Healthcare spending accounts, such as Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs), help individuals and families pay for medical expenses. They also provide more control over how and where to pay for those expenses. One frequently asked question is “can a person have both an HRA and HSA at the same time?”.
The answer is yes – you can have an HRA and HSA at the same time, under specific circumstances. To understand the advantages of having both accounts, let’s first look at the differences between the two.
Health Savings Account
An HSA acts like a long-term savings account you can use to pay for qualified health care expenses. You deposit pre-tax money from each paycheck into the account, and then make withdrawals to pay for eligible medical expenses as needed. Your employer can also contribute to the account, but is not required to.
Account holders can build up their HSAs by earning tax-free interest on the account balance and tax-free returns from investing their funds. In addition, HSAs can be used to supplement your retirement income. Each year unspent funds rollover to the following year, allowing the account to grow over time. You own the HSA and take it with you any time you switch employers or retire, unlike other health benefit accounts.
However, there is one requirement to be able to have an HSA. Participants must be enrolled in a high deductible healthcare plan (HDHP).
Health Reimbursement Arrangement
An HRA is similar to an HSA, but has several significant differences. First, the HRA account is owned by and funded only by the employer. The employer deposits a predetermined amount of money into the account which you can then use to pay for medical expenses not covered by your health plan. HRA funds may be eligible for rollover (depending on your plan), but cannot be invested.
Employers cannot offer standard HRAs as stand-alone plans; they must be integrated with a group health plan. The HRA is not transferable when you leave the company since it’s owned by the employer.
How to Have an HRA and HSA at the Same Time
As mentioned before, to qualify for an HSA, you must be covered by a qualified HDHP and have no other health coverage that’s not high-deductible. To be compliant with healthcare reform, an HRA must be integrated with a group health plan. Once those conditions are met, there are four HRA plan types (which vary by employer) that are compatible with an HSA, per IRS regulations.
Four HRA plan types that are compatible with an HSA:
- Limited Purpose HRA: Pays or reimburses only permitted coverage (including vision and dental), permitted insurance or preventative care. These expenses do not count toward the HDHP deductible.
- Post-deductible HRA: Pays or reimburses only for preventative care or medical expenses that are incurred after the minimum annual HDHP deductible is met.
- Retirement HRA: This HRA covers eligible expenses only after retirement. Up to retirement, the participant uses an HSA to cover expenses, then loses HSA eligibility after retirement and switches to the HRA.
- Suspended HRA: The participant suspends his or her HRA by electing to forgo reimbursement/payment for medical expenses incurred during the coverage period. This must be done before HRA coverage begins. During the suspension, the person is HSA-eligible. The suspension does not apply to expenses that are permitted insurance, permitted coverage, or preventive care.
Consult IRS Ruling 2004-45 for further guidance.
The Advantages of Having an HRA and HSA
Having both accounts combines the benefits of two different financial tools. Both HRAs and HSAs are designed to help manage and pay for medical expenses.
The advantages of utilizing both accounts includes:
- Tax-free employer-sponsored funds to pay for qualified medical expenses with an HRA
- Lower health insurance premiums with an HDHP
- Funds can be used for a wide variety of healthcare expenses
- Triple-tax benefits with pre-tax contributions, tax-free growth (interest and investment) and tax-free distributions for eligible expenses with an HSA
- Any unspent HSA funds can be saved for retirement
Medical expenses can be a burden for many families. Having an HRA and HSA can relieve much of that burden while offering opportunities to add to your retirement nest egg. For more information, talk to your company’s HR department.