Healthcare is a major expense for the majority of Americans. Both Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs) provide assistance with health care costs, but they work differently. We will cover both HSAs and HRAs in depth to help you make an informed decision about which one may be right for you.
What is an HSA?
An HSA, or health savings account, is owned by the individual. It is an account that you can draw from to pay for eligible medical expenses. Contributions are tax-deductible and it is available to those who have a high deductible health plan. Both the employee and employer can contribute to an HSA. It is owned by you so if you leave your job then you will take your HSA with you.
What is an HRA?
An HRA, or health reimbursement arrangement, is run by your employer and it offers reimbursement for medical expenses that you pay for first. Employees can claim a tax deduction for these reimbursements. If you leave your job, then you cannot take the HRA with you.
What am I eligible for?
To be eligible for an HSA you must meet the following criteria:
- You must have a high deductible health plan that is HSA-eligible.
- You can’t have Medicare or any other non-HDHP health insurance.
- You cannot have a FSA account.
- You can’t be a dependent on someone else’s tax return.
All employees are eligible for an HRA if an employer offers it. HDHP members who are not eligible for an HSA are eligible for an HRA.
What’s the difference between an HSA vs HRA?
The major difference between an HSA and HRA is that you own an HSA and your employer owns the HRA. You can make contributions to an HSA and may have the option to invest those contributions but you can’t do that with an HRA. The below table outlines the key differences.
HSA vs HRA Differences
|Health Savings Account (HSA)||Health Reimbursement Arrangement (HRA)|
|Who’s eligible?||Must have high deductible health insurance plan||If your company offers it|
|Who funds it?||Funded by yourself, your employer, or both||Funded and managed by your employer. You cannot put your own money into it.|
|Do I need to have a HDHP as well?||Must be paired with a High Deductible Health Plan (HDHP)||Can be free-standing|
|How do I access funds?||Debit card, or request reimbursement||Must submit claims for reimbursement|
|What medical expenses does it cover?||Covers a wide range of qualified medical expenses. This doesn’t include paying for premiums.||Less medical expenses are covered. However, paying for premiums is included.|
|Are there contribution limits?||The contribution limits are regulated by the IRS. The maximum contribution for 2023 is $3,850 for yourself and $7,750 for families. The annual “catch-up” contribution amount for individuals age 55 or older is $1,000.||The contribution limits vary and are set by the employer.|
|Can I invest my funds?||HSA money can be invested and cangrow tax-free.||HRA money cannot be invested.|
|What happens if I don’t use the funds?||No deadline on when to use funds. If you pass away, unused HSA money can go to your beneficiaries.||You will lose the funds if you don’t use them|
|What happens if I leave my job?||If you leave your job, you can take your HSA with you.||You can’t take an HRA with you when you leave your job. It belongs to the employer.|
|Are there any tax advantages?||Contributions are tax-deductible. Account holders can also build up their HSA by earning tax-free interest as well as tax-free returns from investing their funds.||It's a tax-deductible expense for the company. It’s not considered taxable income to an employee.|
Is it better to have HSA or HRA?
Take a look at your current health insurance to decide if an HSA or HRA is better for you. An HSA is a great option if you have a high deductible health insurance plan. We will outline the advantages and disadvantages to both below.
- You own and control the HSA: This means that if you change jobs then you still keep your HSA.
- You can open without an employer: If you have a HDHP then you can open an HSA without an employer.
- You can contribute your own money: You can contribute money to an HSA up to the annual contribution limits for that year. You don’t have to rely on an employer.
- Tax benefits: Contributions are tax-deductible, money in your HSA grows tax-free and money can be withdrawn from your account for qualifying medical expenses without incurring any tax penalties.
- You can invest your HSA: Investing your HSA means that you can grow your account over time.
- Contribution limits 2023: The contribution limit for HSAs is low. The HSA contribution limit for 2023 is $3,850 for single coverage and $7,750 for family coverage. There is an additional $1,000 catch-up contribution for account holders age 55 or older.
- Limited investment options (for some HSA providers).
- You can only contribute to a HSA if you have an HSA-eligible HDHP: For 2023, HSA-linked HDHPs must have an individual deductible of at least $1,500, or a family deductible of at least $3,000.
- Employers contribute: Employers contribute money to an HRA to cover your health costs. You don’t have to make your own contributions.
- No contribution limit: There’s no maximum annual limit on how much employers can contribute but some HRA plans do have a cap.
- Not taxable to you: Money your employer puts into your HRA is not taxable for you.
- You cannot contribute to an HRA: You have to rely on the contributions from your employer.
- Your employer owns the account: If you leave your job then you also lose your HRA.
- Money in an HRA cannot be invested: The money cannot grow over time and you will lose it if you don’t spend it during that year.
Can I have a HSA and a HRA?
Yes, you can have both an HSA and HRA. However in order to have both, you must have an HSA-qualified HDHP and not be covered under other health insurance that is not an HDHP.
An HSA has some important benefits that HRAs don’t. If your employer is offering an HRA then it can be worth having but you should also consider an HSA if you can afford it. An HSA can offer you greater coverage of eligible expenses and you could also use it as additional retirement savings.
Reduce your healthcare expenses with a HSA or a HRA
An HSA or HRA can help make your medical care less expensive. Make sure that you reach out to your employer to see what options are available to you. If you have any questions about financial planning, or if you want to see how we can help you achieve your financial goals, schedule a free discovery call today.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.