There are numerous acronyms used when discussing non-traditional health benefits options. Two popular "account"-based options are HSAs (Health Savings Accounts) and HRAs (Health Reimbursement Arrangements). Even though they both have the same basic idea, there are a few key differences how HSAs and HRAs work in 2014, and beyond.
If you have an HSA and/or HRA, or you are considering offering one to your employees, consider the following.
HRAs vs HSAs: HRAs are owned by the employer, HSAs are owned by the individual
HRAs are employer-sponsored plans. An employer sets allowances for employees who can then use that money to be reimbursed for medical expenses.
HSAs are individual accounts that employers sometimes choose to contribute to. While HSAs are often part of an employer's benefit package, they are really more like IRAs in that individuals can set them up and contribute to them on their own.
HRAs vs HSAs: HSAs are actual accounts, HRAs are notional
When money is put into an HSA, it belongs to the account holder. If an employer contributes to an employee's HSA, the employee controls that money immediately, even if they leave the company.
When money is added to an HRA, it belongs to the employer until a qualified medical expense is incurred. If an employee leaves a company without spending all the money in the HRA, the employee generally loses access to that money.
HRAs vs HSAs: Reimbursable medical expenses
With an HRA, the employer specifies exactly which categories of medical expenses an HRA will cover (within the parameters set by the IRS in Publication 502). If an employer wants to cover doctor's visits and pharmacy, but not dental or vision, the HRA can be designed in that way. It is also common with HRAs paired with a group health plan ("Integrated HRAs") to only cover deductible expenses. This allows the employer control over the cost and usage of the HRA.
Because HSAs are owned by the individual, the employer doesn't have anything to do with what can be reimbursed. Employees can use HSA funds for any IRS-qualified medical expense.
HRAs vs HSAs: HSAs require compatible plans
In order to contribute to an HSA an individual must have a high-deductible plan (see the 2014 HSA rules here).
With an HRA, the employer sets the eligibility criteria for participation. For example, with an Integrated HRA the employee needs to enroll in the company-sponsored group health coverage.
HRAs and HSAs can be used together
HRAs and HSAs are not mutually exclusive. Employees can have both type of "accounts" at the same time.
However, the employer needs to set up the HRA with an HSA-compatible platform, as there are ordering and deductible rules with an HSA. See this FAQ: Can I have an HRA and an HSA at the same time?
HRAs vs HSAs: Health Reform's impact
Perhaps this should have been number one on the list, as it is top of mind for any one setting up an HRA or HSA (as it should be). Here's how the Affordable Care Act (aka ACA or Health Reform) impacts HRAs and HSAs.
First, HRAs. Health Reform impacts HRAs in different ways, depending on how the employer is using the plan.
Integrated HRAs are generally compliant. An Integrated HRA is linked with a high deductible group health plan, and is offered only to those at the company who enroll in the group health plan. Integrated HRAs are also called deductible-only HRAs, supplemental HRAs, linked HRAs, or GroupHRAs.
Stand-Alone HRAs are generally not compliant. The biggest change to HRAs because of Health Reform is to stand-alone HRAs. A stand-alone HRA is not linked to a group health insurance plan. Rather, the employer offers the stand-alone HRA plan as an alternative to group health insurance. With stand-alone HRAs, the plan is generally set up to reimburse individual health insurance premiums and other out-of-pocket medical expenses.
However... One-Person Stand-Alone HRAs are generally compliant. If a stand-alone HRA only has one participant, they can continue to offer a stand-alone HRA in 2014, and beyond.
Retiree HRAs are generally compliant.
As of 2011, over-the-counter (OTC) medications are generally no longer an eligible medical expense for HSAs, FSAs, and HRAs
As of 2011, the excise tax for non-qualified HSA withdrawals doubled from 10% to 20%.
HRAs vs HSAs: Reimbursing Health Insurance Premiums
While there are a few exceptions, HSAs generally cannot be used toward individual health insurance premiums.
In the past, stand-alone HRAs have been the most common "account"-based plan used by employers to reimburse individual health insurance premiums. However as mentioned above, Health Reform placed restrictions on the ability of most HRAs to be offered as a stand-alone benefit.
For employers using stand-alone HRAs, or looking to transition to a "pure" defined contribution approach, one solution is to adopt a limited Healthcare Reimbursement Plan (HRP). The HRP is structured to only reimburse:
Health insurance premiums up to a specified monthly healthcare allowance,
Preventative care as required by PHS Act Section 2713 at 100% without cost-sharing.
This structure ensures the HRP complies with health reform and the related "market reforms". Read more: How Healthcare Reimbursement Plans (HRPs) Work With New "Market Reforms".
Questions about HRAs and HSAs in 2014 and beyond? Leave a question below.