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HRA vs HSA: Which should I offer?

Written by: Elizabeth Walker
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Originally published on March 28, 2022. Last updated April 5, 2022.

When evaluating employee health insurance options, it’s easy to confuse different health plans with one another. Two commonly mixed-up health benefits are the health reimbursement arrangement (HRA) and the health savings account (HSA).

While they have similar-sounding names, the two options are different in many ways. For instance, an HRA is employer-owned and an HSA is employee-owned. There are also differences in terms of who can participate, where contributions come from, 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 discuss how they can be used together.

Pros and cons of HRAs and HSAs

HRAs and HSAs are two prominent tax-advantaged health benefits. They can help offset rising healthcare costs for your employees and 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 over their healthcare decisions. But both benefits aren’t without their ups and downs.

Taking the time to understand the general pros and cons of both plans, as shown below, can help employers determine which is the right choice for their company to entice employees.

HRA Advantages

HSA Advantages

HRA Disadvantages

HSA Disadvantages

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

HSA-qualified high deductible health plans (HDHPs) tend 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.

Employers have no financial liability until an employee incurs an eligible expense.

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.

Prior to 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 employer 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 and grown year-over-year for potential returns.

HSA funds can be used as a 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

A health reimbursement arrangement is owned by the employer. HRAs are an arrangement—not an account—between an employer and an employee. The employer provides a tax-advantaged reimbursement allowance that employees can use when they incur a qualified medical expense such as an insurance premium or other out-of-pocket eligible expense. At the end of each year, or when the employee leaves the organization, unused funds stay with the employer.

An employee can still be reimbursed for an eligible medical expense with pre-tax money from HRA funds when they leave the organization, but only within 90 days of leaving the company for the qualified healthcare expenses incurred during their employment.

HSA

A health savings account is owned by the employee. As its name implies, an HSA is a spending account that houses pre-tax dollars for future eligible healthcare expenses. Both the employer and 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 the organization.

Many employers offer card-based HSA solutions, so employees can spend their HRA dollars just like they would a 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.

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

Some HRAs—such as PeopleKeep's group coverage HRA (GCHRA), also known as an integrated HRA—are used as a supplement to group health insurance, while others—like the QSEHRA and individual coverage HRA (ICHRA)—are used to reimburse individual health insurance premiums.

HSA

An individual is eligible for an HSA if they meet the following requirements:

  • They’re enrolled in an HSA-qualified high deductible health 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 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

The HRA is funded entirely through employer contribution—employees can't contribute any of their own money. Depending on what type of HRA you have, there may be annual contribution limits. Because an HRA is a reimbursement tool, employers only pay after an expense is incurred, and only up to the employer-defined allowance amount.

HSA

With a health savings account, contributions can come from both the employer and the employee, so long as the combined contributions don’t exceed the annual HSA contribution limits set each year. Unlike an HRA, employers pay whether or not expenses are incurred at a regular, organization-defined interval.

4. Plan coverage

HRA

Depending on which HRA an employee has access to and how their employer sets it up, employees can use their fund to cover either their individual health insurance premiums to cover an eligible medical expense that's incurred as an out-of-pocket cost, or both. The IRS Publication 502 provides more details on which expenses are qualified, not qualified, or could be qualified based on certain circumstances (such as with a doctor’s note or a prescription).

Learn more about what medical expenses are covered by an HRA in our infographic

HSA

Employees can use their HSA for the same 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. However, if an individual uses their HSA funds on non-qualified medical expenses before age 65, they’ll have to pay income tax on those distributions.

How HRAs and HSAs can work together

As an employer, you don't need to decide between the two—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 an employer 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 very narrow focus.

The eligible expenses under a limited-purpose HRA 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 to ensure compliance with federal regulations.

Get our HRA and HSA compatibility guide to see how the two plans work together

Conclusion

The debate of HRA vs. HSA will always be a tricky one. 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. PeopleKeep’s personalized benefit advisors can help you with setting up a standard HRA or an HSA-qualified plan.Simply schedule a call and we’ll get you started!

This article was originally published on March 18, 2020. It was last updated on March 28, 2022.

Originally published on March 28, 2022. Last updated April 5, 2022.
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