HSA vs. HRA: What's the Difference?

Your employer may already have a health care plan in place

benefits of HSA vs. HRA
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Health insurance can help with the bulk of medical care costs, but rarely does it cover everything; patients usually are responsible for co-pays and deductibles that sometimes are very costly. Thankfully there are a many types of accounts available that can help you avoid getting stuck with high out-of-pocket costs and medical bills. A Health Savings Account (HSA) is a fund that you draw from to pay for eligible medical expenses, while a Health Reimbursement Arrangement (HRA) is run by your employer to offer reimbursement for medical expenses that you pay for first.

If either of these options is available to you, it's important to understand how an HSA compares with an HRA, and the functions and perks of each.

What's the Difference Between an HSA and an HRA?

Health Savings Account (HSA) Health Reimbursement Arrangement (HRA)
Funded by employee, employer, or both Funded and managed by employer
Must be paired with a High Deductible Health Plan (HDHP) Can be free-standing
Funds are accessible, operates like a debit fund Must submit claims for reimbursement
Covers a wide range of medical expenses Eligible medical expenses may be more limited
Contributions limits regulated by IRS with employee-favorable tax treatment Contribution limits vary, and set by employer with employer-favorable tax treatment
Unused funds rollover into savings Funds are use-it-or-lose-it

Management and Operations: HSA vs. HRA

While both HSAs and HRAs are designed to be used for medical costs, they are set up quite differently. An HSA can be funded by either the employee, employer or both. An HRA is an employer-funded account, managed by the employer.

As the name suggests, an HSA is a savings account that's meant to be used specifically for health care. These accounts are associated with high-deductible health plans, which may be offered by your employer. You can also opt to enroll in a high-deductible plan with an HSA if you're self-employed.

A HRA is a type of health benefit funded by employers that essentially reimburses employees who have out-of-pocket medical expenses—they might even pay health insurance plan premiums in certain cases. They are funded entirely through the employer, not through employee salary deductions. An HRA is neither a savings account, nor is it health insurance. You don't make any contributions to the account; instead, your employer makes contributions for you.

Accessing Funds: HSA vs. HRA

Using your HSA funds is relatively easy. Your insurance company can provide you with a debit card linked to your health savings account. You can then swipe your card to pay for eligible medical costs, and your HSA provider will furnish a tax statement at the end of the year showing your total spending and annual contributions.

If you have an HRA, your employer has control over how you can spend the money. For example, if you incur medical expenses that insurance doesn't pay, you could tap into your HRA to pay, then cover any remaining difference yourself. Alternately, your employer may set up your plan so that you cover a specific amount that's not covered by insurance, then your HRA pays the rest.

Eligible Expenses: HSA vs. HRA

An HSA can be used to pay for a broad range of medical expenses, including:

  • Doctor visits
  • Preventive care
  • Specialty services
  • Physical therapy
  • Drug and alcohol treatment programs
  • Weight-loss programs
  • Organ transplants
  • Lab tests
  • Medical equipment and supplies
  • Hospital services
  • Dental services
  • Vision services
  • Prescription drugs
  • Over-the-counter medications

The Internal Revenue Service limits how HSA funds can be used. For instance, you can't use the money in your HSA to pay for things like teeth-whitening services, vitamins, hair transplants, exercise equipment, or a gym membership.

Similar to HSAs, money held in an HRA can only be used for qualified medical expenses. Generally, that includes those expenses covered by your health insurance plan, such as doctor visits, hospital services, and prescription drugs. Your employer has the option to expand the scope of coverage to include the full range of expenses that are HSA-eligible, but this isn't mandatory.

If your employer doesn't opt to go beyond the expenses covered by your health care plan in their HRA, you may find yourself paying more out-of-pocket for medical expenses that otherwise could be covered by an HSA.

Contribution Limits and Taxation: HSA vs. HRA

There are limits to contributions to an HSA if you have single coverage and different limits for family coverage. These limits will change per year, so be sure to keep up to date on them. Employers can make matching contributions to an HSA on your behalf. Total employee and employer contributions can't exceed the annual contribution limit, however.

For HRAs, limits vary based on the type of HRA the employer has established. An Integrated HRA, which is linked to a high-deductible group health plan, has no annual contribution limit. A Qualified Small Employer HRA (QSEHRA), which is designed for businesses with 50 or fewer employees, has a contribution limit of $5,300 for individual coverage and $10,700 for family coverage in 2021.

HSA contributions are also tax-deductible. Deductions reduce your taxable income for the year, which could result in a lower tax bill or a larger refund.

HRA contributions are deductible, but only for your employer—you get no tax break for having one of these accounts.

Unused Funds: HSA vs. HRA

With an HSA, you're not required to use your funds until you need them. The money you contribute rolls over from year to year and continues to earn interest until you withdraw it.

With an HRA, your employer decides whether to let you carry contributions over from one year to the next. If that's not an option, your HRA money essentially becomes use-it-or-lose-it.

One interesting benefit of the rollover feature of HSA funds is that it can be used as a retirement planning tool. Ordinarily, withdrawals from an HSA for anything other than health care would be subject to a 20% tax penalty and ordinary income tax. If you stay healthy and continue to accumulate money in your account during your working years, you can withdraw money from your HSA at age 65 or older for any purpose, without incurring the 20% penalty. You'd still owe ordinary income tax on your withdrawal, but this can be a useful way to supplement Social Security benefits or retirement income from a 401(k) or individual retirement account.

The Bottom Line

Reach out to your employer to find out what plans are offered and then weigh your options. An HSA and HRA may be equally advantageous in some cases, but HSAs yield some important benefits that HRAs don't. An HRA is definitely worth having if that's all your employer is offering, but you should consider using an HSA if one is available or if you can afford it. Contributing to an HSA, even if you don't max out your plan each year, could offer you greater coverage of eligible expenses, and can be useful in creating an additional source of savings for retirement.