If you find making decisions about your healthcare during open enrollment scary and confusing, you’re not alone. Close to half of Americans who get healthcare through their employer feel the same way. So today, we’ll cover the differences between two pre-tax health account options you may be faced with: an HSA vs HRA.
First…what are they?
With two similar acronyms, we’re not surprised you might be a little baffled. To clarify, let’s start off with a brief definition of each.
An HSA, is a health savings account that is funded by you (and, sometimes your employer as well) so you can pay for eligible health care expenses. On the other hand, an HRA is a health reimbursement account/arrangement. It’s a pre-tax account that’s funded by your employer, allowing you to do the same thing.
Look, you just learned the first major difference! How they are funded.
What other differences are there?
Let us start off by saying that there are a lot of nuances that may be out there with HRAs. This is mainly due to the fact that they are employer-owned. Therefore, your employer sets up the rules associated with the account. Be sure to check your Plan Highlights to learn more about the requirements, limitations, and deadlines related to your specific HRA plan.
- HRAs may have limits on what items are eligible. While both accounts define their eligible expenses by IRS Code Section 213(d), your employer may choose to restrict eligible items even further under an HRA.
- Your employer controls if HRA funds will rollover. Your employer gets to decide if your HRA funds rollover from year to year and any restrictions surrounding that. Unlike HRA funds, HSA funds rollover automatically and are not controlled by your employer.
- Difference in how fund limits are determined. Since HRAs are employer-funded, your employer decides the contribution limits. On the other hand, HSA contribution limits are set by the IRS each year. Additionally, HSA contributions can be made until the tax-filing deadline (typically April 15) for the prior year. Any contributions you make outside your employer’s cafeteria plan can be deducted when filing taxes by whomever owns the account.
- Switching jobs? Then you (probably) forfeit leftover HRA funds. Unlike an HSA which you can take with you when you leave, any money in your HRA will likely be forfeited to your employer should you choose to work somewhere else.
Other considerations to make
That’s not all! Here are some other key things that may affect your benefits decision.
- Health plan requirements. In order to contribute to an HSA, you must be covered by an HSA-compatible health plan as defined by IRS. On the other hand, an HRA can be provided with any comprehensive group health plan as long as it meets the minimum requirements set by the Affordable Care Act.
- HSA’s triple-tax benefit and long-term savings. The triple-tax benefit is a key perk of HSAs. Funds go into the account tax-free, funds grow tax-free and finally, remain completely tax-free when used for eligible medical expenses. Because of this and the fact that you own the fudns in the HSA, you can use them for eligible medical expenses in retirement.
Check the table below for a summary of these differences.
| Health Savings Account (HSA) | Health Reimbursement Account (HRA) | |
|---|---|---|
| Account funding | Employee, employer, and/or third-party | Employer only |
| Account owner | Employee | Employer |
| Eligible expenses | Defined by Section 213(d) | Defined by Section 213(d); employers have the option to restrict further |
| Annual rollover | Yes | Must be designed your employer |
| Limits to contributions | Annual limits set by IRS | Limits set by your employer |
| Account portability | Yes | No (must be designed by your employer) |
| Health plan requirements | High-deductible health plan (HDHP) | Requirements defined by employer |
| Funds earn interest | Yes | No |
| Investment opportunities | Yes | No |
| Use in retirement | Yes | Must be designed your employer |
Think you understand an HSA vs HRA now?
Check out this article we put together last year to test your knowledge of these two accounts.
If you want a breakdown of differences that also compares these two plans to Medical FSAs and Limited Medical FSAs/HRAs, check out this handy chart we put together.
