Key takeaways:
Health reimbursement arrangements (HRA) and health savings accounts (HSA) are both ways to pay for qualified medical expenses tax-free.
An HRA is solely funded by an employer, whereas an HSA can be funded by an employer and an employee. You can contribute money to your HSA — as long as you meet the qualifications — up to the annual limit.
An HRA and HSA can help you pay for healthcare expenses not covered by your health insurance. Depending on how your HRA is set up, your unused funds may not roll over into the next year.
If you’re looking for ways to get tax savings on everyday medical expenses, a health reimbursement arrangement (HRA) or health savings account (HSA) may come in handy. These are both healthcare benefits that your employer may offer, but the qualifications and account features differ.
What’s the difference between an HRA and HSA?
One of the main differences between an HRA and HSA is ownership. Employers own and fund HRAs. The employee has no say about contributions or investing.
On the other hand, the employee owns the HSA and can take it with them even when they leave their employer. An employer can fund an HSA, but that is not necessary.
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Employers offer HRAs as an alternative to health insurance. Employers can also offer HSAs to eligible employees, but they do not have to fund the account. The funds in both are tax-free when used for qualified medical expenses.
You do not need to work for an employer to have an HSA. A self-employed individual can set up their own HSA at a financial institution or credit union if they meet the requirements.
Let’s look at some key differences between an HRA and HSA.
| HRA vs. HSA | Health reimbursement arrangement (HRA) | Health savings account (HSA) |
|---|---|---|
| Ownership | Employer owned | Individual owned |
| Funding | Employer | Employer and employee |
| Elegible expenses | Employer chooses | Set by IRS |
| Can be invested | No | Yes |
| Contributions reported on the 1040 | No | Yes |
| High-deductible health plan required | No | Yes |
Another key difference is the employer control of an HRA. Employers can decide things like if the funds will roll over each year. Whereas funds in an HSA roll over from year to year.
How do you participate in an HRA or HSA?
You can typically participate or change your HRA participation when:
You start your job
During open enrollment period, and
If you have a qualifying life event such as marriage or divorce
Certain types of HRAs require you to be enrolled in a qualified individual health plan — like a state or federal marketplace plan — before you can use HRA money.
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Unlike an HRA, you must have a high-deductible health plan (HDHP) to have an HSA. With this type of insurance plan, your monthly premiums are lower than traditional health plans. But your annual deductible is high. Your deductible represents the amount of money you must pay out of pocket before your insurance starts to cover some of the costs.
You can participate and contribute to an HSA at any time as long as you have a qualified HDHP. Your employee may only offer to enroll you during the same times they would offer an HRA. However, you can open an HSA on your own. Your employer will let you know if they offer an HRA or HSA. If you are unsure, you can always reach out to your human resources department at work.
What are the pros and cons of HRAs vs. HSAs?
HRAs can be beneficial depending on your situation. Here are some of the pros and cons of an HRA.
| Pros | Cons |
|---|---|
| Funds are never taxable if used for qualified medical expenses. | The employer chooses which qualified medical expenses they will cover. |
| Employer fully funds the account. | Participants do not control the amount contributed to the account. |
| You do not need to have an HDHP to receive reimbursements from an HRA. | If you withdraw funds to pay for nonqualified medical expenses, you will have to pay taxes. |
| Some HRAs can be used to pay for health insurance premiums. | If you switch jobs, you forfeit funds that your previous employer contributed to the HRA. |
HSAs are also a good health benefit to have. Here are some of the pros and cons of an HSA.
| Pros | Cons |
|---|---|
| Personal contributions reduce taxable income. | Only available with a high-deductible health plan. |
| Unused funds can be invested. | There are limits to how much you can contribute. |
| If employed, your employee can contribute to your account. | 20% tax penalty if funds are not used for qualified medical expenses. |
| Individuals own the account not employers. | 6% excise tax on contributions over the contribution limits. |
How do you use HRAs and HSAs?
You can use your HRA or HSA to pay for qualified medical expenses. Be sure to talk with your employer about how they disburse your HRA funds. For an HSA, contact your account administrator. You may be able to pay for your items by:
Using a debit card that’s linked to your HRA or HSA
Requesting a reimbursement when you pay for qualified medical expenses out of pocket
Asking your employer to send payment directly to your healthcare provider to cover approved services
What expenses are eligible for HRAs and HSAs?
All qualified medical expenses under IRS publication 502 are eligible for reimbursement. Employers participating in an HRA can choose which eligible expenses they will cover.
Below is a list of 10 common expenses covered by an HRA and HSA.
Annual exams
Healthcare provider copayments
Check with your employer if you have an HRA to see which expenses they will cover before making a purchase. If you have an HSA, you can check with your account administrator.
Can you have an HRA and an HSA?
You can have an HRA and an HSA at the same time as long as you meet the requirements. Typically, you can only have HDHP insurance coverage to contribute to an HSA.
Per the IRS, you can use the following four HRAs with an HSA:
Limited-purpose HRA: This account reimburses vision and dental expenses only.
Post-deductible HRA: This only pays or reimburses medical expenses after an employee meets HDHP deductible.
Retirement HRA: This HRA reimburse medical expenses incurred after retirement, similar to a pension.
Suspended HRA: An employee agrees to go without reimbursement for a specific period of time. The employee must decide to forgo reimbursement before the start of the coverage period.
Do HRA and HSA balances roll over into the next year?
HSA funds do roll over into the next year. Generally, HRA balances do not roll over each year. The IRS gives employers flexibility to choose if their HRA funds will roll over or not. If your employer decides not to roll over funds at the end of the plan year, you will lose any unused funds in the account. The employer gets to keep the money.
What are the contribution limits for HRAs and HSAs?
The IRS sets limits on how much individuals can contribute to HSAs and some HRAs. The contribution limits are adjusted each year for inflation. For 2023, you can contribute up to $3,850 to an individual coverage HSA and $7,750 to a family HSA. Individuals ages 55 and older can contribute an extra $1,000 above the annual limit to an HSA.
Employers typically have the flexibility to set limits on how much they will contribute to an HRA. There’s an exception if your employer offers these types of HRAs:
For 2022, employers can contribute up to $1,800 to an excepted benefit HRA. They can contribute up to $5,450 to an individual coverage and $11,050 to a family coverage QSEHRA.
If you have a QSEHRA, your employer can make an extra $1,000 contribution for individuals 55 and older.
The bottom line
HRAs and HSAs provide tax benefits for employees who need to pay for qualified medical expenses not covered by insurance. You won’t have to pay taxes on the dollars in your account as long as you follow the rules.
Although these health accounts have many similarities, there are also many differences you need to be aware of. The contribution limits, set up requirements, and roll over rules are some of the features that set these two accounts apart. However, you don’t have to choose one or the other. You may be able use an HRA and HSA together to maximize your healthcare savings.
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References
Internal Revenue Service. (2019). Internal revenue bulletin: 2004-22.
Internal Revenue Service. (2021). Internal revenue bulletin: 2021-25.
Internal Revenue Service. (2022). Publication 502 (2021), medical and dental expenses.
Internal Revenue Service. (2022). Publication 969 (2021), health savings accounts and other tax-favored health plans.
U.S. Centers for Medicare & Medicaid Services. (n.d.). Deciding between group coverage & an HRA?
U.S. Centers for Medicare & Medicaid Services. (n.d.). Health reimbursement arrangements (HRAs) for small employers.
