Understanding the Differences Between HRA and HSA for Better Health Savings

Choosing the right health savings option can save you money and reduce stress when medical expenses arise. Two popular choices are Health Reimbursement Arrangements (HRA) and Health Savings Accounts (HSA). While both help manage healthcare costs, they work differently and suit different needs. This post explains how HRAs and HSAs compare, helping you decide which fits your situation best.

What is a Health Reimbursement Arrangement (HRA)?

An HRA is an employer-funded plan that reimburses employees for qualified medical expenses. The employer sets aside a specific amount of money for each employee to cover healthcare costs like copays, prescriptions, or deductibles.

Key Features of HRAs

• Employer-funded only: Employees cannot contribute their own money.

• Reimbursement-based: You pay medical expenses upfront, then submit claims for reimbursement.

• Unused funds: Employers decide if unused money rolls over year to year or expires.

• No portability: If you leave your job, you usually lose access to the HRA funds.

• No tax on reimbursements: Money reimbursed for qualified expenses is tax-free.

  
  

Example of HRA Use

Imagine your employer offers an HRA with $1,000 annually. You visit the doctor and pay a $200 copay. You submit the receipt to your employer, who reimburses you $200 tax-free. If you don’t use the full $1,000, your employer may allow the remainder to roll over or may reset it next year.

What is a Health Savings Account (HSA)?

An HSA is a tax-advantaged savings account that individuals can use to pay for qualified medical expenses. Unlike HRAs, HSAs are funded by the individual, employer, or both, and the money belongs to the account holder.

Key Features of HSAs

• Individual ownership: You own the account and funds, even if you change jobs.

• Tax advantages: Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified expenses are tax-free.

• Contribution limits: The IRS sets annual limits ($3,850 for individuals and $7,750 for families in 2024).

• High-deductible health plan (HDHP) required: You must have an HDHP to open and contribute to an HSA.

• Funds roll over: Unused money stays in your account year after year.

  
  

Example of HSA Use

Suppose you contribute $3,000 to your HSA in a year. You pay $500 for prescription drugs and use your HSA card to cover the cost. The $500 withdrawal is tax-free. The remaining $2,500 stays in your account and can grow with interest or investments.

Comparing HRA and HSA: What You Need to Know

| Feature | HRA | HSA |

|-----------------------------|---------------------------------------|---------------------------------------|

| Who funds it? | Employer only | Employer and/or employee |

| Account ownership | Employer | Individual |

| Portability | No (usually lost if you leave employer) | Yes (yours to keep) |

| Contribution limits | Set by employer | IRS limits apply |

| Tax benefits | Tax-free reimbursements | Tax-deductible contributions, tax-free growth, tax-free withdrawals |

| Eligibility | No specific health plan required | Must have a high-deductible health plan |

| Use of funds | Reimbursement only | Pay directly or reimburse yourself |

| Rollover of unused funds | Depends on employer | Yes, funds roll over indefinitely |

When to Choose an HRA

• Your employer offers it as part of your benefits package.

• You want help covering out-of-pocket costs without contributing your own money.

• You prefer a plan that does not require a high-deductible health plan.

• You don’t mind losing funds if you leave the company.

  
  

When to Choose an HSA

• You have or want a high-deductible health plan.

• You want to save money for future medical expenses with tax advantages.

• You want control over your health savings and portability if you change jobs.

• You want to invest your health savings for potential growth.

  
  

Practical Tips for Managing HRAs and HSAs

• Track your expenses carefully: For HRAs, keep receipts and submit claims promptly. For HSAs, keep records of qualified medical expenses in case of IRS audits.

• Understand your employer’s HRA rules: Some HRAs allow rollover, others do not. Know your plan’s details.

• Maximize HSA contributions: If eligible, contribute the maximum allowed to benefit from tax savings.

• Use HSA funds wisely: Pay for qualified expenses to avoid taxes and penalties. After age 65, you can withdraw for any reason without penalty, but non-medical withdrawals are taxed.

• Combine with other benefits: Some employers offer both HRA and HSA options. Understand how they interact.

  
  

Final Thoughts on Choosing Between HRA and HSA

Both HRAs and HSAs offer valuable ways to manage healthcare costs, but they serve different purposes. HRAs provide employer-funded reimbursements without requiring employee contributions, while HSAs offer individual control with tax benefits but require a high-deductible health plan.

Choosing the right option depends on your health plan, financial goals, and job situation. If your employer offers an HRA, it can reduce your immediate out-of-pocket costs. If you want to save for future medical expenses with tax advantages and portability, an HSA is a strong choice.