How a group coverage HRA and an HSA compare

If you’re looking to supplement your organization’s group health insurance plan to help cover your employees’ out-of-pocket costs, you have two main options: Section 105 plans, such as the group coverage HRAs (GCHRAs), and Section 125 cafeteria plans, such as health savings accounts (HSAs).

But what’s the difference between a GCHRA and a HSA, and how do you know which is right for your organization?

Simply put, a GCHRA works alongside group health insurance and allows employers to reimburse their employees' for their deductibles, copays and other qualifying medical expenses through an employer-funded allowance of tax-free money.

On the other hand, HSAs help employees save money for healthcare as long as they are covered by a high-deductible health plan (HDHP). Employers and employees can make contributions to the HSA and account funds never expire so they can be saved for future use.

In this article, we’ll go into more detail on how GCHRAs compare to HSAs so you can better understand which option will best support your employees’ health needs.

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• How an health savings account (HSA) works
• How a group coverage HRA (GCHRA) works
• Differences between a GCHRA and an HSA

How a health savings account (HSA) works

An HSA is a tax-advantaged, employee-owned account that allows the employee to save pre-tax money for qualified medical expenses. With an HSA, the employer pre-funds the account after enrolling employees in an HSA-qualified high deductible health plan (HDHP). Annual contribution limits are set by the IRS outlining the minimum deductible and maximum out-of-pocket costs each year.

Employees won’t be taxed when they withdraw money from their HSA, as long as they use the money to pay for medical expenses specified in IRS Publication 502. They can also withdraw money at any time, however, they can only contribute money to the account while they are covered under a qualified HDHP.

Other highlights of an HSA:

• HSAs are only eligible if an employee is enrolled in an HDHP.
• Both employees and employers can contribute pre-tax dollars, up to the annual IRS maximum.
• Employees can withdraw money for non-medical purposes, but will be subject to a 20% tax penalty and be required to report the withdrawal as income.
• Those aged 65 and above don’t have to pay the 20% tax penalty for non-medical withdrawals, but still must report the withdrawal as income and pay income taxes on the amount.
• All HSA funds belong to the employee, and the employee takes the account with them when they leave the company—including 100% of employer contributions.

Want more information? Download our HRA vs. HSA vs. FSA comparison chart

How a group coverage HRA (GCHRA) works

A GCHRA helps employers supplement their employees’ out-of-pocket medical costs that aren’t fully paid for in their group health insurance plan. With a GCHRA, rather than pre-fund a savings account, the employer agrees to reimburse employees for these medical expenses.

During setup, the employer creates plan documents describing the terms of the plan, including the amount they will reimburse employees and what expenses will be covered. After making an eligible purchase, employees submit documentation of the expense, typically with receipt or invoice, to their HRA administrator.

Once the expense is reviewed and verified, the employee is reimbursed up to a maximum pre-determined allowance amount, which can accrue monthly or be made entirely available upfront. Unlike HSAs, there’s no limit to the amount the employer can reimburse employees.

Other highlights of a GCHRA:

• A GCHRA can be offered with any traditional group health insurance plan ranging from an HDHP to an already generous group health insurance benefit.
• Employers can specify expenses they want to reimburse. For example, an employer may decide to reimburse medical and dental, but not vision.
• Employers can implement cost-control mechanisms like deductibles or cost sharing.
• The employer only pays for the expenses their employee submits. If their entire allowance isn’t used by the end of the year, the funds remain with the employer.
• When an employee leaves the company, any unused allowance funds stay with the employer.
• Employees who leave the company have 90 days to submit expenses incurred while they were still employed.

Eager to learn more? Download our complete guide to offering a GCHRA!

Differences between a GCHRA and an HSA

While both are great choices to supplement your group health insurance, the lack of contribution requirements make GCHRA much more flexible than an HSA. The chart below covers key differences and guidelines to follow when deciding whether to offer a GCHRA or an HSA.

Check out more differences between a GCHRA and an HSA in our full comparison chart

Conclusion

GCHRAs and HSAs are both good ways for employers to supplement a group health insurance plan. Understanding which option is right for your organization depends on the type of group health plan you are offering and the level of flexibility and control you want over the benefit.

If you’re looking for a customizable health benefit that will boost your group health insurance, a GCHRA may be just what you need. Schedule a call with a personalized benefits advisor at PeopleKeep to learn more.

This article was originally published on October 15, 2020. It was last updated November 12, 2021.