HRA vs. HSA Explained

Wondering about HRA vs HSA accounts? Health Reimbursement Accounts (HRAs) and Health Savings Accounts (HSAs) enable families and individuals to pay their medical expenses. These 2 healthcare spending accounts are similar but not entirely the same. 

Benzinga explains what each plan does and their advantages. The main differences revolve around tax benefits, health insurance requirements and ownership policies.

What is an HRA?

An HRA is a Health Reimbursement Arrangement with several variations designed to enable employees to pay for qualifying medical expenses. Employees pay medical costs first and then get reimbursed by the employer. Employers fund the account and determine how much to contribute to each employee. 

All employer contributions are 100% tax-deductible, and employees cannot contribute their own money into an HRA. HRA plan types include the following:

• Group HRA: A group HRA, also known as an integrated HRA, is a medical reimbursement plan funded by the employer and linked to a group health insurance plan, which often comes with a high deductible. A group coverage HRA has a sponsored health plan with the aim to lower premium costs while simultaneously keeping the amount of coverage the same. For example, a company may switch from a $500 deductible to a $2,000 deductible health plan. Then, the employer would offer group coverage HRA to make up the difference between the previous and current deductible. Employees on this plan get reimbursed for out-of-pocket medical fees subject to specific allowances. Unused funds do not get rolled over annually.

• Individual Coverage HRA: An individual coverage HRA allows businesses to reimburse employees tax-free for medical expenses and individual health insurance premiums. Employees receive a monthly allowance, and all reimbursements are payroll and income tax-free. Allowances can be differentiated and customized based on each employee. To receive reimbursement, account holders need to describe their product or service, submit expense costs and show proof of the date when the expenses were incurred.

• Excepted Benefit HRA: In an excepted benefit HRA, an employer provides funds to cover vision, dental services or short-term limited disability insurance. Traditional health insurance plans usually exclude these kinds of expected benefits. Thus, the employer determines which services are eligible for reimbursement. Employees are not mandated to enroll in a group health plan. When submitting reimbursement requests, employees need to prove that their coverage is up-to-date, show where the payment was made, verify how much was paid, note the date it was paid and list the names of everyone covered by their policy.

• Qualified Small Employer HRA: Companies with fewer than 50 full-time employees can open a qualified small employer HRA. Employers reimburse workers tax-free for their medical payments, which include individual health insurance premiums. This type of HRA offers allowances for employees to monitor their capped amounts, and they do not have to join group health insurance. Employees choose from hundreds of eligible expenses, such as copays, long-term care insurance premiums, prescriptions and even chiropractor visits.

Employees can roll over HRA contributions when they retire, but they forfeit unspent funds after resigning from or being terminated by a company.

What is an HSA?

An HSA is a Health Savings Account that belongs to the owner and can be taken with them, even if their employment status changes. Anyone can put money in an HSA, such as an employer, employee or both. All contributions are tax-free since the account holder makes pre-tax contributions and gains tax-free interest on the total balance. 

An employer also receives a tax benefit for its contributions. Account holders can invest the HSA funds once they meet a minimum balance in the account, and no set limit is placed on how much account accumulation or rollover amount can be achieved. Furthermore, these funds become available to use in retirement as well.

To open an HSA, the account holder must pair it with a high deductible health insurance plan rather than a basic insurance plan premium. That makes HSAs generally more beneficial for healthier and younger employees who do not expect high medical expenses. Typically, an HSA comes with lower monthly premiums.

If you open an HSA with your employer, it will automatically deduct funds from your paycheck to your account. You can decide what amount of your income you want deducted from each paycheck and deposited into your account.

HSA vs. HSA: Which is the Better Option?

It is advisable to understand the differences when looking at HRA vs. HSA options. 

Both an HRA and HSA allow workers and their families to have easier access to more affordable health care and pay for qualified health expenses. An HRA comes with several account types, and since it is employer-funded, you will not have to worry about paycheck reductions to pay for health care. And if you expect to have a high amount of healthcare costs throughout the year, an HRA would give you coverage and most likely not require a high deductible health plan.

An HSA, on the other hand, allows you to save in case a health emergency arises and to invest funds you don’t need at the moment. If you do not expect to need much medical attention throughout the year and have no chronic conditions, it may be better to have an HSA account.

Best Health Insurance Providers

While an HSA or HRA is a type of savings account that only you control, your insurer may dictate which types of accounts you're eligible to work with. Check out these great healthcare providers to get quotes and compare plans.

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