Group health insurance has changed since the Affordable Care Act was enacted. The increases in premiums after ACA led to much innovation in how health insurance would be provided to employees. One of these changes saw the rise of health savings accounts (HSAs) and health reimbursement arrangements (HRAs).

HRAs and HSAs both help with the costs related to health insurance and health care, but they work very differently. To help you leverage these options, we’ve outlined what these HRAs and HSAs are, the benefits you may want to consider, and how they differ.

HSA (Health Savings Account) and HRA (Health Reimbursement Arrangement) differ primarily in ownership, funding, and portability. HSAs are owned by individuals, funded through pre-tax contributions, and are portable even if you change jobs. HRAs are typically funded solely by employers, have no individual ownership, and may not be portable.

HSA (Health Savings Account)

Health Savings Accounts (HSAs) have become increasingly popular in recent years as a powerful tool for managing healthcare expenses and saving for the future. In this section, we’ll delve into the world of HSAs, exploring what they are, how they work, and the numerous benefits they offer to individuals and families seeking to take control of their healthcare finances. Whether you’re new to HSAs or looking to deepen your understanding, this comprehensive guide will provide you with valuable insights into how these accounts can positively impact your healthcare and financial well-being.

Introduction to HSAs

An HSA, or Health Savings Account, is owned by the individual. They are tax-advantaged accounts that are for people with high deductible health insurance plans.

Both the person who owns the account and their employer can contribute to the account up to a certain amount each year. These accounts are like an IRA but for health expenses.

An individual with an HSA can use their HSA funds to pay for certain medical expenses, and this feature is a significant advantage of having an HSA. These accounts offer tax benefits and flexibility when it comes to covering qualified medical costs, making them a valuable resource for healthcare planning and saving.

These plans are one way people can help afford their health care costs if they have a high deductible, which is the amount of money a person pays for their (or their family’s) health care before their health insurance kicks in.

Because this is the employee’s account, this means that if an employee leaves their current job, they take their HSA with them.

Keep in mind to have an HSA, you must have an HSA-eligible plan. HSA-eligible plans are high-deductible health plans, also called HDHPs. You can check out more information on how to set up an HSA for your employees with eHealth, as well.

Benefits of using an HSA

An HSA allows employees to pay medical expenses with pre-tax dollars. Those pre-tax dollars can even sometimes be invested, allowing for growth to cover potentially catastrophic expenses. Moreover, once you reach 65, the funds in the HSA can be used for any expenses, not just qualified medical expenses. Using the funds this way makes them taxable but does not carry a penalty.

HSAs work like debit cards and are portable. Funds follow you from employer to employer and remain yours no matter what.

For employers, HSAs can reduce your overall costs when it comes to cost-sharing. Plus, you can decide how much you want to contribute when you set up HSA accounts for your employees.

Qualifying Medical Expenses for HSAs

Qualifying medical expenses for Health Savings Accounts (HSAs) encompass a wide range of healthcare-related costs, offering individuals a flexible and tax-advantaged way to manage their healthcare expenses. These expenses include doctor’s visits, hospital stays, prescription medications, dental care, and vision care. However, it’s essential to understand the process of using your HSA funds for these expenses.

When you incur a qualifying medical expense, you can withdraw funds from your HSA to cover the cost. Typically, you’ll use a debit card associated with your HSA, write a check, or make an online transfer to pay for the expense directly. Alternatively, you can keep your receipts and reimburse yourself from your HSA at a later time. It’s crucial to maintain accurate records of your expenses and HSA transactions for tax purposes.

Additionally, HSAs offer the advantage of covering certain preventive care services with no out-of-pocket cost to you. This includes services like annual check-ups, vaccinations, and screenings, which are fully covered by your HSA-qualified high-deductible health plan.

By leveraging the flexibility of HSAs, individuals can effectively manage their healthcare costs, while also benefiting from the tax advantages these accounts provide. Keep in mind that IRS regulations outline which expenses qualify, so it’s advisable to consult these guidelines or seek advice from a tax professional for a comprehensive understanding of eligible medical expenses.

These funds can be used to pay for qualified medical expenses. These expenses include things like:

• Most medical care
• Most dental care
• Most vision care
• Over-the-counter drugs

Investment Options in HSAs

Investment options with Health Savings Accounts (HSAs) offer individuals the opportunity to grow their healthcare savings over time. While HSAs are primarily designed for saving and paying for current medical expenses, many HSA providers offer the option to invest a portion of your HSA funds in various investment vehicles, such as mutual funds, stocks, bonds, and exchange-traded funds (ETFs).

Here’s how it works: Once your HSA balance reaches a certain threshold, typically around $1,000 or more, you can choose to invest a portion of your funds beyond that threshold. The invested portion can potentially earn returns, helping your HSA balance grow over time. These investment gains are tax-free, just like your contributions and withdrawals for qualified medical expenses.

Investing your HSA funds can be a smart long-term financial strategy, as it allows you to harness the power of compound interest and potentially build a more substantial healthcare nest egg for the future. However, it’s important to remember that all investments come with some level of risk, and the value of your investments can go up or down. Therefore, it’s crucial to carefully consider your risk tolerance, investment goals, and time horizon before choosing your investment options.

HSAs offer a unique blend of short-term and long-term benefits, giving individuals the flexibility to use their funds for current healthcare expenses while also providing an avenue for potential wealth accumulation through smart investing decisions. It’s advisable to consult with a financial advisor or HSA provider to explore investment options that align with your financial objectives and risk tolerance.

HRA (Health Reimbursement Arrangement)

Health Reimbursement Arrangements (HRAs) have gained prominence as an innovative and flexible approach to employer-sponsored healthcare benefits. In this section, we’ll delve into the world of HRAs, providing a comprehensive overview of what they are, how they function, and the advantages they offer to both employers and employees. Whether you’re an employer seeking to enhance your benefits package or an employee navigating your healthcare options, this guide will provide you with valuable insights into the workings of HRAs and their potential impact on your healthcare coverage and expenses.

What is an HRA?

HRAs are employer-funded plans that pay back, or reimburse, employees for qualified medical expenses and sometimes health insurance premiums. Unlike an HSA, HRAs are not accounts; they are an agreement between the employee and employer.

Employers are allowed to claim a tax deduction for these reimbursements. Plus, the money that employees get from their employers is typically tax-free as well.

Additionally, an HRA is not an account they can pull funds from. The employee must make the payment and then have it reimbursed after. This also means that an employee can’t take their HRA with them if they leave their job.

Benefits of using HRAs

HRAs offer a multitude of benefits for both employers and employees. For employers, the flexibility HRAs provide is paramount, especially for smaller businesses that may face budget constraints when offering traditional health insurance plans. Employers have the latitude to tailor their HRA offerings, aligning them with their preferences and financial capabilities, thus ensuring a personalized approach to employee healthcare benefits.

While the primary advantage for employees is the invaluable assistance HRAs offer in covering their medical costs, there are several additional benefits that make HRAs an attractive choice for them:

• Tax-Free Reimbursements: HRA reimbursements are entirely tax-free for employers, resulting in cost-effective healthcare solutions. This not only reduces the financial burden on employers but also makes healthcare more accessible for employees.
• Tax-Free Interest and Growth: Any interest or growth earned on the HRA funds remains tax-free for both employers and employees, allowing these funds to potentially grow over time, further enhancing their healthcare coverage.
• Payroll Tax Savings: Importantly, reimbursements under an HRA do not trigger payroll taxes for employers, resulting in significant savings and cost efficiency.
• Income-Tax-Free Funds: Additionally, if an employer offers employees a minimum essential coverage policy, their HRA funds become income-tax-free for employees, translating into substantial savings and financial relief.

Furthermore, HRAs empower employees with the flexibility to choose how they use their allocated funds, giving them more control over their healthcare decisions. This combination of flexibility, tax advantages, and cost savings highlights the appeal of HRAs, ultimately benefiting both employers and employees by enhancing the overall value of their healthcare benefits.

Types of HRAs

Types of HRAs (Health Reimbursement Arrangements) offer various options for both employers and employees to structure healthcare benefits in a way that suits their needs and preferences. Here are some common types of HRAs along with examples:

• Integrated HRA (Integrated Health Reimbursement Arrangement): This HRA is typically offered alongside a group health insurance plan. It is designed to work in conjunction with a specific high-deductible health plan (HDHP) and allows employers to contribute funds that employees can use for qualified medical expenses. For example, an employer might offer an Integrated HRA with a $1,000 annual contribution to help employees cover their deductible expenses.
• Qualified Small Employer HRA (QSEHRA): QSEHRA is designed for small businesses with fewer than 50 employees. It allows employers to reimburse employees for their individual health insurance premiums and eligible medical expenses. For instance, a small business might offer a QSEHRA that reimburses employees up to $500 per month for health insurance premiums and other qualifying costs.
• Individual Coverage HRA (ICHRA): ICHRA is a flexible option that allows employers to offer reimbursements for individual health insurance policies purchased by employees in the individual marketplace. Employers can determine the contribution amount based on employee classes, such as full-time, part-time, or seasonal workers. For instance, a company might offer its full-time employees an ICHRA with a $300 monthly contribution for their individual health insurance premiums.
• Retiree HRA: This type of HRA is designed to assist retired employees with their healthcare expenses. Employers contribute to the HRA, and retirees can use the funds for eligible healthcare costs. For example, a company may establish a Retiree HRA to provide a financial safety net for retired employees by contributing a specific amount annually.
• Group Coverage HRA (GCHRA): GCHRA is designed for employers who offer traditional group health insurance plans but want to provide additional assistance to employees for out-of-pocket expenses. Employers can fund the GCHRA to cover co-pays, deductibles, and other qualified medical expenses not covered by the group insurance plan.

These are just a few examples of the various types of HRAs available. Each type of HRA offers its unique advantages and flexibility, allowing employers to tailor their healthcare benefits to meet their specific business needs while providing employees with valuable assistance in managing their healthcare costs. It’s essential for employers and employees to understand the nuances of each HRA type to make informed choices that align with their healthcare and financial objectives.

Reimbursement process in an HRA

The reimbursement process in an HRA (Health Reimbursement Arrangement) typically involves several steps. First, an eligible expense is incurred by the employee or the employee’s covered family member. The employee then submits documentation of the expense, which may include receipts or invoices, to the HRA administrator or employer for verification. Once verified, the HRA funds are disbursed to reimburse the employee for the eligible expense. This reimbursement is typically tax-free for both the employer and the employee, providing a straightforward and tax-efficient way to cover healthcare costs. The specific details of the reimbursement process, including submission methods and timelines, may vary depending on the HRA plan design and employer policies.

HSA vs. HRA: Key differences

Both an HSA and an HRA can help employees afford medical care and minimize the burden on the employer for costs. Additionally, they both offer tax benefits related to health care costs.

While both HSAs and HRAs are used to help pay health insurance and health care costs, they are very different.

HSAs, or Health Savings Accounts, are owned by the individual. HRAs, or Health Reimbursement Arrangements, are agreements that are owned by employers. As such, there are key differences, including:

• An HSA can be funded by both the employee and employer, while only the employer funds an HRA.
• You can pull money from your HSA to pay for medical costs, HRAs require you to pay up front and then get reimbursed.
• Your self-funded HSA is portable; your HRA generally isn’t.
• Account holders can earn interest on their HSA, but no interest is earned on an HRA.
• HSAs are usually better for those who are focused on the long-term.
• HRAs allow more flexibility for employers.

To delve deeper into HRAs, let’s explore eligibility criteria and participation requirements, as well as the enticing tax benefits and advantages they offer. Additionally, we’ll discuss contribution limits to help you make informed decisions about how HRAs can optimize your healthcare benefits and financial planning.

Eligibility criteria and participation

Eligibility criteria for participating in an HRA (Health Reimbursement Arrangement) and an HSA (Health Savings Account) differ significantly, primarily due to the nature and purpose of these two healthcare benefit options.

HRA Eligibility Criteria:

• Employer-Sponsored: HRAs are typically offered by employers to their employees as part of their benefits package.
• No Personal Contribution: Employees do not typically contribute their own funds to an HRA; it is entirely funded by the employer.
• No High-Deductible Health Plan (HDHP) Requirement: Employees can participate in an HRA regardless of whether they are enrolled in a high-deductible health plan or any other specific health insurance plan.
• Employer Control: Employers have full control over the contributions, design, and administration of the HRA, including determining which expenses are eligible for reimbursement.
• Tax Implications: Reimbursements under an HRA are generally tax-free for both the employer and the employee.

HSA Eligibility Criteria:

• Individual Enrollment: HSAs are available to individuals who are enrolled in a qualified high-deductible health plan (HDHP).
• Personal Contribution: Both employers and employees can contribute funds to an HSA, with specific annual contribution limits set by the IRS.
• HDHP Requirement: To open and contribute to an HSA, individuals must be enrolled in a high-deductible health plan, meeting specific deductible and out-of-pocket expense thresholds.
• Individual Control: HSA owners have control over their contributions, investments, and withdrawals, giving them more autonomy in managing their healthcare funds.
• Tax Advantages: HSAs offer triple tax advantages, including tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

In summary, HRAs are primarily employer-funded and do not require employees to have a specific health insurance plan. HSAs, on the other hand, require individuals to be enrolled in an HDHP and allow both employer and employee contributions. Understanding these key differences in eligibility criteria is crucial for individuals and employers when considering which healthcare benefit option aligns best with their needs and circumstances.

Tax benefits and advantages

Tax Benefits and Advantages of HRAs (Health Reimbursement Arrangements):

• Tax-Free Employer Contributions: Employers can make tax-free contributions to HRAs, reducing their overall taxable income.
• Tax-Free Reimbursements: Reimbursements from HRAs for eligible medical expenses are tax-free for both the employer and the employee. This means employees don’t pay income tax on the HRA funds used for qualified expenses.
• Deductibility for Employers: Employers can deduct their contributions to HRAs as a business expense, further reducing their tax liability.

Tax Benefits and Advantages of HSAs (Health Savings Accounts):

• Tax-Deductible Contributions: Contributions made by both employers and employees to HSAs are tax-deductible, reducing the individual’s taxable income for the year. This provides immediate tax savings.
• Tax-Free Growth: Any interest or investment gains earned within an HSA are tax-free, allowing the account balance to grow over time without incurring capital gains tax.
• Tax-Free Withdrawals: Withdrawals from an HSA are entirely tax-free when used for qualified medical expenses, providing a tax advantage during both contribution and withdrawal phases.
• Triple Tax Benefits: HSAs offer a unique triple tax advantage, including tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

Differences Between HRAs and HSAs in Terms of Tax Benefits:

• HRAs are funded entirely by the employer, and the contributions are tax-free for the employer. Reimbursements to employees for qualified medical expenses are also tax-free for both parties.
• HSAs allow contributions from both employers and employees, and these contributions are tax-deductible. The growth and withdrawals from HSAs are tax-free if used for qualified medical expenses. This triple tax advantage makes HSAs highly attractive from a tax perspective.

In summary, both HRAs and HSAs offer tax advantages, but HSAs provide more significant tax benefits due to their triple tax advantage. HSAs allow individuals to reduce their taxable income through contributions, enjoy tax-free growth, and make tax-free withdrawals when used for qualified medical expenses. Employers also benefit from tax savings when contributing to both HRAs and HSAs, making these healthcare benefit options valuable for both employers and employees from a tax perspective.

Contribution limits for HRA vs. HSA

Contribution Limits for HRAs (Health Reimbursement Arrangements):

• No Specific Maximum Contribution Limit: HRAs do not have a specific maximum contribution limit set by the IRS. Instead, the employer determines the annual contribution amount, giving them flexibility in funding the HRA.
• Employer Control: Employers can choose to contribute varying amounts to HRAs for different employees, tailoring the benefit to meet specific business needs.
• No Employee Contributions: Employees generally do not contribute their own funds to HRAs. The entire contribution comes from the employer.

Contribution Limits for HSAs (Health Savings Accounts):

• Annual Maximum Contribution Limits: The IRS sets annual maximum contribution limits for HSAs. These limits vary depending on whether an individual has self-only or family coverage under a high-deductible health plan (HDHP).

• For 2024, the HSA contribution limits are:
  • $4,150 for individuals with self-only HDHP coverage.
  • $8,300 for individuals with family HDHP coverage.

• Catch-Up Contributions: Individuals aged 55 and older can make additional “catch-up” contributions to their HSAs. For 2024, this additional contribution limit is $1,000.

• Employer and Employee Contributions: Both employers and employees can contribute to an HSA, and the total contributions must not exceed the IRS-established limits.
• Contributions Are Combined: If both an employer and an employee contribute to an HSA, their contributions are combined for the purpose of calculating whether they have exceeded the annual limits.

Differences Between HRA and HSA Contribution Limits:

• HRAs do not have specific IRS-imposed contribution limits, and the employer has control over the contribution amounts.
• HSAs have annual maximum contribution limits set by the IRS. These limits vary based on the type of HDHP coverage (self-only or family) and can be further increased for individuals aged 55 and older through catch-up contributions.
• While HRAs are funded solely by employers, HSAs allow contributions from both employers and employees, subject to the IRS limits.
• Exceeding contribution limits for HSAs can result in tax penalties, making it crucial for individuals to monitor and manage their contributions to avoid excessive contributions.

Understanding these contribution limits is essential for individuals and employers when deciding between HRAs and HSAs. HSAs offer more tax-advantaged savings opportunities, but individuals must be mindful not to exceed the annual limits to avoid penalties. HRAs provide flexibility in contribution amounts, but the entire contribution comes from the employer, limiting the potential for individual savings.

HSA vs. HRA: Choosing the right one for you

When deciding between an HRA, an HSA, or even opting for both, individuals should carefully evaluate their unique circumstances, healthcare needs, and financial goals. Making the right choice can significantly impact both short-term expenses and long-term financial security. Here are some key factors to consider when making this decision:

1. Healthcare Needs and Usage: Begin by assessing your typical healthcare needs and usage. If you anticipate frequent medical expenses or have ongoing healthcare requirements, an HSA might offer greater flexibility due to its tax advantages and the ability to carry over unused funds from year to year. Conversely, if you have relatively predictable healthcare expenses, an HRA with employer contributions might suffice.
2. High-Deductible Health Plan (HDHP) Enrollment: To open an HSA, you must be enrolled in a qualified high-deductible health plan (HDHP). Evaluate your HDHP coverage to determine if it aligns with your healthcare preferences and needs. If you have a non-HDHP plan, an HRA could be your primary option for employer-sponsored healthcare assistance.
3. Employer Offerings: Consider what your employer provides. Some employers offer a choice between an HRA and an HSA, while others may only offer one option. Analyze the benefits and contributions offered by your employer, as this can significantly influence your decision.
4. Contribution Preferences: Assess your contribution preferences. If you want more control over your healthcare funds and the ability to save for future medical expenses, an HSA might be preferable. Alternatively, if you prefer the convenience of employer-funded healthcare assistance, an HRA can provide financial support without personal contributions.
5. Tax Considerations: Examine the tax implications of your choices. HSAs offer unique tax advantages, including tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. HRAs also provide tax benefits, but they may not offer the same level of tax-advantaged growth as HSAs.
6. Long-Term Savings Goals: Think about your long-term financial goals. If building a healthcare nest egg is a priority, an HSA’s ability to accumulate funds over time might align better with your objectives. HRAs are generally designed for more immediate healthcare needs.
7. Budgetary Restrictions: Be mindful of your budgetary restrictions. Evaluate how much you can comfortably contribute to an HSA or if you’re reliant solely on employer contributions in the case of an HRA.

The decision to choose between an HRA, an HSA, or both should be driven by a comprehensive assessment of your healthcare requirements, financial situation, and tax considerations. While HSAs often offer greater individual control and potential for long-term savings, HRAs can be a valuable resource for immediate healthcare expenses, particularly if your employer provides significant contributions. Weighing these factors carefully will help you make an informed choice that aligns with your specific needs and financial goals. Be sure to consider your health care needs and budgetary restrictions before making the decision to get an HRA, an HSA, or both.

Who should have an HSA?

An HSA is a great option to have if you have an HDHP.

HSAs have plenty of perks. However, it’s important to consider that an HDHP and an HSA are not the best choices for everyone. For example, if you expect to have a lot of health care needs or need long-term care, a low-deductible health insurance plan may be a better choice.

When deciding if you should open an HSA and get an HDHP, make sure to consider the healthcare needs of your past, present, and future. You also want to make sure to look at what best suits your budget in the long term.

As an employer, it’s important to note that contributing to employee HSAs is important to employees and helps them save on unexpected health and can prevent surprise medical bills.

Who should have an HRA?

If you find that a High Deductible Health Plan (HDHP) doesn’t align with your healthcare needs or preferences, having the option of an HRA can be an excellent alternative. HRAs work particularly well for individuals and employees who value employer-funded healthcare assistance, whether they don’t have an HDHP or prefer not to enroll in one. Here’s a more in-depth comparison between HRAs and HSAs to help you determine which is the better fit for you:

HRAs Work Best For:

• Individuals with Non-HDHP Plans: HRAs don’t require you to be enrolled in an HDHP, making them accessible to a broader range of individuals with varying insurance plans.
• Preference for Employer Contributions: If you appreciate employer contributions to cover healthcare expenses, an HRA is entirely funded by your employer. This can provide immediate financial support without personal contributions.
• Wide Range of Medical Expenses: HRAs often cover a comprehensive array of medical expenses, including some that may not be covered by your insurance plan. This can be advantageous for individuals with specific healthcare needs or conditions.
• Immediate Healthcare Needs: HRAs are generally designed for more immediate healthcare needs, making them suitable for individuals who expect to incur regular medical expenses.

Important Considerations for HRAs:

• Employer Control: Employers set the annual contribution limits and most of the rules governing the HRA. This means you may have less individual control compared to an HSA.
• Employer Dependency: Since HRAs are entirely funded by employers, if you change jobs, the HRA doesn’t follow you. This lack of portability can be a drawback for some individuals.
• Tax Benefits: Contributions made by employers to HRAs are tax-deductible for the employer. Reimbursements from the HRA are tax-free for both the employer and the employee.

In contrast, Health Savings Accounts (HSAs) are ideal for those who are enrolled in HDHPs and seek more control over their healthcare funds. HSAs provide tax advantages, long-term savings potential, and greater autonomy in managing healthcare expenses. Ultimately, the choice between an HRA and an HSA hinges on your insurance plan, financial goals, and preferences. Carefully evaluating these factors will help you determine which option best suits your needs and priorities when it comes to healthcare benefits.

Can I have both an HSA and an HRA?

Yes, you can have both. However, in order to have both an HSA and an HRA you must:

• Have an HSA qualified HDHP
• Not be covered under other health insurance that is not an HDHP

Additionally, your HRA must be compatible with your HSA. This typically means that you will have to be eligible for reimbursement under a “limited purpose HRA”.

A limited purpose HRA means that in the years that contributions are made to your HSA, the HRA can only be used to reimburse:

• Health insurance premiums
• Dental expenses
• Vision expenses
• Wellness/preventative care, like checkups
• Long-term care premiums

Find an insurance plan with an HSA or HRA

Understanding all your coverage options for healthcare costs can be confusing. Fortunately, you don’t have to figure it out on your own. eHealth is here for you when making tough decisions like these. Our licensed health insurance agents can help you figure out which option is best for you.