The biggest difference between HRAs and HSAs is that the employer 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.
The answer as to which is better for your organization 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 and highlight the main differences to help you evaluate each for your organization.
HRAs vs. HSAs: what's the difference?
The differences between HRAs and HSAs are by design. The 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 employer reimburses them up to their allowance amount. It's meant to act as an employee benefit organizations can use to keep employees happy and healthy, while also limiting their own financial exposure.
HSAs, on the other hand, were designed to help individuals save money for healthcare. Employers are permitted to contribute to employees' HSAs as a health benefit, but this benefit is less robust. Employees can also make contributions to their HSAs, and many use it as a savings vehicle for retirement 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 employer (making the HDHP the main health benefit) or from a source unrelated to the employer (and the employee can't use the HSA to pay for those premiums).
Do I need to choose between an HRA and an HSA?
Organizations don't need to choose between an HRA and an HSA. They can offer both.
Offering an HRA alongside an HSA contribution maximizes the employer’s tax-free compensation to employees. It also ensures the money goes explicitly to healthcare, 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 healthcare assistance from their employer.
Before going this route, employers should make sure their HRA is designed to work with HSAs.
How to determine if an HRA or HSA is right for your organization
If you decide to use just one, there are key similarities and differences you should remember:
Similarities between the HRA and HSA
- Tax-free contributions. 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.
- Empower employees. 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.
Differences between the HRA and HSA
The differences between HRAs and HSAs relate to control, flexibility, and simplicity.
- Who funds the benefit. HRAs are employer-owned. Only the employer can fund the benefit and employees can only get reimbursed when they actually incur expenses. Employers 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. HSAs can be both employer-funded and employee-funded. Employees receive contributions whether or not expenses are incurred and take them with them when they leave.
- Control. With an HRA, employers have control over which expenses they reimburse employees for. They can choose to reimburse just insurance premiums or, at their discretion, any or all eligible expenses in IRS publication 502. With an HSA, the employer has no control over how employees spend the money. Employees can even use funds for non-medical expenses, though they will lose their tax deduction on the money, and must pay a penalty if they are younger than 65.
- Flexibility. Depending on the type of HRA, employers can adjust contributions by family status or job classification. Employees can use them with any type of health insurance as long as it offers minimum essential coverage. Also, group coverage HRAs (GCHRAs) and individual coverage HRAs (ICHRAs) do not have contribution limits. Qualified small employer HRAs (QSEHRAs) and HSAs limit employees to a certain contribution amount every year.
- 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 administration product.
The table below compares HRAs to HSAs
|Health Reimbursement Arrangement (HRA)||Health Savings Account (HSA)|
|Employers pay when expense is incurred, and only to the extent of company-defined contributions.||Employers pay 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.|
|Employers determine which expenses they will reimburse||Employees control how they spend the funds.|
|Employers can contribute as much as they want to an ICHRA or GCHRA.
Employers can contribute up to a maximum amount with a QSEHRA. This amount is higher than HSA amounts.
|Employers can contribute up to a maximum amount with an HSA.|
|Employees must have minimum essential coverage.||Employees must have a qualified high deductible plan.|
|Contributions can vary by family status.
Contributions can vary by job classification for GCHRA and ICHRA
Contributions can vary by age for ICHRAs
|All employees receive the same employer contribution based on comparable coverage.|
|May be used with FSA with few restrictions.||May be used only with restricted, limited-purpose FSA.|
|Funds are paid from the employer’s bank account.||Employee sets up an account with a bank or brokerage and has a separate policy with an insurance company. Employers may set up an account under the employee’s name, which the employee controls.|
|Employee submits receipts for payment.||Employee manages the account and submits expenses for payment.|
|Rules driven by IRS guidelines and, to some extent, the employer’s plan design.||IRS regulations govern expenses, funding, participation and fiduciary requirements.|
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, communicate your new plan, and guarantee you’ll be compliant with all regulations.
If you’re ready to get started with a HRA, either standard or HSA compatible, and a #1 rated software to manage it, schedule a call with our Sales team and we’ll be happy to help you!
This post was originally published in March 2012. It was last updated October 18, 2021.