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Should I offer an HRA or HSA?

Written by: Elizabeth Walker
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Published on October 24, 2022.

When evaluating employee health plans, it’s easy to confuse different benefits with one another. Two commonly mixed-up health benefits are the health reimbursement arrangement (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 use employee or employer contributions, what kind 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 primary differences, and show you how the two benefits can be used together.

Read more about health reimbursement arrangements in our complete guide

Pros and cons of HRAs and HSAs

There are many advantages to HRAs and HSAs. That’s why, according to the Kaiser Family Foundation, nearly a quarter of companies1 that offer health benefits offer an HRA, an HSA, or both.

Firstly, both types of accounts allow employers and employees to use tax-advantaged 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. But both benefits aren’t without their ups and downs.

Taking the time to understand both plans' general pros and cons, as shown below, can help you determine which is the right choice for your company to build an an enhanced benefits package that entices employees.

HRA Advantages

HSA Advantages

HRA Disadvantages

HSA Disadvantages

Integrated HRAs can be paired with any traditional group health plan. Stand-alone HRAs can be paired with any individual health plan.

An HSA-qualified health plan (HDHP) tends to have lower premiums for the employer and employees.

HRAs are a health plan, so they are subject to COBRA and must comply with Internal Revenue Service regulations.

HSAs can be offered only in conjunction with an HSA-qualified health plan and come with annual contribution limits.

Employers have no financial liability until an employee incurs an eligible out-of-pocket medical expense.

HSAs have flexible carryover rules. All unused balances in the spending account roll over automatically for employees’ future use.

Employers own the HRA, so employees lose their contributed funds if they leave the company.

Before age 65, HSAs can’t be used to pay for most individual health insurance premiums, except under specific circumstances.

Other than the qualified small employer HRA (QSEHRA), there are no annual maximum contribution limits for HRAs.

HSA fees are low because the benefit administration is simpler, and no plan documents are required.

Unlike an HSA, HRA funds can’t be invested in mutual funds, stocks, or bonds for potential returns.

HSA funds can be used as an investment tool, which can interfere with an employer’s desire to offer a sole health benefit.

Now, let’s go into further detail on the primary differences between HRAs and HSAs below by breaking down four common characteristics.

1. Plan ownership

HRA

HRAs are owned by the employer. Essentially, they’re an arrangement—not an account—between you and your employees. With an HRA, you provide a tax-advantaged reimbursement allowance that your employees can use when they incur a qualified medical expense such as a health insurance premium or other out-of-pocket expenses.

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 be reimbursed for an eligible medical expense 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.

HSA

An HSA is owned by the employee. As its name implies, an HSA is a spending account that houses pre-tax money for future eligible healthcare expenses. Both you and the employee can fund the account. However, because the employee owns it, any unused funds 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 HRA dollars with a debit or credit card. However, unlike a credit card, only certain vendors will accept an HSA card at the register.

2. Participation requirements

HRA

An HRA must be offered by an employer; 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 the QSEHRA and individual coverage HRA (ICHRA), require individuals to have an individual health insurance policy to participate in the benefit and be reimbursed for their health insurance premiums and other out-of-pocket expenses.

HSA

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

  • They’re enrolled in an HSA-qualified high-deductible health plan (HDHP)
  • 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 aren’t claimed as a dependent on someone else’s tax return
  • They aren’t enrolled in Medicare Parts A & B or Medicaid

Even if an individual's employer doesn't offer an HSA, they can still open and fund an account on their own as long as they meet the requirements listed above.

3. Contributions

HRA

HRA contributions can only come from the employer—employee contributions aren’t allowed. Depending on what type of HRA you have, there may be annual employer contribution limits. Because an HRA is a reimbursement tool, you only pay for your employee’s medical costs after an expense is incurred, and only up to your defined allowance amount.

HSA

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 are made at a regular, organization-defined interval whether or not a medical expense is incurred.

4. Plan coverage

HRA

Depending on which HRA an employee has access to and how you set it up, employees can use their funds to cover either their monthly health insurance premium, an eligible medical expense that's incurred as an out-of-pocket cost, or both.

The IRS Publication 502 provides more details on which healthcare expenses are qualified, not qualified, or could be qualified based on certain circumstances (such as with a doctor’s note or a prescription).

HSA

Employees can use their HSA for the same eligible healthcare expenses outlined in IRS Code Section 213(d) as an HRA. Because HSA funds are portable, employees can use their HSA as a savings account of sorts that can be used in the future to pay for non-medical expenses. This means individuals can include their HSA dollars as part of their retirement plan.

However, if the individual hasn’t reached the age of 65 yet, distributions will be considered taxable income if they use their HSA funds on non-qualified medical expenses. Therefore, participants must pay income taxes on the distributions during tax season.

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! In fact, this approach often provides the best value to employees. However, specific requirements must be met for employees to use both compliantly.

To be eligible for an HSA, an individual must be covered by an HSA-qualified HDHP. All policies that the individual uses must be HSA-qualified, including the HRA.

The simplest way for you 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 it can still be used for medical purposes.

The eligible expenses under a limited-purpose HRA are:

  • Health coverage premiums
  • Long-term care premiums
  • Wellness and preventive care, such as annual physicals, 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 health coverage for all medical expenses, including copays for prescriptions, which aren’t exempt.

If you plan to offer an HRA through a provider, you must make sure they give you the ability to limit expenses to just these categories to ensure compliance with federal regulations.

Conclusion

While HSAs and HRAs are similar employee health benefits, they each have their different advantages and disadvantages. It’s critical to understand how each benefit works before implementing one or the other at your company.

Whether you offer an HRA, an HSA, or both, your employees will get a flexible benefit to help them pay for their medical care and other healthcare costs. If you have determine whether or not an HRA makes sense for your organization, PeopleKeep’s personalized benefit advisors can help. Simply schedule a call, and we’ll get you started!

This article was originally published on March 18, 2020. It was last updated on October 24, 2022.

1https://www.kff.org/report-section/ehbs-2021-section-8-high-deductible-health-plans-with-savings-option/

Originally published on October 24, 2022. Last updated October 24, 2022.
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