HRA Vs HSA: Which is Right for You?

HRA Vs HSA: What’s the Difference?

If you wish to take better control over the money you spend on health care, consider a couple of health savings options: a health savings agreement (HSA) and a health reimbursement account (HRA). Both are often tied to employer-based benefits.

HSAs and HRAs:

• Employer-sponsored
• Help offset your medical costs
• Offer tax-advantage contributions

Side by side, an HSA and an HRA look similar but there are plenty of differences between the two. HRA Vs HSA, which account is right for you?

Health Savings Accounts

To qualify for an HSA you must enroll in a high-deductible health plan (HDHP).

HDHPs and HSAs

Even though an HDHP may offer lower premiums, you’ll pay more for the deductible. A higher deductible means that you pay more for your medical services and items before your health insurance plan kicks in.

Since an HSA is tax-free, when you combine it with an HDHP, you can pay your deductible, co-pays, coinsurance costs and other qualifying medical expenses included) with the contributions you’ve made to your HSA and not pay taxes on the funds.

Not all employers offer both HDHPs and HSAs. If your employer does not offer HSAs, you can buy your own HSA separately as long as you have a qualifying insurance plan.

How Your HSA Works

You are the owner of your HSA, even if you got it through your employer. Your employer can contribute, as can you and your family members.

• Your employer can allow you to deposit directly from your paycheck, which makes the funds are pre-tax.
• Unused funds roll over to the subsequent year, which HRAs cannot.
• You are able to take the funds with you if you leave the company.
• Contributions have limits.

Eligible Expenses                                     

HSAs can be used to pay a variety of IRS-determined out-of-pocket medical expenses. Besides these kinds of medical expenses, qualified medical expenses include COBRA, long-term care premiums, as well as premiums for Medicare Parts A and B.

Tax Benefits

If you placed your contributions into your HSA through your employer, all funds in the account are tax-free, as are withdrawals for qualified medical expenses and any interest earned.

Because deposits to your HSA are considered pre-tax, you don’t have to pay federal or, typically, state income taxes. If your deposits are made using direct deposit from your paycheck through your employer, it is not considered income and, depending on circumstances, you don’t have to pay social security taxes too.

Contributions Limits

Every year, the IRS decides contribution limits for HSAs. The 2021 limits are:

• $3,600 for individual plans
• $7,200 for family plans

Investing        

You can invest your contributions. Sitting in your account money will earn interest. You can also invest in mutual funds.

Health Reimbursement Accounts

HRAs are owned by the employer. The only way to get an HRA is through an employer, who might offer an account to all employees or a portion of employees, such as salaried workers.

How an HRA Works

• Since your employer owns your HRA, you won’t have access to the funds if you leave the com.
• The employer makes all contributions to the account.
• Any leftover money in the account at the end of the year does not rollover to the next year.
• The employer, based on eligible expenses as defined by the IRS, sets the rules for what qualifies for reimbursement including deductibles, co-pays and coinsurance.

Tax Benefits

Only the employer receives a tax benefit.

Contributions Limits

Your employer sets the amount to be contributed.

Investing

There are no investment opportunities with an HRA.

Limited Purpose HRAs

Some employers offer a limited purpose HRA, limiting how you can use the HRA. A common limited HRA to vision and dental. You can have both an HRA and an HSA; while the limited purpose HRA is used for vision and dental, your HSA funds can be used for your other qualified medical expenses.

Another Health Savings Vehicle: FSA

To round out the options, let’s take a look at another type of health savings. The Flexible Spending Account (FSA).

How an FSA Works

Although set up and owned by the employer, the employee funds it. Employers can also contribute if they choose.

• Employers are required to offer FSAs.
• Like the HRA, an FSA does not require you to have a high deductible health plan.
• Contribution limits apply.
• Your employer can allow you.
• Since the account is owned by the employer, you cannot take remaining funds with you if you leave the company.
• You can have a limited purpose FSA or limited purpose HRA to be used for eligible dental or vision.
• While a limited purpose FSA does not require you to buy a health insurance plan, a regular FSA does.
• You cannot have both an HSA and an FSA, although you can have an HSA and a limited purpose FSA.

Eligibility

The employee must work a minimum of 30 hours a week to qualify for an FSA.

Tax Benefits

All tax benefits go to the employer because they own the account.

Contribution Limits

As of 2021, the IRS has set the FSA pre-tax contribution maximum at $2,750 for the individual, although an employer can limit employees’ contributions to less.

Investments

FSAs do not include an investment option.

Portable? Somewhat

Some employer-based health plans will allow you to do one of the following:

• Roll-over $500 to the new year’s FSA.

OR

• Use a 2.5-month grace period to use the unused balance.
  OR
• Forfeit all unspent funds.

The Bottom Line

All healthcare savings plans are designed to help you pay healthcare expenses. HSA Vs HRA, which one would be best for you and your family?