Do you know the difference between a Health Reimbursement Arrangement (HRA) and a Health Savings Account (HSA)? While they sound similar, they are actually quite different.
Let’s cover the similarities first. As part of consumer directed healthcare, the purpose of both an HRA and an HSA is to make healthcare more affordable for workers and their families as financial tools for health related expenses.
Participants can use these benefit accounts to pay for qualified healthcare expenses. This 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 types of accounts can be part of an employer-sponsored benefit plan (and some employers offer both).
What is a Health Reimbursement Arrangement?
An HRA is an employer-owned and funded healthcare benefits account. There are four types of HRA:
- HRA – used for IRA approved healthcare expenses; the employee must be on the company’s group health plan; cannot be used for health insurance premiums
- Individual Coverage HRA – used for IRS approved expenses, INCLUDING individual health plan premiums
- Excepted Benefit HRA – used for IRS approved expenses, INCLUDING vision and dental plan premiums (and other non-health plans)
- Qualified Small Employer HRA – used for IRS approved expenses, INCLUDING individual health plan premiums; the employer must have fewer than 50 full-time employees
What is a Health Savings Account?
A Health Savings Account is for those people who are enrolled in a high deductible health plan. The HSA is owned by the individual, not the company. It is designed to help offset higher deductible costs and other out-of-pocket expenses.
So … what are the key differences between an HRA and HSA?
There are several key differences between an HRA and HSA.
Account ownership
First, an HRA is employer-owned whereas an HSA is employee-owned. This means an HRA is left behind when an employee leaves their job. With an HSA, the employee owns the account and can transfer it when he or she changes jobs, and even keep it to use in retirement.
Account funding
Second, an HRA is funded by the company. Employees do not pay into the HRA and the benefit amount does not count toward the employee’s income (is not taxable). An HSA is funded by the account owner (employee). However, a company can contribute if it chooses, but the money is kept by the employee.
Another funding difference is that HSAs can grow tax-free. HSA owners do not pay any taxes on interest earned and they can invest their account balance to help it grow without paying taxes.
Tax benefits
Since the employer funds the HRA, they receive the tax benefits for putting money into the account. Employees can enjoy not having to pay taxes on the money used for eligible healthcare expenses.
HSAs offer a triple tax benefit for employees. Contributions are tax-free; the money used for eligible expenses is tax-free; and they can earn tax-free interest and investment income.
Eligible expenses
Something else to keep in mind is eligible expenses. Since the employers owns the HRA, it can choose which expenses to cover (so long as they are IRS approved). An HSA covers every eligible expense allowed under the IRS guidelines. These include prescriptions, copays, deductibles, vision, dental and more.
The following table below provides a side-by-side comparison of an HRA and HSA:
| Health Reimbursement Arrangement (HRA) | Health Savings Account (HSA) | |
| Funding | Employer-funded only | Funded by account holder and/or employer. |
| Tax-advantage | Employer for funding; No taxes for employees | Tax-free contributions, withdrawals, and growth |
| Portability | None. Stays with employer | Stays with account holder |
| HDHP Requirement | None | HDHP required |
| Interest earned? | No | Yes |
| Ability to invest | No | Investment option once account reaches minimum balance (if required) |
| Rollover/Account Accumulation | If allowed by plan design | Yes |
| Funds available for use in retirement | No | Yes |