When looking at your health benefits options, it’s easy to confuse different plans with one another. Two of the most commonly mixed-up plans are health reimbursement arrangements (HRAs) and health savings accounts (HSAs).
While they have similar sounding names, the two plans are different in several ways, specifically when it comes to who can participate, where contributions come from, what kind of health plans you can combine with the benefit, and more.
In this post we’ll cover five common questions about HRAs and HSAs, highlight their differences, and discuss how they can be used together.
Who owns the plan?
An HRA is an employer-sponsored plan that’s owned by the organization. An HRA is an arrangement, not an account, between an employer and an employee. The employer provides an allowance for employees to use and get reimbursed, tax-free, for out-of-pocket medical expenses and personal insurance premiums. Funds stay with the employer at the end of the year, or when the employee leaves the organization.
Note: An employee can still get reimbursed when they leave the organization, but only for expenses incurred during their employment there.
An HSA is owned by the employee—it’s a special bank account that allows participants to make pre-tax contributions to be used specifically for medical expenses in the future. Because it’s owned by the employee, any contributions made will stay with the employee even after the employee leaves the organization.
Who’s eligible to participate?
In order for someone to participate in an HRA, it must be offered by their employer—it’s not a health account available to individuals to open on their own.
The following individuals can participate in an organization’s HRA:
- A current W-2 employee
- A spouse of a current employee
- A dependent of a current employee
An individual is eligible for an HSA if they meet the following requirements:
- They’re enrolled in an HSA-qualified high deductible plan
- They’re not enrolled in any other non-HSA qualified health insurance plan
- They’re not eligible to use a general purpose flexible spending account (FSA)
- They can’t be claimed as a dependent on someone else’s tax return
- They’re not enrolled in Medicare Parts A & B or Medicaid
Where do contributions come from?
With an HRA, the allowance is provided by the employer, and employees don’t contribute any of their own money. In addition, employers only pay when an expense is incurred, and only up to the employer-defined allowance amount.
With an HSA, contributions can come from both the employer and the employee, so long as the combined contributions don’t exceed the annual limit that’s updated every year. Unlike an HRA, employers pay at a regular, organization-defined interval whether or not expenses are incurred.
What does the plan cover?
Employees can use their HRA (assuming it’s not set up as a premium-only HRA) on all qualified medical expenses as defined by the IRS. The IRS Publication 502 has the full list of things that are qualified, not qualified, or could be qualified based on certain circumstances (such as with a doctor’s note or a prescription).
Employees can also use their HSA for the same qualified medical expenses outlined in IRS Publication 502 as an HRA. HSA funds can also be withdrawn to pay for non-medical expenses, however, participants under 65 will have to pay a penalty.
How do HRAs and HSAs work 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. However, there are certain requirements that must be met for employees to use both compliantly.
To be eligible for an HSA, an individual must be covered by an HSA-qualified high deductible health plan (HDHP). All policies that the individual uses must be HSA-qualified, including the HRA.
The simplest way for an employer to do this is to offer a "limited-purpose HRA” that only reimburses employees for expenses that are exempt from the HSA deductible requirement.
These expenses are:
- Health insurance premiums
- Long-term care premiums
- Wellness/preventive care
- Such as checkups, mammograms, smoking cessation, and weight loss
- Dental expenses
- Vision expenses
A standard HRA will make an employee ineligible for an HSA because it would provide coverage for all medical expenses, including copays for prescriptions, which aren’t exempt.
If you plan to offer an HRA through a provider, it’s important you make sure they give you the ability to limit expenses to just these categories so you can ensure compliance with federal regulations.
While HSAs and HRAs have some similarities, they have different benefits. An HRA is an arrangement between an employer and an employee allowing employees to get reimbursed for their medical expenses, while an HSA is a portable account that the employee owns and keeps with them even after they leave the organization. Whether you choose to offer an HRA, an HSA, or both together, your employees will get a flexible benefit to meet their unique healthcare needs.
This article was originally published on March 11, 2020. It was last updated June 9, 2021.