Do you know the difference between a Health Reimbursement Arrangement (HRA) and a Health Savings Account (HSA)? While they look and sound similar, there are distinct differences between them – particularly when it comes to ownership, tax benefits, and insurance requirements.
HRA vs HSA – Similarities
The idea behind both HRAs and HSAs is that they help make healthcare more affordable for workers and their families. There are more similarities as well, even though each type of account also has its own advantages.
Account holders and participants can use the funds in their HRA or HSA to pay for qualified health expenses. These accounts are part of consumer directed healthcare, which empowers individuals to be more involved in their personal healthcare since they choose how and when to spend their healthcare dollars. Also, both accounts can be part of an employer-sponsored benefit plan (and some employers offer both).
HRA vs HSA – Differences
Account types and insurance requirements
An HSA is a Health Savings Account, period. There are no variations. However, to open and contribute to an HSA, account owners must be enrolled in a qualified high deductible health plan.
With an HRA, there are several types of accounts. The employer may choose to offer one of the following:
- Group HRA – Offered in conjunction with a group health plan and covers IRS-approved expenses
- Individual Coverage HRA – May be offered by employers of any size and can cover individual health insurance premiums (non-group)
- Excepted Benefit HRA – Used only for benefits such as dental, vision, short-term disability, etc.
- Qualified Small Employer HRA – Available for employers with fewer than 50 full time employees and may cover non-group health insurance premiums and employer-approved expenses
An HRA is employer-owned whereas an HSA is employee-owned. This means an HRA remains with the employer when an employee leaves the company, and the funds are no longer accessible.
With an HSA, the employee keeps the account for life, regardless of employment status. The account holder can continue to use the available balance, and if enrolled in a high deductible plan, keep making new contributions. Account holders may also invest their HSA funds once the account balance reaches a minimum threshold.
Funding and taxes
Another noteworthy difference is how each account is funded. The money in an HRA comes solely from the employer. Therefore, the employer sets the rules for which expenses are eligible for reimbursement, such as deductibles, copays, coinsurance, and other services like dental and vision.
Anyone can fund an HSA, but contributions generally come from the employee, the employer, or both. The IRS sets the guidelines for HSA qualified expenses. Furthermore, there is a set annual contribution limit for an HSA. HRA limits, if any, vary by employer.
There are also differences in tax advantages. Since an HRA is employer-funded, only the employer gets a tax reduction. However, an HRA benefit does not count towards the employee’s income.
With an HSA, an account holder makes pre-tax contributions to the account and earns tax-free interest on the account balance, and the employer gets a tax benefit for contributing, as well.
The table below provides a side-by-side comparison of the differences between an HRA and HSA for account holders:
HRA vs HSA Table
|Item||Health Reimbursement Arrangement (HRA)||Health Savings Account (HSA)|
|Funding||Employer-funded only||Funded by account holder and/or employer|
|Tax-advantage||Employer||Tax-free contributions for account holder and employer|
|Portability||None. Stays with employer||Stays with account holder|
|Integration with other tax-advantaged accounts||May be integrated with FSA||None|
|HDHP requirement||None||HDHP required|
|Interest earned?||No||Tax-free interest earned|
|Ability to invest||No||Investment option once account reaches minimum balance|
|Rollover/Account Accumulation||Dependent on plan set up||Yes, with no limit|
|Funds available for use in retirement||Dependent on plan set up||Yes|
For employers, the advantages of including an HRA vs HSA in their employee benefit program are very similar, though employers have more control over HRAs. Conversely, there is also an added administrative, record-keeping need with an HRA.
Knowing the difference between an HRA and an HSA is important, especially as they are key to consumer-driven healthcare. Decide which one is right for you.
DataPath Summit features flexible HRA plan design and all-in-one HSA administration.