Alyssa Lane
Health insurance in the United States is a complex topic, and it can be challenging to navigate the ins and outs of health insurance and paying for medical expenses. Two options for paying for healthcare expenses are Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs). HRAs and HSAs are both ways to pay for qualified medical expenses, but they have different features and eligibility requirements. HRAs are owned and funded by employers, while HSAs are owned and funded by individual account holders. This article will explore the key differences between HRAs and HSAs and help you decide which option is best for you.
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What You'll Learn
HSA ownership and funding
A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). HSA ownership is an important differentiator between HSAs and company-owned Health Reimbursement Arrangements (HRAs). HSAs are owned by the individual, whereas HRAs are company-owned. This means that even if you leave your employer, you still own your HSA and can choose to keep it or transfer the balance to another HSA.
Funding an HSA is straightforward and can be done through your employer or by setting up an account on your own. You can fund an HSA regardless of your income level, but there are annual contribution limits. Both the employer and the employee can contribute to an HSA, and there is also the option for self-employed or unemployed individuals to contribute if they meet the eligibility requirements. The maximum contribution for an HSA in 2024 is $4,150 for an individual and $8,300 for a family, with a ''catch-up' provision for those aged 55 or over, allowing for an additional $1,000 contribution. It is important to note that contributions to an HSA are made with pre-tax income, and any unused funds at the end of the year can be rolled over and will carry forward.
The funds in an HSA can be used to pay for a range of qualified medical expenses, including dental, vision, and prescription drugs. These distributions are tax-free, providing further tax advantages. However, if funds are used for non-medical expenses, they are subject to income tax and a 20% tax penalty.
HSA funding can also be distributed from a traditional or Roth IRA, and rollover contributions are allowed from other HSAs or Archer MSAs. These rollover contributions are not included in your income and do not affect your contribution limit. It is important to note that you can generally only make one qualified HSA funding distribution during your lifetime, and it must be made directly by the trustee of the IRA to the trustee of the HSA.
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HRA ownership and funding
Health Reimbursement Arrangements (HRAs) are owned and funded by employers. Employers set contribution and rollover limits, and employees cannot contribute to the account. The money in an HRA is deposited by employers, who offer their employees a monthly allowance dedicated to health spending. This is a cost-effective way for employers to take care of their employees, as they can design the plan to meet their unique needs and budget.
There are several types of HRAs, including the qualified small employer HRA (QSEHRA), the individual coverage HRA (ICHRA), and the integrated HRA, also known as a group coverage HRA (GCHRA). Each type of HRA offers unique benefits and flexibility for employers. For example, with a QSEHRA, small employers can provide non-taxed reimbursements for specific healthcare expenses. An integrated HRA allows employees to set aside pre-tax dollars, provided by their employer, into a separate account.
While HRAs are owned and funded by employers, employees have control over how they use the funds. Depending on the type of HRA, employees can use the money to pay for qualifying care, treatment, supplies, and insurance premiums. Employees pay out of pocket and then submit receipts to get their money back, or the HRA plan can pay the provider directly.
Funds in an HRA typically expire at the end of the year, and employees usually lose these funds if they leave the company. However, some employers grant access to the funds after retirement, and some plans have a rollover provision that gives participants more time to use their balance.
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HSA tax advantages
Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs) are both ways to pay for qualified medical expenses. However, HRAs are owned and funded by employers, while HSAs are owned and funded by individual account holders. HSAs offer a range of tax advantages that are not available with HRAs.
Firstly, HSA contributions are made pre-tax, meaning that they are tax-deductible and lower your overall taxable income. This includes payroll deductions, which are also not subject to Social Security or Medicare taxes. Secondly, HSA funds grow tax-free. Any interest or earnings on the account are tax-free, which is not the case with other types of savings accounts, such as 401(k)s or IRAs. Finally, HSA withdrawals are tax-free when used for qualified medical expenses, including deductibles, copays, prescriptions, vision, and dental care.
In addition to these advantages, HSA funds remain in your account from year to year if you don't spend them, and you retain ownership of the account if you leave your job or switch health plans. This means that HSA funds can be used as an extra tax-advantaged retirement fund, providing long-term savings for medical expenses in retirement.
It is important to note that to qualify for an HSA, you must be enrolled in a high-deductible health plan (HDHP) and meet certain eligibility requirements. Consult with your employer and a qualified tax professional to determine if an HSA is right for you.
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HRA tax advantages
A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses and, in some cases, insurance premiums. HRAs offer several tax advantages for both employers and employees.
Tax advantages for employers
- Employers can claim a tax deduction for the reimbursements they make through these plans.
- There are generally no limits on employer contributions to regular HRA plans.
- Employers can determine the maximum amount that can be carried from one year to another.
- Employers can set contribution and rollover limits.
- Employers can use the Employer Lowest Cost Silver Plan Premium Look-up Table to determine if the offer of an individual coverage HRA is affordable.
Tax advantages for employees
- Employees receive reimbursements tax-free.
- Unused HRA money can be rolled over to the following year, whereas unused money in a Health Savings Account (HSA) is forfeited.
- HRA reimbursements are free of federal, state, and FICA taxes.
- Employees can use certain types of HRA to reimburse health, vision, and dental insurance premiums.
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HSA and HRA eligibility
Eligibility for a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA) depends on the individual health plan's administrative procedures.
To be eligible for an HSA, you must be enrolled in a high-deductible health plan (HDHP). This is a health insurance policy that requires you to pay more of your healthcare expenses out of pocket before the policy begins covering them. You cannot open an HSA if you are covered under an HRA or any other health coverage that is not an HDHP. You are also ineligible if you are covered by another health plan, such as your spouse's. HSAs are usually better for those who are focused on the long term.
You can open an HSA through an employer or on your own, and the same eligibility requirements stand. If you are self-employed, do not work, or your employer does not offer an HSA-eligible plan, you can open one independently. With an HSA, you have the advantage of rollover. The money is always yours, even if you switch jobs. You can also invest some of the money. HSA holders can use a limited-purpose flexible spending account (LPFSA) for dental and vision expenses and a dependent care FSA for childcare costs.
HRAs, on the other hand, are typically offered by employers to their employees as part of their benefits package. Employees do not usually contribute their own funds to an HRA; it is entirely funded by the employer. Employees can participate in an HRA regardless of whether they are enrolled in an HDHP or any other specific health insurance plan. Employers have full control over the contributions, design, and administration of the HRA, including determining eligible expenses.
There are different types of HRAs, such as limited-purpose HRAs, post-deductible HRAs, retirement HRAs, and suspended HRAs. A limited-purpose HRA, for example, can be used alongside an HSA to cover eligible dental and vision expenses. A suspended HRA means that if your employer enrols you in an HRA and you suspend it, you will be eligible for an HSA as long as the HRA is suspended.
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Frequently asked questions
HRA stands for Health Reimbursement Arrangement. It is an employer-funded plan that is offered as part of an employer-sponsored group health insurance plan. The money in an HRA can be used for a wide range of medical expenses, including doctor's visits, vision exams, dental care, glasses, contact lenses, and counseling.
HSA stands for Health Savings Account. It is a tax-advantaged savings and investment account that allows individuals to put money aside tax-free for current and future medical expenses. HSA funds can be carried over from year to year and job to job, and they can also be invested to earn interest.
The main difference is that an HRA is owned and funded by an employer, while an HSA is owned and funded by an individual. This means that with an HRA, you may lose the funds if you leave the company, whereas with an HSA, you can take the funds with you. Additionally, HSA funds can be invested and grown tax-free, while HRA funds cannot.
