Do you know the difference between a Health Reimbursement Arrangement (HRA) and a Health Savings Account (HSA)?
Each account has its own benefits and merits, and they are similar in some ways. The philosophy behind an HRA and an HSA is that they are designed to help make healthcare more affordable for workers and their families by providing financial support for health related expenses. Members and account holders can use the funds in their HRA or HSA to pay for qualified health expenses, which means the person is more involved in his or her 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 – What’s the difference?
The key difference between the two accounts is that an HRA is employer-owned whereas an HSA is employee-owned. This means an HRA is left behind when an employee no longer works for that employer, and the funds are no longer accessible. With an HSA, the employee keeps the account and can transfer it when he or she changes jobs. Account holders may also invest their HSA funds once the account reaches a minimum threshold.
Another noteworthy difference is how each account is funded and used. 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. An HSA can be funded by anyone, but contributions generally come from the employee, the employer, or both. The IRS sets the guidelines for HSA qualified expenses. Furthermore, there is an annual contribution limit for an HSA, while HRA limits, if any, vary by employer.
Then there are the tax implications. Since an HRA is employer-funded, only the employer gets a tax reduction. With an HSA, an account holder makes pre-tax contributions to and earns tax-free interest on the account, 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:
|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|
|Funds available for use in retirement||No||Yes|
For employers, the benefits of providing an HRA or HSA are very similar, though an employer has more control over an HRA. Conversely, there is also an added administrative, record-keeping need with an HRA.
Knowing the difference between an HRA and an HSA is important as they are key to consumer-driven healthcare. Decide which one is right for you.
DataPath has been in the healthcare benefits administration industry since 1984. Our Summit platform allows practically unlimited plan design and our HSAToday platform can handle account administration, investing, and deposits in-house.