Health reimbursement accounts (HRAs) and health savings accounts (HSAs) can both 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 HRAs are owned and funded by employers and thus subject to more limitations on how the money is used, while you own your HSA, can make contributions to it, and can invest the money so it grows. Let's look at these differences in more detail. 

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Key differences between an HRA and an HSA

A healthcare reimbursement account (HRA) is an account that your employer contributes a set amount of money to. 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, can withdraw it only for eligible medical services, and will lose it if you leave your job (unless you choose COBRA coverage). Your employer may allow unused funds in an HRA to carry over and be used in subsequent years, but it's not required, and your employer can set the rules for what care you can pay for using HRA funds.

Health savings accounts (HSAs), on the other hand, are accounts that you and your employer can contribute to. 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. 

When you have an HSA, you can leave the money invested from year to year and it will grow tax-free if you don't take it out to pay for healthcare expenses. And 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 under 65, you'll pay a 20% tax penalty on the money.

HRA vs. HSA eligible expenses

The Internal Revenue Service (IRS) establishes the rules for what expenses you can pay with HSA funds. This includes most medical and dental expenses that you would be eligible to claim a medical expense tax deduction for, including dental care, 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. 

HRA vs. HSA comparison chart

The chart below shows the key differences between an HRA and an HSA so you can more easily decide what type of account to use. 

Aspect HRA HSA
Eligibility rules
  • Only employers can offer HRAs
  • Anyone whose employer offers an HRA is eligible for the account
  • Employees or individuals can open HSAs
  • You must have a qualifying HDHP to be eligible to contribute to an HSA
Contribution rules
  • Only employers can contribute
  • Contributions are tax-deductible for employers and tax-free for employees
  • Employers and individuals can contribute
  • Contributions are made with pre-tax dollars
Annual contribution limits
  • Varies depending on HRA type, and in some cases there is no limit on the amount employers can contribute
  • $3,550 for self-only coverage in 2020
  • $7,100 for family coverage in 2020
  • $1,000 additional catch-up contribution for those over 55
Account ownership
  • Employers own HRAs and leaving a job means losing access unless you elect COBRA continuation if eligible
  • Employees own HSAs and can take them with them when leaving a job
Withdrawal rules
  • Money in an HRA can be used only for qualifying medical expenses
  • You can withdraw only money you've contributed
  • You can withdraw money for any reason but will be subject to a 20% penalty if you're under 65 and the funds aren't used for qualifying medical purposes
  • Withdrawals can be made without penalty for any purpose after age 65 and will be taxed at your ordinary income tax rate
Investing rules
  • HRA money cannot be invested
  • HSA money can be invested and grow tax-free
Carryover rules
  • Varies by plan: Some plans allow money to carry over into the next year and others are "use it or lose it"
  • Money in an HSA doesn't have to be used in the year contributions are made. It can remain indefinitely in your account and grow tax-free

If your employer offers an HRA, it will help you to 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 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, both HRAs and HSAs help make medical care less expensive. Whether your employer offers an HRA or an HSA, it is 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.