HRAs and HSAs are similar in many ways. Both types of accounts are designed to make healthcare services more affordable for employees and their families by providing financial support for certain health-related expenses. The funds in either an HRA or HSA can be used to pay for qualifying health expenses. With both options, account holders can remain more involved in their own personal healthcare and choose how they wish to spend their healthcare dollars. Read on to learn the key differences in a HRA vs HSA.
What Is an HRA?
A health reimbursement arrangement (HRA), sometimes referred to as a health reimbursement account, is a type of employer-funded plan used to cover certain medical expenses for employees. As the name suggests, the plan involves reimbursing employees for qualified medical expenses. An employer chooses how much to put into the plan, and an employee can request reimbursement for any incurred medical expenses. An HRA is not technically an account as employees are not able to withdraw money in advance to pay for medical expenses.
- Employers can maintain more control over costs.
- All employer contributions to the plan are 100 percent tax deductible.
- As the sponsor and contributor to the plan, employers have the ability to personalize the plan to meet the unique needs of their workforce.
- Employers do not have to pay covered expenses until a claim is filed and validated, reducing the risk of benefit fraud.
- Offering an attractive benefits package can draw in new talent.
- Persons who are self-employed are not eligible for an HRA.
- Employees may use up all of their benefits at the start of the year and leave the company, forcing the employer to take a financial hit when it is time to rehire.
- Rules and regulations surrounding an HRA can sometimes be complex.
What Is an HSA?
A health savings account (HSA) has features that are similar to a personal savings account with the main difference being it can solely be used for qualified healthcare expenses. HSAs are only eligible to those who are already enrolled in a high-deductible health plan (HDHP). With a higher deductible, more money is paid out-of-pocket before the insurance kicks in. However, in exchange you receive lower monthly premiums, as well as the option to put more money into an HSA to save toward medical costs. Like a normal savings account, an HSA earns interest over time.
- Moving to an HSA allows your business to save on health insurance premiums without sacrificing employee coverage.
- As contributions to HSAs pre-tax are not considered wages, employees and employers do not have to pay FICA taxes on this money.
- Over time, using an HSA often results in lower annual premiums as employees begin to take more control over their healthcare.
- An HSA can be a great selling point for employers looking to draw in new talent with a benefits package that contains a smart way to save money and invest.
- A high-deductible health plan, which is required to be eligible for an HSA, can put a financial strain on your employees.
- Employees face taxes and a 20 percent penalty if they withdraw funds for non-qualified expenses before the age of 65, which can result in unhappy workers.
- Maintaining an HSA requires stringent record keeping to ensure that you are properly following all rules.
What Are the Differences in HRA vs HSA?
There are a number of differences between an HRA and HSA. One of the biggest differences is that HRAs are employer-owned and funded by the employer, while HSAs are employee-owned and funded by either the employer, employees, or both. When we say that an HRA is employer-owned, it means that the account is left behind when an employee no longer works for that employer. If an employee chooses to change jobs, any funds left in their HRA account are no longer accessible. However, with an HSA, the employee gets to keep the account. If the employee chooses to change jobs, he or she can transfer the account to their new job.
Another big difference between the two accounts relates to how they are funded and used. All money found in an HRA comes only from the employer. This allows the employer to maintain control of the account and set rules for which types of healthcare expenses are eligible for reimbursement and which are not. The employer also gets to set expenses for deductibles, coinsurance, copays, and services like vision and dental. In comparison, an HSA can be funded by anyone as the contributions typically come from both the employer and employee. Guidelines for expenses that qualify for an HSA are set by the IRS and their established annual contribution limits.
There are also some differences when it comes to tax implications. Since an HRA is only funded by the employer, only the employer receives a tax reduction. However, under an HSA, the account holder is the one who makes the pre-tax contributions and, therefore, receives tax-free interest on the account. However, the employer may also receive a tax benefit for any contributions made. There are also a few other differences between an HRA and HSA to be aware of. An HSA requires the account holder to have an HDHP while an HRA does not. In addition, an HSA can earn tax-free interest while an HRA cannot. Once an HSA reaches the minimum balance, an investment option is available but there are no investment options for HRAs. Finally, unlike an HRA, the funds do become available for use in retirement with an HSA.
Choosing an Account
As an employer, you want to build an employee benefits package that draws in new talent and maintains existing staff. A healthcare savings plan is an excellent way to achieve this goal. Both health reimbursement arrangements and health savings accounts can provide both employers and employees with a host of benefits. However, there are some distinct differences between the two to be aware of. For more information about HRA vs HSA or for assistance determining the best account for your business needs, reach out to the professional business benefits consultants at BBG.