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Small Business Employee Benefits and HR Blog

HRA vs. HSA (Reimbursement Arrangements vs. Savings Accounts)

November 28, 2018
HRA vs. HSA

Which is better: A health reimbursement arrangement (HRA) or a health savings account (HSA)?

That depends entirely on what you're trying to accomplish, either as an employer or an employee. The benefits are similar, but each has its own strengths and weaknesses you should consider before making your choice.

In this post, we'll examine HRAs and HSAs, highlight the main differences, and help you evaluate each for your business.

HRAs vs. HSAs: what's the difference?

The biggest difference between HRAs and HSAs is that the business owns the HRA while the employee owns the HSA. This means employees can contribute to and keep their HSA when they change jobs, but they'll surrender their HRA when they leave the company.

This is by design. The modern HRA was created to allow employers to reimburse employees' health insurance and medical expenses as a stand-alone benefit. With an HRA, employers offer employees a monthly allowance of tax-free money. Employees then purchase health insurance and other medical expenses, and the business reimburses them up to their allowance amount. It's meant to act as an employee benefit businesses can use to hire and keep valuable employees while also limiting their own financial exposure.

HSAs, on the other hand, were designed to help individuals save money to be used for health care. Employers are permitted to contribute to employees' HSAs as a health benefit, but this benefit is less robust. Employees also make contributions to their HSAs, and many use it as a savings vehicle rather than an immediate health benefit. Additionally, employees must be covered by a qualified high-deductible health insurance plan (HDHP) in order to open and contribute to an HSA. This coverage is either obtained through the business (making the HDHP the main health benefit) or from a source unrelated to the business (and the employee can't use the HSA to pay for those premiums).

Do I need to choose between an HRA and an HSA?

Businesses don't need to choose between an HRA and an HSA. They can offer both.

Offering an HRA alongside an HSA contribution maximizes the business's tax-free compensation to employees. It also ensures the money goes explicitly to health care, which is one of employees' largest financial burdens.

When employees have access to both an HRA and an HSA contribution from their employer, they can purchase an HDHP and use money from their HRA to reimburse the premiums. They can also use money from their HSA to fund expenses their HDHP doesn't cover.

Together, these two benefits provide employees the greatest possible degree of health care assistance from their business.

Employees who choose to offer both an HRA and an HSA must ensure their HRA is adapted to fit with the HSA.

Interested in offering both an HRA 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:

HRA vs. HSA - 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.

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.

  • 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, depending on plan documents, but keep all unused HSA employer contributions.
  • 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. There are no minimum contribution requirements.
  • 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 $5,150/self-only or $10,450/family in 2019 with a qualified small employer HRA. When the individual coverage HRA becomes available in 2020, it will have no contribution limits.
Employer can contribute up to $3,500/self-only or $7,000/family in 2019.
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 an 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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