In the health benefits industry, certain benefit options are often confused with one another. Two of the options most commonly mixed-up are HSAs (Health Savings Accounts) and HRAs (Health Reimbursement Arrangements). Though they have similar sounding names, they actually function quite differently.
In this post we'll compare the two benefits, highlight their differences, and discuss how they can be used together.
HSAs vs HRAs:
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 health insurance premiums and medical expenses.
HSAs are individual accounts owned by the employee, that employers can contribute to. While HSAs are often viewed as a traditional "employer owned benefit", they are more similar to a retirement account like an IRA that individuals can create and contribute to on their own.
HSAs are actual accounts
Money that's contributed to an HSA is deposited into an actual account. Employees with an HSA own the account and all the funds within. If an employer contributes to an employee's HSA, the employee controls that money immediately and takes it with them if they leave the company. Furthermore, employees can open their own HSA account without the help of an employer.
With an HRA, employers set a specific monthly or annual allowance for their employees. The money remains with the employer until a qualified medical expense is incurred and a request is submitted and verified. That means if an employee doesn't use their entire allowance, the employer keeps the rest. It also means, that if an employee leaves the company without using all of their accrued allowance, they'll lose access to the allowance after a defined run out period.
HSAs don't cover health insurance premiums
HRAs are designed to act as full health benefits solutions so that employers can pay all or some of the medical expenses of employees. HSAs are meant to cover expenses that fall under the deductible of a health insurance plan. As such, HSA money generally can't be used to pay for the insurance itself.
HSAs require compatible plans
In order to contribute to an HSA, an individual must have a high-deductible health plan (HDHP). High-deductible plans make a lot of sense for most Americans, so this isn't a problem, but keep in mind that HRAs don't have that restriction. Instead, most HRAs only require participants to have minimum essential coverage.
HSAs and HRAs can be used together
HRAs and HSAs can be used together if certain conditions are met.
First, to be eligible for an HSA an employee must:
- Be covered under an HSA qualified High Deductible Health Plan (HDHP), and
- Not be covered under other health insurance that is not an HDHP.
Next, the HRA must be compatible with the HSA. There are a few adjustments that can be made to an HRA to make it HSA qualified, but the simplest and most straightforward is limiting what is eligible for reimbursement under a "limited purpose HRA".
With a limited purpose HRA, in years that contributions are made to an HSA, the HRA can only be used to reimburse the following expenses:
- Health insurance premiums
- Wellness/preventive care (e.g. checkups, mammograms, smoking cessation, weight loss)
- Dental expenses
- Vision expenses
- Long-term care premiums
The Bottom line
While HSAs and HRAs have some similarities, they are different benefits. An HRA allows an employer to retain unused benefit funds, while an HSA is a portable account that the employee owns. HRAs are a great standalone benefit while an HSA is a great companion benefit. The two can be used together in a combined benefit that some employees may prefer.