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 an HRA and HSA simultaneously?”.
The answer is yes; you can have an HRA and HSA simultaneously under specific circumstances. However, to understand the advantages of having both accounts, let’s first look at the differences between the two.
Health Savings Accounts
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. Employers may contribute to the account, but this is not a requirement.
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, HSA funds may supplement your retirement income. Each year, unspent funds roll over to the following year, enabling the account to grow. Unlike other health benefit accounts, you own the HSA, which goes with you when you switch employers or retire.
However, participants must have a High Deductible Healthcare Plan (HDHP) to have an HSA.
Health Reimbursement Arrangements
An HRA is similar to an HSA but has several significant differences. First, HRA accounts are entirely funded and owned by the employer. Participants use the accounts to pay for qualified out-of-pocket medical expenses. HRA funds may roll over if the plan includes this provision, or revert to the employer in full. There is no investment option.
The Affordable Care Act (ACA) requires that standard HRAs be integrated with the company’s group health plan and used to cover eligible expenses that the health plan doesn’t cover (such as deductibles, copays, coinsurance, and certain medical services). In addition, HRAs are not portable. If you leave your employer, the HRA stays with the company.
How to Have an HRA and HSA Simultaneously
As noted, to open and contribute to an HSA, participants must be enrolled in a qualified HDHP, and have no other health coverage. The HRA must be integrated with a group health plan. With those two conditions met, four HRA plan types are compatible with an HSA, per IRS regulations.
The Four HRA Types that are HSA-Compatible
- Limited Purpose HRA: Pays or reimburses only permitted healthcare coverage (including vision and dental), permitted insurance, or preventative care. These expenses do not count toward the HDHP deductible.
- Post-deductible HRA: Pays for or only reimburses preventative care or medical expenses incurred after meeting the minimum annual HDHP deductible.
- Retirement HRA: Covers eligible expenses only after retirement. Before retirement, the participant uses an HSA to cover the expenses. Once HSA eligibility is lost after retirement, the participant switches to the HRA.
- Suspended HRA: The participant suspends an HRA by electing to forego 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.
Advantages of Owning Both Accounts
Having an HSA and HRA at the same time combines the benefits of two different financial tools that help manage and pay for medical expenses. The advantages of utilizing both accounts include the following:
- Tax-free employer-sponsored funds pay for qualified medical expenses with the HRA
- The HSA-qualified HDHP offers lower health insurance premiums
- The HSA funds can pay for a wide variety of healthcare expenses.
- The HSA offers triple-tax benefits with pre-tax contributions, tax-free growth (interest and investment), and tax-free distributions (withdrawals) to pay eligible expenses
- Participants may save unspent HSA funds for retirement
Medical expenses can be a burden for many families. Having an HRA and HSA at the same time can relieve much of that burden while offering opportunities to build your retirement nest egg. For more information, talk to your company’s HR department.
DataPath has been a full-service TPA solutions provider for nearly four decades. The company’s cloud-based Summit platform is the industry’s first all-in-one solution for CDH, HSA, Well-Being, COBRA, and Billing administration. Please enter your email (above right) to be notified when new blog articles are published.