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Should I offer an HRA or HSA?

Video • December 11, 2023 at 12:16 PM • Written by: Elizabeth Walker

When evaluating employee health plans, it's easy to confuse different benefits with one another. Two commonly mixed-up health benefits are health reimbursement arrangements (HRAs) and health savings accounts (HSAs).

While they have similar-sounding names, the two options differ in many ways, such as who can participate, whether they are funded with employee or employer contributions, what type of health plan works with each benefit, and more.

In this post, we'll cover the pros and cons of HRAs and HSAs, highlight their wide range of key differences, and show you how to use the two employee benefits together.

Get our HRA and HSA comparison chart to learn more about how these two health benefits work

Pros and cons of HRAs and HSAs

There are many key benefits to HRAs and HSAs. That's why, according to KFF, nearly a quarter of companies1 that offer health benefits offer an HRA, an HSA, or both.

First, there are tax and financial benefits. HRAs and HSAs allow employers and employees to use pre-tax money to fund employee medical expenses. They also help offset rising medical care costs for your employees and can save your organization money on your overall health benefits budget.

HRAs and HSAs have several similar key aspects, such as encouraging your employees to take more ownership of their medical care by purchasing the healthcare items and services that fit their needs. But both benefits aren't without their ups and downs.

Understanding both plans' general pros and cons, as shown below, can help you determine the right choice for your company to build an enhanced benefits package that will entice employees.

HRAs vs. HSAs: Advantages and disadvantages

HRA advantages

HSA advantages

  • Integrated HRAs can supplement any traditional group health plan.
  • Stand-alone HRAs can pair with any qualifying individual health plan. This allows you to offer an HRA instead of traditional group health insurance.
  • Employers have no financial liability until an employee incurs an eligible out-of-pocket health expense. Employers only reimburse employees up to their defined allowance.
  • Other than the IRS-set maximum limits for the qualified small employer HRA (QSEHRA), there are no annual contribution limits for HRAs.
  • Some HRAs allow you to vary allowances and eligibility with employee classes.
  • They are paired with high-deductible health plans (HDHPs), which tend to have lower premiums for the employer and employees.
  • HSAs have flexible carryover rules. All unused balances in the spending account rollover automatically for employees' future use
  • HSA fees are low because the benefit administration is more straightforward and requires no plan documents.

HRA disadvantages

HSA disadvantages

  • The federal government considers some HRAs a group health plan, so they must comply with COBRA continuation coverage, ERISA regulations, and Internal Revenue Service regulations.
  • Employers own the HRA, so employees lose any unused funds if they leave the company. However, this is a benefit to employers because they get to keep the funds employees don’t use.
  • Unlike an HSA, employees can’t invest HRA funds in mutual funds, stocks, or bonds for potential returns.
  • You can only offer HSAs alongside an HSA-qualified health plan.
  • The IRS sets annual contribution limits.
  • Before age 65, employees can’t use their HSA to pay for most individual health plan premiums except under specific circumstances2.
  • Employees can use HSA funds as an investment option, which can interfere with an employer's desire to offer a sole health benefit.

Now that we’ve covered the advantages and disadvantages of each, let’s break down these two personalized health benefits in more detail in the sections below.

1. Plan ownership


HRAs are employer-owned health benefits. Essentially, they're an arrangement between you and your employees—not an account. With an HRA, you provide a tax-free reimbursement allowance that your employees can use when they incur a qualified expense, such as dental and vision care expenses or other out-of-pocket medical expenses.

With an individual coverage HRA (ICHRA) or QSEHRA, you can even reimburse your employees for their individual health plan premiums.

At the end of each year, or when the employee leaves your organization, unused funds stay with you.

Employees generally use their HRA while they're under active employment. However, an employee can still get reimbursements for qualified expenses on a pre-tax basis from HRA funds when they leave your organization, but only within 90 days of leaving your company for eligible expenses incurred during their employment.


Unlike an HRA, the employee owns an HSA. As its name implies, an HSA is a spending account that houses pre-tax dollars for future eligible healthcare expenses. Both you and the employee can fund the account. However, because the employee owns it at their financial institution of choice, any unused contributions in the HSA bank account will stay with the employee even after leaving your organization.

As a bonus, many employers offer HSA card-based solutions. This means employees can purchase medical services and items using their HSA dollars with a debit card. However, unlike a credit card, only certain vendors will accept an HSA card at the register.

2. Participation requirements


Only an employer can offer an HRA; it's not a reimbursement account that individuals can open independently.

Employees eligible for an organization's HRA include:

  • A current W-2 employee
  • A spouse of a current employee
  • A dependent of a current employee

Some HRAs, such as an integrated HRA, also known as a group coverage HRA (GCHRA), require individuals to be on their employer's traditional health plan, like group health insurance, to participate.

Other HRAs, like ICHRA, require employees to have individual health insurance coverage to participate in the benefit and receive HRA reimbursements for their health insurance premiums and other out-of-pocket expenses.


Employers can offer an HSA, or employees can open them themselves at their preferred financial institution.

Eligible employees qualify for an HSA if they meet the following requirements:

  • They enroll in an HSA-qualified high-deductible health plan (HDHP)
  • They aren’t a participant in any other non-HSA qualified health insurance coverage
  • They're not eligible to use a general-purpose flexible spending account (FSA)
  • Someone else doesn’t claim them as a dependent on their tax return
  • They don’t have Medicare Parts A & B or a Medicaid plan

3. Contributions


HRA contributions can only come from the employer—employees can’t make any additional contributions. Depending on your type of HRA, there may be annual employer contribution limits. QSEHRAs have annual maximum contribution limits, but ICHRAs and GCHRAs have no minimum or maximum contribution limits.

Because an HRA is a reimbursement tool, you only pay for your employee's healthcare costs once they incur a medical expense. You only reimburse employees up to your defined allowance amount.


Contributions to HSAs can come from both the employer and the employee, so long as the combined contributions don't exceed the annual limit set by the IRS. Unlike an HRA, employer contributions happen at regular, organization-defined intervals no matter if an employee incurs a medical expense or not.

Suppose you have employees who are 55 or older. In that case, they can take advantage of catch-up contributions and add $1,000 more per year to their HSA.

4. Plan coverage


Depending on which type of HRA plan you offer and how you design it, employees can use their funds to cover their monthly health insurance premiums, an eligible medical expense they incurred as an out-of-pocket cost, or both.

IRS Publication 502 provides more details regarding eligible healthcare expenses, which costs aren’t qualified, and which expenses may qualify based on certain circumstances (such as with a doctor's note or a prescription).


Employees can use their HSA for the same eligible healthcare expenses outlined in IRS Code Section 213(d)3 as an HRA. Because HSA funds are portable, employees can use their HSA as a savings account that they can use in the future to pay for non-medical expenses. This means individuals can include their HSA dollars in their retirement savings to help them reach their financial goals.

However, if the individual has yet to reach age 65, the IRS will tax distributions if they use their HSA funds on non-qualified medical expenses. Therefore, participants must report these distributions on their tax returns so they can pay income taxes.

How HRAs and HSAs can work together

As an employer, you don't need to decide between these two employee health plans—you can offer both! This approach often provides the best value to employees. But you must meet specific requirements for employees to use both compliantly.

To meet HSA eligibility requirements, an individual must enroll in an HSA-qualified HDHP. All policies that the individual uses must be HSA-qualified, including the HRA.

The simplest way to do this is to offer a "limited-purpose HRA” that only reimburses employees for expenses exempt from the HSA deductible requirement. Like a limited-purpose FSA, this type of HRA has a narrow focus, but employees can still use it for medical purposes.

The eligible medical expenses under a limited-purpose HRA are:

  • Healthcare coverage premiums
  • Long-term care premiums
  • Wellness and preventive care, such as annual physicals, checkups, mammograms, smoking cessation, and weight loss
  • Dental expenses, like orthodontia, diagnostic services, and dental plan deductibles
  • Vision expenses, like eye exams, contact lenses, and LASIK surgery

A standard HRA type will make an employee ineligible for an HSA because it would provide health coverage for all medical expenses, including copays for prescriptions, which aren't exempt.

If you plan to offer an HRA through a provider, make sure they allow you to limit medical costs to these categories so you follow federal regulations.


While HSAs and HRAs are similar employee health benefits, they each have their different advantages and disadvantages. Understanding how each benefit works before implementing one or the other at your company is critical. Whether you offer an HRA, an HSA, or both, these types of health benefits will help them pay for their medical care and other eligible expenses.

If an HRA makes sense for your organization, PeopleKeep's personalized benefit advisors can help. Schedule a call, and we'll get you started!

This article was originally published on March 18, 2020. It was last updated on December 11, 2023.

  1. https://www.kff.org/report-section/ehbs-2023-section-8-high-deductible-health-plans-with-savings-option/
  2. https://www.goodrx.com/insurance/fsa-hsa/hsa-to-pay-insurance-premiums
  3. https://www.irs.gov/pub/irs-drop/rr-99-28.pdf

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Elizabeth Walker

Elizabeth Walker is a content marketing specialist at PeopleKeep. She has worked for the company since April 2021. Elizabeth has been a writer for more than 20 years and has written several poems and short stories, in addition to publishing two children’s books in 2019 and 2021. Her background as a musician and love of the arts continues to inspire her writing and strengthens her ability to be creative.