In recent years, the number of Americans participating in health savings accounts (HSAs) has increased dramatically. Within the last decade, HSA participation has jumped from 3.2 million in 2006 to 20.2 million in 2016. Health benefits experts believe these numbers will continue to rise as the current Republican administration seeks to expand HSAs as part of its efforts to replace Obamacare.
With a growing number of Americans choosing HSAs, employees and businesses alike often wonder if it’s possible to have both an HSA and an HRA (health reimbursement arrangement). The answer is yes, but you have to make sure you do it right.
Better Together: The Benefits of HSAs and HRAs
HSA and HRA. The two acronyms may be almost identical, but they stand for two very different types of plans. With an HSA, the employee owns the account. Money contributed to the HSA is tax-free, and withdrawals must be spent on qualified medical expenses. Since HSAs are owned by the employee, they are also portable. This means they move with the employee from job to job.
Read more: Health Savings Account Overview
In an HRA, the account is owned by the company, and the funds stay with the company if the employee decides to leave. In December 2016, Congress passed legislation that created an HRA specifically for small businesses. The Qualified Small Employer Reimbursement Arrangement (QSEHRA), or Small Business HRA, allows businesses with fewer than 50 employees to reimburse employees for individual health insurance premiums and eligible medical expenses also tax-free. With the QSEHRA, businesses must offer reimbursements on the same terms to every employee, but they can vary these amounts based on family status.
When businesses offer an HSA in combination with an HRA, they give employees more choices and more control over their own health benefits. The combo appeals to businesses, too, as it allows them to control costs by fixing them through an HSA contribution and setting up an HRA in place of other small business health insurance options.
How to Make Your HSA “HRA Qualified”
To have both an HSA and an HRA, the HRA must be adjusted to be compatible with HSA regulations. There are many ways to make this work, but two of the simplest are:
- Limited purpose HRA: Reduce the scope of what the QSEHRA can reimburse.
- Post-deductible HRA: Reduce the scope of what the QSEHRA can reimburse, until the HSA deductible has been met. Then reinstate the full list of medical expenses eligible for reimbursement through the HRA.
The expenses which can be reimbursed through the HRA before the HSA deductible has been met are the following: health insurance premiums, preventive services, dental and vision expenses, and long-term care premiums.
For more information, see "How to Use an HSA with a QSEHRA."
Businesses that offer an HRA can give their employees more flexibility, greater freedom of choice, and additional retirement benefits by adding an HSA to their employee benefits program. Once you understand the mechanics of HRAs and HSAs, it’s easy to see why using them together appeals to businesses and employees alike.
Are you using an HRA and HSA together? Let us know in the comments below.