HRA vs. HSA: What’s the Difference? September 2024

When it comes to healthcare, the alphabet soup can be as dizzying as the ever-rising costs of health insurance. A health reimbursement account (HRA) and a health savings account (HSA) can both provide tax-free dollars to spend on your healthcare.

But gaining a clear understanding of HRA vs. HSA can go a long way in helping you better manage your healthcare costs. While the two health plans may appear similar, a closer look at the difference between HRA and HSA reveals that each plan can make its own impact on your wallet.

What Is an HRA vs. HSA?

An HRA and an HSA are both medical spending accounts employers can offer employees to help pay for qualified medical expenses. These health plans provide tax advantages designed to offset your cost of healthcare. But when comparing a health reimbursement account vs. health savings account, the similarities end there.

What Is an HRA?

An HRA is funded by your employer to set aside money to reimburse you for qualified medical expenses. The HRA is owned by your employer, and you’re not permitted to contribute to the account.

Your employer also sets the rules for how and when the account can be used, including the annual limit for reimbursement. Employers can determine whether money in the account rolls over as well.

The reimbursement you receive from the account isn’t counted as taxable income. You can receive the full amount to pay for health and medical costs permitted under your employer’s plan.

If you leave the company, you can’t take the HRA with you. The account belongs to your employer. However, your employer may have a retiree HRA that can help you pay for medical expenses in retirement.

How Can You Use HRA Funds?

How you use the money in your HRA depends on what the IRS and your employer say are eligible medical expenses. Some employers allow the money to be spent only on expenses associated with your health plan. Others allow the money to go toward other health and medical services.

Here are some healthcare expenses that could be covered by an HRA:

• Premiums

• Doctor’s visits

• Copays

• Dental

• Vision

• Hospital expenses

• Medications

Your employer determines when and how you access the account. Employers may make payments directly to healthcare providers or give you a debit card to handle payments when services are rendered. Another option is to require you to pay upfront and submit a claim for reimbursement.

Types of HRAs

Employers can offer several types of HRAs for employees. Some of the most common include:

• Standard HRA: The traditional reimbursement plan

• Individual Coverage HRA: An individual health plan the employee buys

• Qualified Small Employer HRA: A plan for small business employees

• Expected Benefit HRA: A plan to pay for qualified expenses without insurance

If your employer doesn’t offer group health insurance, an HRA could affect your eligibility for health insurance through the HealthCare Marketplace.

Benefits of HRAs

Consider these key benefits of an HRA:

• Tax-free reimbursements

• Healthcare freedom

• Potentially lower healthcare costs

• No need to report it as income

It’s important to remain aware of what your HRA covers. Eligible reimbursements can change from year to year. Staying on top of these changes can allow you to take full advantage of an HRA.

What Is an HSA?

An HSA is a tax-advantaged account that allows you, your employer and your family members and friends to contribute toward paying for your health and medical expenses. You can use the money from your HSA anytime to pay for medical expenses the IRS deems eligible.

With an HSA, you’re not just able to save, but you’re also able to invest. You can invest money in your HSA in stocks, bonds, mutual funds and exchange-traded funds, or allow it to bear interest. Your principal contributions and investment earnings or interest are tax-free as long as the money remains in your HSA or is withdrawn to spend on qualified medical expenses.

Before the age of 65, you can withdraw money to pay for qualified medical expenses. After 65, you can withdraw your money and use it however you want. The money can be withdrawn tax-free for medical expenses, or you can pay taxes on the money and spend it how you want.

The HSA is yours and rolls over each year. If you leave your employer, all the money in the account belongs to you—even contributions from your employer.

Opening an HSA

To open an HSA, the IRS requires you to enroll in a high deductible health plan (HDHP) that has a deductible higher than typical. The HDHP also must have an out-of-pocket maximum that includes the health insurance deductible, copays and coinsurance. What’s typical is set by the IRS.

The current requirements for deductibles and contributions are:

• Individual: More than $1,600 deductible and a $4,150 contribution

• Individual With Family: More than $3,200 deductible and an $8,300 contribution

The IRS allows people over age 55 an additional $1,000 in a catch-up contribution, for a total of $5,150 in a year. Unlike an HRA, there aren’t several types of HSAs.

How Can You Use HSA Funds?

The IRS determines what is an eligible use of HSA money. Some healthcare expenditures that qualify include:

• Doctor visits

• Preventive care

• Medications

• Lab work

• Medical equipment

• Dental care

• Vision care

Generally, money in your HSA cannot cover premiums.

Benefits of HSAs

Consider these important benefits of an HSA:

• Tax-free

• No expiration date

• Potential use by spouse and dependents

• Portability

Staying aware of updates from the IRS can help you reap the benefits of an HSA. Additionally, a side-by-side HRA vs. HSA comparison can help you determine which of the HSA vs. HRA insurance plans fits your situation.

Talk to ConsumerShield About an HRA vs. HSA Plan

Once you’re familiar with the pros and cons of HRA vs. HSA plans, it’s time to discuss choosing an HRA vs. HSA with an insurance professional. ConsumerShield believes in sharing information to empower you to make the best decisions for your future. Give us a call today to learn more.