What’s the Difference Between an HRA & an HSA?

Health Reimbursement Arrangements Vs Health Savings Accounts

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Both Health Savings Accounts and Health Reimbursement Arrangements are tax-favored programs that help you pay for health care. However, there are a lot of differences between an HRA and an HSA. Understanding these differences is key to using each program correctly.

Account Vs Arrangement

An HSA is an account. Your HSA funds are held within your HSA account. When you have a qualified medical expense, you make a withdrawal from that account to pay the expense.

An HRA is an arrangement, not an account. It’s literally an arrangement between you and your employer under which your employer agrees to reimburse you for certain medical expenses. There may or may not be an account associated with your HRA. Let’s say your employer allocates $2,000 per year to your HRA. Your employer may or may not create an account for your HRA and actually place $2,000 in it at the beginning of the year. Alternately, your employer might wait to produce the funds promised by your HRA until you have a medical expense and request reimbursement for it.

Ownership & Control

You own your HSA. You control what happens to the funds in it. You may even invest the funds held within your HSA in investments allowed by your HSA custodian.

Given that your HRA is an arrangement rather than an account, when you have an HRA, you don’t really own a tangible asset as you do with an HSA. Everything about the HRA is controlled by your employer.

Your employer decides if, when, and how much to allocate to your HRA as well as what types of qualified medical expenses will be reimbursed from it.

Self-Employment

An HSA works well if you’re self-employed. Contributions are not counted as income, the money in the HSA grows tax deferred, and money taken out of the HSA is also tax-free as long as it’s used for qualified medical expenses.

By definition, an HRA is provided by an employer as an employee benefit. You cannot have an HRA if you’re self-employed.

Contributions

Contributions to an HSA can come from you, your employer, or even a third-party such as an ex-spouse. However, federal law limits tax-free contributions each year. For 2015, the limit is $3,350 for self-only or $6,650 for family coverage if you’re under 55-years-old. If you’re 55 or older, you can contribute an extra $1,000.

HSA contributions are only permitted when you’re an "eligible individual." This means you must have a High Deductible Health Plan as your health insurance coverage. You’re not allowed to have other health insurance coverage in addition to your HDHP, and you can’t be claimed as a dependent on someone else’s federal income tax return.

Unlike an HSA, only your employer can contribute to an HRA. You can’t contribute to it yourself. There is no limit to the amount your employer may contribute each year.

Health Insurance

When an HSA is opened, it must be paired with a High Deductible Health Plan health insurance.

If you lose your HDHP, you continue to own your HSA, but you can’t make contributions into it until you get HDHP coverage again.

There is no health insurance requirement for an HRA, although some employers link an HRA to participation in a group health plan.

HSA rules are restrictive when it comes to using HSA funds to pay health insurance premiums. You’re allowed to use HSA funds to pay COBRA continuation coverage premiums and to pay health insurance premiums when you’re receiving government unemployment compensation. After age 65, you’re permitted to use HSA funds to pay premiums for Medicare or other major-medical health insurance, but you’ll pay income tax on HSA funds used to pay Medigap supplemental health insurance premiums.

HRA rules regarding paying for health insurance are different than those for an HSA. Health insurance premiums are an HRA qualified medical expense. However, your employer can structure your HRA to have stricter reimbursement criteria than those allowed by the IRS. So, your employer may choose to structure your HRA to prohibit reimbursement for health insurance premiums even though the IRS permits it. Since the 2014 implementation of the Affordable Care Act, many employers have stopped using stand-alone HRA’s to reimburse individual health insurance premiums and are instead integrating an HRA with an employer-sponsored health insurance plan.

What Happens When You Leave Your Job

You continue to own your HSA and the funds in it when you leave your job. However, if you lose your health insurance along with your job, it can impact your ability to make contributions to your HSA. Learn more about that and paying for COBRA health insurance in “What Happens to My HSA When I Leave My Job?

What happens to your HRA when you leave your job depends on how your employer designed your HRA. Your employer can opt to allow continued reimbursement of qualified medical expenses from an HRA for a former employee. Some employers even set up retiree-only HRA accounts. However, many employers choose to stop reimbursements from an HRA when an employee leaves his or her job.

Sources:

IRS Publication 969
IRS Notice 2013-54
IRS Publication 502

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