursement Arrangement, or HRA, is a notional account that employers use to reimburse employees’ health insurance and medical expenses. Funds do not accumulate in a separate account; rather, employers pay only after their employees incur expenses. 

What is a Health Savings Account (HSA)? 

A Health Savings Account, or HSA, is a financial account established by an individual to pay for qualified medical expenses. HSAs must be linked with a qualified high-deductible health insurance plan, and anyone can contribute to it.

Interested in offering both a QSEHRA and an HSA? PeopleKeep can help. Check out how the PeopleKeep software works and evaluate whether HRAs, HSAs and other personalized benefits are right for your business.

Which One is Right for Your Business? 

If you feel you must decide between the two, there are key similarities and differences you should remember:

Similarities

Employer contributions to both HRAs and HSAs are tax-deductible. Employees aren’t taxed on these contributions; rather, employer HRA contributions are excluded from wages, while employees deduct HSA contributions on their personal tax returns.

Both HRAs and HSAs encourage employee "consumerism," helping them pay attention to healthcare costs and use healthcare more prudently. They’re rewarded by having unused funds roll forward, though while HSAs roll forward annually, QSEHRAs roll over month to month only.

To make the right decision, however, you need to understand the key differences between HRAs and HSAs. 

HRA vs HSA - Important Differences

The differences between HRAs and HSAs relate to control, flexibility, and simplicity.

1. Control. Employers only may contribute to HRAs and use these funds to reimburse actual expenses. With HSAs, contributions are made whether or not expenses are incurred. Employers have more opportunity to recoup unused funds with an HRA. Employees forfeit unused HRA funds at the end of every year or when they change jobs, but keep all unused HSA employer contributions.

2. Flexibility. With HRAs, employers can adjust contributions by family status. HRAs can be used with any type of health insurance as long as it offers minimum essential coverage. Additionally, HRAs allow for greater flexibility in contribution amount. Through a QSEHRA, employers can contribute up to $5,050 for single employees and $10,250 for employees with families. With an HSA, employers can only contribute up to $3,400 for single employees and $6,750 for employees with families.

3. Simplicity. HRAs are often easier to understand and administer. Employees don’t have to store receipts for multiple years, worry about tax deductions, or pay monthly administrative fees to their bank or broker. Instead, employers take care of administrative requirements, ideally with the help of a software-based administration tool.

Health Reimbursement Arrangement (HRA)
Health Savings Account (HSA)
Control
Employers pay when expense is incurred, and only to extent of company-defined contributions.
Employer pays at a regular, company-defined interval, whether or not expenses are incurred.
Funds stay with the employer at the end of the year, or when the employee leaves the company.
Funds go with the employee when he/she leaves the company.
Only employers may contribute.
Employers, employees, or third parties may contribute.
Flexibility
Employer can contribute up to $5,050/self-only or $10,250/family.
Employer can contribute up to $3,400/self-only or $6,750/family.
Employees must have minimum essential coverage.
Employees must have a qualified high deductible plan.
Contributions can be varied by family status.
All employees receive same employer contribution based on comparable coverage.
May be used with FSA with few restrictions.
May be used only with restricted, limited-purpose FSA.
Simplicity
Funds paid from company bank account.
Employee sets up account with bank or brokerage and has separate policy with insurance company.
Employee submits receipts for payment.
Employee manages account and submits expenses for payment.
Rules driven by IRS guidelines and, to some extent, company plan design.
IRS regulations govern expenses, funding, participation and fiduciary requirements.

Can I use them together?

As an employer, you don't need to decide between offering a Small Business HRA and an HSA – you can offer both. In fact, this approach often provides the best value to employees.

There are certain requirements that must be met for employees to use both compliantly, however.

Conclusion

Both HRAs and HSAs offer great value to employees and can be offered together. However, if an employer decides to choose between the two, it is important to consider their similarities and differences. 

The best-in-class software platforms can administer both, providing the flexibility to control how much you’ll pay and, with HRAs, accommodate different health policies and carriers. They let you create electronic plan documents and communicate your new plan. They also ensure your plan will be fully compliant with all regulations.

Editor's Note: This post was originally published in March 2012.

What do you think? Let us know in the comments below.

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