A great way to save money on medical expenses? Pre-tax savings and spending accounts.
That’s why employers often offer specialized accounts, like health reimbursement arrangements (HRAs) and health savings accounts (HSAs).
Both types of accounts can help an employee pay for medical care, but there are some key differences. For example, an HRA is owned and funded by an employer, while you own your HSA. You can also take your HSA with you when you leave your job, but that option isn’t available for HRAs.
Here are important details to know about HRAs vs. HSAs, including which may be right for you.
Key differences between an HRA and HSA
||Employees whose employers offer HRAs and who can meet employer-specific eligibility requirements
||Individuals with an HDHP who can meet all IRS-specific eligibility requirements
|Who owns the account?
||Individuals account holders
|Who can contribute?
||Both individuals and employers, as well as spouses and family members of the account holder
|What is the maximum contribution amount?
||There are no maximum annual contribution limits for standard HRAs and ICHRAs, but QSEHRAs and EBHRAs have annual limits set by the IRS.1
||Annual limits are set by the IRS. For 2023, health contribution limits are $3,850 for individuals and $7,750 for families.2
|Does it earn interest?
|Does the money roll over year-to-year?
||Typically no, but an employer can allow it
|Is the account portable if you change jobs?
||Typically no, but an employer may allow you to use remaining funds
What to know about HRAs
An HRA is a type of account that reimburses employees for qualified medical expenses, such as deductibles and prescriptions. HRAs are employer-owned-and-funded plans and are offered as part of an employer-sponsored group health insurance plan. Only an employer can put money into an HRA, and employers set contribution and rollover limits. Because HRAs are owned by an employer, employees typically lose these funds if they leave the company.
Contributions to an HRA aren’t taxed, and employees can only withdraw the money for qualified health-related expenses. Depending on the employer, some HRAs can also be used to reimburse health, vision, and dental insurance premiums.
There are several types of HRAs an employer might offer its employees. Some of the most common include:
- Standard HRA: This is a traditional HRA in which an employer provides a tax-advantaged reimbursement plan that employees can use toward qualified medical expenses.
- Individual coverage HRA (ICHRA): This is a new type of HRA that became available in January 2020.3 Employers can offer this plan as an alternative to traditional group health insurance. To participate, employees must enroll in individual health insurance coverage through the private marketplace.
- Qualified small employer HRA (QSEHRA): This type of HRA is for small businesses that want to offer their employees a tax-free reimbursement for qualifying health expenses.
- Expected benefit HRA (EBHRA): This type of HRA is offered to all employees, even if they don’t participate in the company’s group health coverage. This plan can be used for out-of-pocket expenses related to vision and dental costs, short-term disability insurance, and other qualified medical expenses.
Benefits of an HRA
Some advantages of an HRA include:
- Employers contribute money that can be used to help cover qualified health costs.
- The money contributed to an HRA isn’t considered taxable income.
- Some employers may allow unused HRA funds to roll over to the next year.
What to know about HSAs
An HSA — not to be confused with a flexible spending account (FSA) — is a tax-advantaged savings account designed to help cover out-of-pocket qualified medical expenses. To qualify for an HSA, account holders must be enrolled in a high deductible health plan (HDHP). HSAs are owned by an individual and not an employer, but both an employer and employee can contribute to the account.
Contributions are limited to an annual maximum dictated by the government. The funds saved in an HSA are portable — meaning you take them with you if you retire or leave your job. They also carry over into the next year.
Employers who offer HDHPs might offer HSAs as part of their employee benefits package. However, individuals can also purchase their own HSA in the private marketplace. Employed, self-employed, and unemployed individuals can all contribute to an HSA, as long as they meet the following eligibility requirements:
- You must be covered under an HDHP.
- You can’t have coverage under any other type of health plan.
- You can’t be enrolled in Medicare.
- You aren’t claimed as a dependent on another person’s tax return.
Benefits of an HSA
Some advantages of an HSA include:
- The money goes with the employee, even if they change employers or retire.
- Any leftover balances automatically roll over to the next year.
- The money contributed to an HSA isn’t considered taxable income.
- Withdrawals aren’t taxed, as long as you use them for qualified expenses.
- The money in an HSA can be invested and grown tax-free.
HRA vs. HSA: Which may be better for you?
To choose between an HRA or HSA, consider your specific needs and circumstances. First, figure out if you meet the basic eligibility requirements, like being enrolled in an HDHP or meeting specific employer mandates.
Then, try to determine what you’ll need out of your health account for the year. If you select an HDHP, for instance, you’ll potentially have costly deductibles to pay when you need medical treatment. But that HSA can help pay for some of those costs. Or maybe you want to use your account to help save for retirement. After you turn 65, you can use your HSA funds for medical expenses in retirement. You can even use it on non-medical expenses, like buying groceries, without penalty — however, federal and state taxes still apply to those distributions. But if you can’t reasonably afford to put your own money into an HSA, or you don't have the financial means to pay the high deductibles that you may incur with an HDHP, an HRA may be a better option.
Keep in mind that in some cases, an employee can have both an HRA and an HSA. Consult with your employer to help you weigh all your options.