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Health Savings Account (HSA) vs Health Reimbursement Arrangement (HRA): What’s the Difference?

By Emily Greenhill Pierce · July 14, 2022 · 8 minute read

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Health Savings Account (HSA) vs Health Reimbursement Arrangement (HRA): What’s the Difference?

A health savings account (HSA) and a health reimbursement account (HRA) both help set aside money for medical expenses not covered by a health insurance plan. But there is a major difference between the two types of accounts: Funds in an HRA are contributed to and distributed by an employer. An HSA, however, is controlled entirely by you, the participant.

Since many people are looking for ways to reduce their healthcare spending, it can be wise to get better acquainted with HSAs and HRAs. Then, provided you are eligible, you can decide which is the best option for you and your family (there’s a chance you might have both kinds of accounts).

To help you with this process, read on to learn:

•   What is an HSA vs. HRA?

•   What are the pros and cons of an HSA?

•   What are the pros and cons of an HRA?

•   How to know which plan is right for you.

•   Alternatives to HSAs and HRAs.

What Is a Health Savings Account?

To compare the differences between an HRA vs. an HSA, it’s helpful to first define what each one is.

A health savings account (HSA) permits employees and freelancers to put away tax-free funds to be used for future medical purposes. There is one major qualification for an HSA: You must be enrolled in a high-deductible health plan (HDHP).

How do you know if you have this kind of plan? Here are the guidelines for 2022: The plan must have a deductible of at least $1,400 for an individual or $2,800 for a family. In addition, the plan’s total yearly out-of-pocket expenses can’t exceed $7,050 for an individual or $14,100 for a family.

HDHPs usually offer lower monthly premiums, but you can get hit with major costs as you work your way towards reaching those high deductibles. That’s where a health savings account can help save the day. An HSA can bridge the gap between your high deductible and out-of-pocket payments.

Also, the money in the HSA isn’t a “use it or lose it” proposition. The cash is yours, and you can even access unused HSA funds as a way to boost your retirement savings. Another plus: If you leave your job, the HSA can travel with you.

A Health Savings Account operates much like a checking account, abiding by its own HSA rules and limits. At any time, an individual may make contributions, allocate HSA funds to pay for qualified medical costs not covered by an HDHP, pay bills online, and make monetary transfers.

Direct deposits can be made straight from payroll into your HSA, and employers can also contribute. Health Savings Account contributions rollover every year, so there’s no rush to spend those pre-tax funds in your account.

What Is a Health Reimbursement Account?

A health reimbursement account (HRA), on the other hand, is an employer-owned account. It’s a job perk that the employer funds and offers to workers, with the HRA money earmarked for qualifying employee medical expenses. The details, including how much is in the HRA, are determined by the employer.

With an HRA, the employer makes the contributions and oversees reimbursement distributions. Unused amounts rollover into the following year, but since your workplace makes the contributions, they keep any accumulated funds if you leave your job, retire, or are let go. Put another way, you can’t take any HRA money with you.

Differences Between an HSA and HRA

Because their names are similar and they both help manage healthcare expenses, HSAs and HRAs can easily be confused. Here are the primary differences between an HRA vs. HSA account:

Health Savings Account (HSA)

Health Reimbursement Account (HRA)

HSAs are created, managed, and owned by an individual (an employee or self-employed worker) HRAs are established, funded, and owned by an employer
Contributions are yours to keep. They can be used as you move from job to job and after you retire Funds can only be used while a person is employed at the company that owns the plan
HSAs can be opened by an individual as long as they are enrolled in a HDHP HRAs can only be opened through an employer. The health plan offered by the employer does not have to be an HDHP
Contributions are tax-free, can grow, and earn interest Tax benefits are only for the employer
Funds roll over year to year Employers may roll over unused funds to use in the future
Contribution limits and qualifying medical expenses are determined by the IRS Rules around contribution limits and qualifying medical expenses may be set by the employer
HSA contributions can be invested into mutual funds Money in an HRA cannot be put toward an employee’s personal investments

Advantages of an HSA

There are many benefits of using an HSA, including:

•   Covering out-of-pocket medical costs, including copays, dental expenses, orthodontia, hearing aids, and eyeglasses. The IRS has an extensive list of how you can use your tax-free dollars.

•   Lower premiums. To qualify for an HSA, you must be enrolled in a high deductible health plan, which means your monthly payments are probably lower than other types of health insurance plans.

•   Lowering taxable income. HSA contributions go into your account before taxes are taken out. This can have the effect of lowering your taxable income, so you could owe less come tax time.

•   Covering family health expenses. HSAs can benefit anyone who is currently on your high-deductible savings plan, including a spouse or children.

•   Rollover contributions. Unused contributions rollover into the next year, accumulating tax-free interest.

•   Investments. You can choose to invest your HSA dollars in certain mutual funds once you reach a required minimum balance.

•   Retirement savings. After the age of 65, you may be able to take advantage of the rules of using HSAs for retirement. Specifically, unused funds can be withdrawn during retirement without penalty. The money doesn’t have to be spent on health expenses — it can be spent on anything!

•   Ownership of the account. The money in an HSA is yours; you don’t forfeit it if you change jobs or are let go.

Disadvantages of an HSA

There are some possible cons to having an HSA. These include:

•   Contribution limits. As of 2022, you can contribute a maximum of $3,650 for individuals and $7,300 per family to an HSA.

•   Monthly or annual fees. Some health savings accounts can charge a monthly service fee. These fees tend to be no more than $5 per month. If you choose to invest in mutual funds, there may be an annual account management fee.

•   Penalties for non-qualified expenses. Any funds used for unapproved healthcare purchases before the age of 65 can get hit by a hefty 20% fine by the IRS. Also, once spent on non-qualified expenses, the money will be considered taxable income.

•   Monetary losses. Any investments you make with HSA funds could cause your balance to fall if the market drops.

•   Unable to contribute. There may be times, due to unemployment or a change in life’s circumstances, when you might not be able to regularly contribute to your HSA. If you can’t add funds, then you might not have enough in your account to cover qualified expenses.

•   Keeping tabs for tax purposes. HSA contributions and expenditures must be reported on your tax return. Keeping track of the transactions can be a chore.

Advantages of an HRA

Despite having a lack of personal control over an employer-owned HRA account, there are some benefits:

•   No money out of your paycheck. Your employer pays for qualifying healthcare costs out of the HRA fund. Be sure to understand your company’s monetary limits and qualifying expenses to avoid any surprises or disappointment.

•   No HDHP requirement. Companies can offer both a low-deductible health plan and an HRA.

•   Companies of all sizes can participate. Small businesses that can’t offer group health plans can create HRAs (known as individual coverage HRAs) to reimburse employees who purchase individual health insurance and pay for other medical costs.

•   No contribution limits. There is no cap on how much money a business can contribute to an HRA.

•   Some HRAs may cover insurance premiums as well as out-of-pocket expenses. Be sure to understand the rules and limits of your employer’s HRA.

Disadvantages of an HRA

As you might expect, there are potential downsides to HRAs. Among these are:

•   You can’t take it with you. When you leave the job, HRA funds don’t come with you. Any unused funds stay with the company.

•   Inconsistent guidelines. HRAs are not standardized. A company can change the rules and what qualifies as a health expense as they see fit. HRA terms at one office can differ wildly from another’s. It can be important to spend time to make sure you understand common health insurance terms as well as your account guidelines.

•   Limited sign-up window. You may only be able to enroll in your company’s HRA during a specific window of open enrollment.

•   Lack of availability. Self-employed people cannot participate in an HRA; it’s strictly an employer-sponsored program offered to their staff.

Which One Is Right for You?

The terms HRA and HSA look and sound so similar, but these plans are very different. When deciding if an HRA vs. HSA is better, the choice may be made for you. Many companies only offer one or the other.

Then again, you might be able to have both, if your employer offers an HRA and you choose to open an HSA. Imagine that you have an HDHP and your employer offers an HRA, which you sign up for. You could therefore open an HSA as well. You might be in a situation in which your employer provides a limited purpose HRA; say, it only covers vision and dental expenses. You could then use your HSA for all your other health expenses or simply save the funds till retirement rolls around.

In the end, the key is to know which plan (or plans) you are eligible to access and then decide if it will help you better handle your healthcare costs.

Alternatives to HSAs and HRAs

HSAs and HRAs aren’t the only game in town when it comes to setting aside money to pay for healthcare expenses. A flexible spending account (FSA) is one that you can contribute pre-tax dollars to and use for certain qualifying expenses. Employers make these accounts available, and in some cases, they may contribute some funds to the account.

These accounts come in a few varieties:

•   Health care FSAs: The money in these funds can be used for eligible medical expenses that aren’t covered by your health plan

•   Dependent care FSAs: The cash in these accounts can be applied to eligible care-related expenses for dependents who are age 12 and under or are disabled and of any age.

•   Limited purpose FSAs: The money in these accounts can cover eligible vision and dental expenses for those enrolled in HDHP and who have an HSA.

Whether you qualify for and enroll in an HSA, HRA, and/or an FSA, these savings accounts can help make healthcare more affordable. These options can have a significant and lasting positive impact in today’s world of skyrocketing healthcare costs.

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FAQ

Is it better to have an HRA or HSA?

Both types of accounts can be useful in helping to lower your healthcare costs. Not everyone has access to an HRA; these funds are created and offered by certain employers, who give employees healthcare funds as a benefit. HSAs, on the other hand, are only for those who have high deductible healthcare plans. If you have one of these HDHPs, an HSA can hold funds that belong to you. This money can be distributed for eligible expenses, invested, rolled over, and used in retirement.

What happens to my HRA if I leave my job?

An HRA is owned by your employer. If you are fired, quit, or retire, the funds in your HRA stay with your employer.

Is an HRA a high-deductible plan?

No. An HRA is a health reimbursement account, which some employers fund to help cover medical costs for their employees.


Photo credit: iStock/Nudphon Phuengsuwan

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