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Health reimbursement accounts (HRAs) and health savings accounts (HSAs) can reduce the costs of paying for medical care, but there are important differences between these two savings vehicles.
The main difference between HRAs and HSAs is that you own your HSA, while your employer owns and funds your HRA and can impose more limitations on it. You can also make contributions to an HSA and can invest your HSA money so it grows, but you can't do that with an HRA. Let's look at these differences in more detail.
A health reimbursement account or health reimbursement arrangement (HRA) is an account to which your employer contributes a set amount of money. The money is used to pay for medical care you'd otherwise need to pay for out of pocket.
You are not taxed on the money your employer puts in your HRA, but you cannot invest the money. You can only withdraw funds for eligible medical services.
You'll lose that money if you leave your job unless you choose COBRA continuing coverage. Your employer may allow you to carry over unused funds in an HRA and use the money in subsequent years, but it's not required. Your employer can set the rules for what care you can pay for using HRA funds.
Health savings accounts (HSAs), on the other hand, allow both you and your employer to contribute money. However, you are eligible to contribute to an HSA only if you have a qualifying high-deductible health plan (HDHP). Your employer may offer an HDHP with an HSA as a workplace benefit. Or, if you sign up for individual health insurance coverage and choose an HDHP, you can open an HSA with a brokerage firm or other financial institution.
With an HRA, your employer reaps the tax benefits since the company is the party making the contribution. With an HSA, you reap the tax benefits. You can leave your HSA money invested from year to year, and it will grow tax-free if you don't take it out to pay for healthcare expenses. Also, the HSA is yours to keep even if you leave your job. However, if you withdraw funds for anything other than healthcare costs and you're younger than 65, you'll pay a 20% tax penalty on the money.
The Internal Revenue Service (IRS) establishes the rules for what counts as HSA-eligible expenses. This includes most medical and dental expenses, eye care, and hearing aids.
The IRS also allows employers to reimburse any medical expenses from an HRA that would be deductible. However, employers can set more narrow requirements. You will need to review your employer's HRA plan documents to determine what you can use the money for.
The chart below shows the key differences between an HRA and an HSA so you can more easily decide which type of account to use.
Often, you don't get a choice whether to use an HRA or an HSA. The decision is made for you based on your employer and/or the type of health plan you choose to enroll in. But sometimes you do have the option to decide between the two account types.
If you're considering which account is right for you, you need to understand the pros and cons of an HRA versus an HSA.
Here are the biggest advantages of an HRA:
And here are the biggest disadvantages:
Here are the biggest advantages of an HSA:
And here are the biggest disadvantages:
If your employer offers an HRA, it will help you keep out-of-pocket costs down because funds your employer contributes to the account cover some of what you'd normally have to pay. But you need to know your plan's rules for what an HRA covers. And, remember, you can't make contributions to this account -- unlike with an HSA -- and, if you leave your job, you can't take unused funds with you.
The good news is that both HRAs and HSAs help make medical care less expensive. Whether your employer offers an HRA or an HSA, it's a valuable workplace benefit. And those who purchase an individual HDHP outside of work should make certain to open an HSA and take full advantage of the tax breaks these accounts offer.
