Let’s face it: Navigating the ins and outs of health insurance options is not for the faint of heart. But one silver lining to this complicated ball of wax is that you have more control of how your health care dollars are spent than ever before.
One of the ways you can start making your health care funds work for you is through a health reimbursement arrangement (HRA) or a health savings account (HSA). There will be guidelines, limits and plenty of fine print (this is still health insurance after all!), but we’re going to walk you through everything you need to know about HRAs vs HSAs so you can pick the best one for you.
What Is an HRA?
Health reimbursement arrangements, or HRAs, allow your employer to flow money to you for qualified medical expenses. Basically, these are dollars your employer earmarks just for health-related expenses.
The main thing to know about HRAs is that they’re employer-owned. That means if you leave your company or get let go, the money in that fund doesn’t go with you. Your employer contributed the money, so it all belongs to them.
In recent years, HRAs haven’t been as popular as the new belle of the ball in the health insurance world: HSAs. They offer a ton of unique benefits that are hard to beat (more on that in a minute). It’s not that HRAs are the HSA’s ugly stepsister, it’s just that they don’t bring quite as much to the table.
What Is an HSA?
Like an HRA, an HSA is an account where you put money to save for health expenses. Get it? Health savings account.
The reason HSAs are so popular is because they come with some pretty great tax benefits. Not only are your contributions tax deductible going in, but they also grow tax-free. And to top it all off, you aren’t taxed when you withdraw your funds for qualified medical expenses.
But not just anyone can open an HSA. There are some eligibility requirements you have to meet first—the most important is that you’re enrolled in a high-deductible health plan (HDHP). If you don’t have an HDHP, you can’t have an HSA.
6 Differences Between an HRA vs HSA
Both HRAs and HSAs are designed to give you more control of the money you spend on your health care. And they’re both intended to be used for qualified medical expenses. But that’s about where the similarities end. So, let’s take a look at how they’re different.
This is the biggest difference between an HRA and an HSA: You own your HSA, but an employer owns your HRA. Both might be part of an employer-sponsored plan, but one you can walk away with and the other you can’t.
As we said above, if you have an HRA and change jobs or get let go, those funds do not leave with you. They belong to your employer and you won’t have access to them.
Now, with an HSA, it’s a totally different story. If you have an employer-sponsored HSA (meaning you opened your HSA through your employer and not on your own through an HSA provider), then no matter what happens with your job, that HSA belongs to you. When you go, you can take your funds with you, including any contributions your employer made to your account.
And, of course, if you open an HSA on your own (not through an employer), then you’re the boss of it from the get-go.
An HRA can only be opened through an employer. Individual HRAs may be open to all employees, or your employer might only offer them to certain classes of employees, like salaried employees but not hourly workers.
An HSA can be opened through an employer or on your own. Whether you open an HSA through work or independently, the same eligibility requirements stand. And the main one is that you’re enrolled in an HDHP. If you’re self-employed, don’t work, or your employer doesn’t offer an HSA, you can quickly and easily open one on your own.
3. Tax Benefits
When it comes to HRAs, the tax benefit is for the employer. Since they’re the ones contributing the money, they’ll also be the ones getting the tax boost from it.
HSAs, however, are triple tax-advantaged. If your HSA is through your employer, your contributions can come straight out of your paycheck and into your HSA without counting as income. That’s called a pretax payroll deduction. Or depending on your situation, you can also claim your contributions as tax deductions when you file your tax return.
So, not only do your contributions go in tax-free, they also grow tax-free. Your HSA can earn interest while an HRA can’t. And as long as you use your HSA money for qualified medical expenses, then you don’t get hit with any taxes or penalties when you withdraw funds. Cha-ching!
With an HRA, unless your employer decides to allow roll overs, your funds won’t roll over year to year. It’s a use-it-or-lose-it kinda deal. But with an HSA, your contributions can keep adding up year over year.
5. Contribution Limits
Remember how we said there would be some fine print? Well, here’s some of it!
The type of HRA your company offers will determine how much your employer can contribute. If you have an individual coverage health reimbursement arrangement (ICHRA), then there are no contribution limits. But remember, your employer is the one funding your ICHRA, so it’s unlikely your employer will go crazy with contributions.
If you have a QSEHRA, or qualified small employer health reimbursement arrangement, then the max contribution in 2020 is $5,250 for single coverage or $10,600 for families.1
One other important thing to note with HRAs is that since they’re employer-owned, your employer can also set rules on what’s eligible for reimbursement, like deductibles, co-pays and coinsurance.
Take Allen for example. Allen works for Acme, Inc. which provides his health insurance. They also offer an HRA option to employees. Because Acme owns the HRA, they also get to set what is eligible for reimbursement.
In Allen’s case, his HRA does not cover co-pays but it can be used for prescription medications. So when Allen gets a sinus infection and goes to see his primary care doc, he can’t use his HRA to pay the $20 co-pay but he can use it to pay for the $15 nose spray his doctor prescribes him.
HSA contribution limits are more straightforward. In 2020, you can contribute up to $3,550 per year for single coverage or $7,100 for family coverage. These numbers include what your employer contributes too. Keep that in mind so you don’t over-contribute and get dinged with a penalty.
Since your HRA funds belong to your employer, you won’t be able to invest them. And like a flexible spending account (FSA), those funds won’t roll over at the end of the year unless your employer has set up roll overs.
But with an HSA, you can invest your contributions. Not only will they earn interest just sitting in your HSA, but you can also invest them into mutual funds.
Most HSA providers will require that you have a balance of $1,000 before you can invest. You’ll want to treat this investment the same way you would a 401(k) or IRA, keeping in mind your age and risk tolerance.
HRA vs HSA: Which Is Right for You?
Despite having similar abbreviations, HRAs and HSAs are pretty different. Take a look at what your employer offers and weigh your options. While you can only get an HRA through an employer, an HSA is available to anyone who meets the basic eligibility requirements. Don’t count an HSA out if your employer doesn’t offer one.
Consider, too, that you can have both an HRA and an HSA. Ask your employer if they offer a limited purpose HRA. It does exactly what it sounds like: It limits how you can use your HRA, most often to vision and dental. Then you can use your HSA funds for your other qualified medical expenses.
HRAs and HSAs are designed to let you take control of how you pay for your health care expenses. Don’t miss this opportunity to be super intentional and tell your money what to do! If you’re ready to start cashing in on those great HSA tax benefits, open your HSA today.