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.
Some employees have the opportunity to have both an HRA and an HSA, either through their own employer or in combination with plans available through their spouse’s employment. This brings up an important question: “Can a person have both an HRA and HSA at the same time?”
The answer is YES, you can – under specific circumstances. Per IRS regulations there are four HRA plan types that are compatible with having an HSA at the same time. To better understand how the accounts can work together, first let’s look at the differences between HRAs and HSAs.
The Basics of HRAs and HSAs
HRAs
HRAs are owned by and funded solely by the employer. The employer credits the HRA with a predetermined amount of money that you can use to pay for eligible medical expenses not covered by the company’s group health plan. Depending on the plan, unused HRA funds may be eligible for rollover from one plan year to the next, but cannot be invested.
Currently, 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 is owned by the employer. Finally, any qualified amount you receive from an HRA does not count toward your taxable income.
HSAs
An HSA acts like a long-term savings account that you can use to pay for qualified health care expenses. To qualify to open and contribute to an HSA, you must be enrolled in a high deductible healthcare plan (HDHP) and not have any health insurance coverage that is not an HDHP. You set aside money pre-tax from each paycheck, and then make withdrawals to pay for eligible expenses as needed. The employer can also contribute to the account, but is not required to.
As an HSA account holder, you can build your balance in three ways:
- Making tax-free contributions
- Earning tax-free interest
- Earning tax-free returns from investing the balance
All unspent funds roll over from year to year. Unlike other tax-advantaged benefit accounts, you own the HSA and take it with you if you switch employers or retire. HSAs can also be used to supplement retirement income since qualified withdrawals after age 65 can be for any reason, not just for medical expenses.
HRAs and HSAs at the Same Time
As mentioned above, to qualify for an HSA you must be covered by a qualified HDHP and have no other health coverage that’s not an HDHP; and, an HRA must be integrated with a group health plan. Once those conditions are all met, you can have both an HRA and an HSA at the same time as long as the HRA falls within one of the plan types listed below.
Four HRA Plan Types Compatible with HSAs
- 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 has been met.
- Retirement HRA: Covers eligible expenses incurred after retirement. Until retirement, you use an HSA to cover qualified expenses, then lose HSA eligibility after retirement and switch to the HRA.
- Suspended HRA: Before HRA coverage begins, you suspend your HRA by electing to forgo reimbursement for medical expenses incurred during the coverage period. As a result, you are HSA-eligible during the suspension period. The suspension does not apply to otherwise HRA-eligible expenses that are permitted insurance, permitted coverage, or preventive care.
Consult IRS Ruling 2004-45 for further guidance.
Advantages
Both HRAs and HSAs are designed to help you manage and pay for medical expenses. Where regulations permit, having both accounts at the same time offers you the best advantages of both:
- Tax-free, employer-funded account to pay for qualified medical expenses (HRA)
- Funds can be used for a wide variety of healthcare expenses (HRA, HSA)
- Lower health insurance premiums (HDHP)
- Triple-tax benefits with pre-tax contributions, tax-free growth (interest and investment) and tax-free distributions for eligible expenses (HSA)
- Unspent funds can be saved for retirement (HSA)
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 add to your retirement nest egg. For more information, talk to your company’s HR department.