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Do HRAs and HSAs work together?

Do HRAs and HSAs work together? Health savings accounts and health reimbursement arrangements have been around for a while, but new laws bring more choices for business owners and their employees as they evaluate the best small business health insurance options. While these two tax-advantaged tools can work together alongside a high deductible plan, their relationship is complex. Here’s what to know about HRAs vs. HSAs before you choose.

Can you have an HRA and HSA?

Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs) are tax-advantaged accounts that help individuals pay for out-of-pocket healthcare expenses for themselves and their families through pre-tax dollars in set-aside funds. Figuring out how to stack these benefits and get the most out of them requires a little context and a lot of explanation. First, we will go over what HSAs and HRAs are intended to do. Then, we will review HRA eligibility and HSA eligibility, explore how they can integrate while keeping the IRS happy, understand if you can use HRA and HSA simultaneously, and bullet out the types of HRAs that play nice with HSAs. 

Here we go!

The Basics

Understanding the fundamental concepts of Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs) is crucial for determining how these accounts can be used together effectively.

What is an HSA

A Health Savings Account (HSA) is a tax-advantaged account created for individuals covered under high-deductible health plans (HDHPs) to save for medical expenses that HDHPs do not cover. Contributions to an HSA are tax-deductible or pre-tax if made through a payroll deduction. Funds from the HSA can be used to pay for qualified medical expenses at any time without federal tax liability. An HSA is owned by the individual, which means it remains with them regardless of their employment status or place of work.

What is an HRA

A Health Reimbursement Arrangement (HRA) is an employer-funded plan reimburses employees for qualified medical expenses up to a certain amount each year. Unlike an HSA, the employer fully funds an HRA, and the reimbursement from an HRA is tax-free to the employee. HRAs vary in design: some may require employees to have health insurance, while others might be used to pay for premiums or medical expenses not covered by insurance. The flexibility of HRAs can make them an attractive option for employers looking to provide health benefits to their employees.

In the context of whether you can have an HRA and an HSA simultaneously, understanding these basics helps explore the specific conditions under which both accounts can be concurrently managed. This consideration is crucial for maximizing the benefits from both accounts, thereby enhancing healthcare savings and benefits coverage.

Is an HRA the same as an HSA?

No, an HRA is not the same as an HSA. But we understand the confusion! They are both tax-advantaged tools that allow individuals to pay for out-of-pocket medical expenses. We will jump into the difference between an HRA and HSA below. 

Have more burning questions about HRAs? 

What's the difference between an HRA and an HSA?

An HSA (aka Health Savings Account) is:

  • Funded by both employer and employee
  • Owned by Individuals; employee takes funds with them when they leave
  • Employee has immediate access to money in account
  • Funds only for medical expenses that fall under the health plan’s deductible 
  • HSA funds cannot be used for insurance premiums
  • HSA participants must have a High Deductible Health Plan (HDHP) 
  • Tax benefits: tax-deductible contributions, tax-free reimbursements, and tax-free accumulation of interest and dividends

Now moving on.

An HRA (health reimbursement arrangement) is exactly how it sounds: the employer reimburses for premiums and medical expenses tax-free, and the employee chooses a plan that fits their needs. Employees are then reimbursed when they submit a claim. There are a few flavors you should be aware of, like ICHRA, QSEHRA and EBHRA, to name a few. Here's what to know about this crew. They all are:

  • Funded entirely by Employer (no employee contributions)
  • Account owned by Employer- funds stay with employer if employee leaves company
  • Reimburses health insurance premiums and medical expenses
  • Money is reimbursed for expenses/premiums after they are incurred and receipts are provided
  • Employees must have qualifying health insurance to participate
  • Tax benefits: Tax free for both employee and employer

HSA and HRA: what to know

Many individuals opt for high deductible plans for the lower premiums, especially if they don't have ongoing medical treatment, are relatively young and healthy, or don't expect any major medical episodes. Tax-free contributions through a health savings account (HSA) help individuals afford the higher deductibles if the unexpected happens, and the money continues to grow, much like an investment account. 

For 2024, individuals under a high deductible health plan (HDHP) will have an HSA contribution limit of $4,150. The HSA contribution limit for family coverage will be $8,300. Those amounts are about a 7% increase over what you could contribute last year.

If you have a high deductible plan and want to benefit from the tax-advantaged HSA that goes along with it, you'll want to understand the full picture if your employer is offering you a health reimbursement arrangement at the same time.  

While health reimbursement arrangements and health savings accounts are both tax-friendly tools to help cover the costs of medical expenses, they differ in design and their integration can be a little tricky. 

First, you'll want to make sure you are eligible for the HSA in the first place before you consider using an HRA and HSA together. 

Eligibility for HSAs

It’s important to remember that if you have any coverage in addition to your HDHP that provides first dollar coverage for medical care, you might be disqualified from opening or contributing to the HSA—and that would include employer contributions.

Reasons for disqualification include things coverage under your spouse’s group health plan that isn't considered high deductible, a spouse’s FSA (flexible spending account), Medicare, or HRAs that reimburse for medical expenses in addition to premiums.  

You read that right: if you're covered by a spouse's qualified health plan that isn't a HDHP or if your spouse has an FSA or an HRA with medical expense reimbursement through their employer, you are disqualified from participating in an HSA. 

→ Learn about the HRA IRS rules. 

→ Learn about Health Reimbursement Arrangement Rules for ICHRA and QSEHRA. 

→ Check out our top 5 Health Reimbursement Arrangement rules to remember here. 

Can a health reimbursement arrangement and a health savings account be used at the same time?

The answer is yes, but there's a catch (isn't there always?). The IRS has some pretty specific rules about how these two tax-advantaged tools work together.

Here are the main rules to remember.

You can use HSA funds any time to cover medical expenses, as long as you don't submit for reimbursement of the same expenses from your employer. No double dipping.

You can contribute tax-free to your HSA and use the funds alongside your company's HRA: 

  1. If you are enrolled in a high deductible plan.
  2. If your HRA reimburses premiums only. 
  3. If you don't double dip. That means you can't enjoy the benefits of tax free reimbursement through your HRA when you've paid for the medical expenses with your  HSA. 

Wondering how our platform might work for you?

Let's go over which HRAs can play well with HSAs. 

HRA and HSA together: Types of HRAs that work with HSAs

There are a few HRAs that will work with an HSA, if certain conditions are met. Here is the full lineup.

  • Individual Coverage HRA:The Individual Coverage HRA, ICHRA plan (ICHRA) allows employers of any size to reimburse any amount to employees for qualified medical expenses and premiums. While HSA funds can be used for medical expenses at any time, as long as employees don't submit the same expenses for reimbursement through ICHRA, it's a bit more complicated when it comes to contributing to an HSA while also participating in an HRA. To allow for employee contributions to an HSA, the ICHRA must give employees an option to opt out of medical expense reimbursement on a yearly basis. More details on this integration below.
  • Qualified Small Employer HRA: The Qualified Small Employer HRA (QSEHRA) allows companies with less than 50 employees to reimburse for medical expenses. Like an ICHRA, medical expenses can't be reimbursed through the QSEHRA if the employee wants to continue to contribute to an HSA. For QSEHRA, if the employer allows expenses, then employees are not able to contribute to an HSA. If it's their spouse's HSA, the spouse can contribute based on the employee not being eligible. For a spouse and employee, the spouse can contribute the single amount. If they have kids, then the spouse could contribute the family rate. 2023 QSEHRA contribution limits can be found here. 
  • Limited Purpose HRA: This type of HRA covers certain things, like preventive care, dental and vision procedures. Your expenses won’t reduce your deductible, but this type of HRA can be used in conjunction with your high-deductible plan.
  • Post-Deductible HRA: This type of HRA is basically an HRA that has its own deductible, covering qualified medical expenses after you pay off your deductible. This is compatible with an HSA. Even if you use a post-deductible HRA, you can still reimburse for certain things like dental expenses or 5 other things before the deductible and everything else you can reimburse after the deductible.
  • Retirement HRA: This type of HRA covers qualified medical expenses for retirees. You can use your HSA up until you lose eligibility for an HSA. After that, you can use your HRA.

Creating an HSA-friendly class for ICHRA

One of ICHRA’s hallmark features, aside from the tax-friendly reimbursement for medical expenses, is the ability to divide employees into different ICHRA classes and offer different levels of benefits to each class. This is one of the top pros when you consider ICHRA pros and cons.

With ICHRA, there’s a provision that allows employers to offer an entire class the option of medical expense reimbursement. They can choose to opt out of the medical expense reimbursement on a year-to-year basis but keep the reimbursement for premiums through ICHRA. If they opt out of the medical expense reimbursement for the year, then they can participate in their HSA.

The only time this would make sense is if the maximum contribution for your HSA or whatever you are saving on taxes is greater than what you are offered through the HRA.

2023 HSA limits are slightly higher than last year, with $3,850 for individuals and self-only HDHP coverage and $7,750 for family HDHP coverage. As an example, if you estimate your tax savings at a 25% tax rate for your family, you would be saving $1,775 a year or about $148 per month. If your monthly HRA reimbursement rate falls short of that figure, opt for the HSA. It’s a better deal.

Advantages of Using Both

Using both a Health Savings Account (HSA) and a Health Reimbursement Arrangement (HRA) simultaneously can provide a robust health benefits strategy that offers numerous advantages. Here are some of the key benefits of using both an HSA and an HRA at the same time:

  1. Enhanced Coverage: Combining an HSA with an HRA can significantly broaden the range of covered medical expenses. While the HSA allows for flexibility and personal control over funds, the HRA can provide additional reassurance by covering costs that might exceed HSA balances, such as copayments, deductibles, or other unforeseen medical expenses.
  2. Financial Efficiency: By strategically using both accounts, employees can maximize their tax savings and financial efficiency. Contributions to an HSA are tax-deductible, reducing taxable income, and reimbursements from an HRA are not counted as taxable income. This dual advantage can increase disposable income and provide more significant financial relief.
  3. Flexibility in Fund Management: HSAs offer the benefit of fund rollover year after year, accumulating wealth in a tax-advantaged account that can grow over time through investments. Meanwhile, HRAs, typically set up and funded solely by the employer, can be designed to complement the HSA by covering immediate medical expenses that the HSA funds do not fully cover.
  4. Security and Peace of Mind: Knowing they have both an HSA and an HRA can give employees peace of mind. They can use their HSA funds for daily qualified medical expenses or invest them for future needs, relying on the HRA for unexpected or larger medical expenses that their HSA may not cover.
  5. Employer Flexibility: Offering both options can be an attractive benefit for employers that helps them recruit and retain talented employees. Employers can customize HRAs to suit their budget and benefits strategy while allowing employees to contribute to an HSA and manage their health savings independently.
  6. Coverage During Employment Changes: As HSAs are individually owned, they stay with the employee even when they change jobs or retire. The HRA, often tied to the current employer, provides a benefit while the employee remains with the company. This combination ensures that employees are covered during their employment tenure and have long-term health savings options that continue afterward.

Incorporating an HSA and an HRA into a healthcare benefits plan offers a comprehensive approach that can meet diverse needs and provide financial benefits. Understanding how an HRA and HSA can be combined or how each works individually can help employees and employers make informed decisions about their healthcare strategies.

Take Command is here to help

There are other more complicated ways to structure your HRA and allow your employees to contribute to their HSAs, but it's best to consult with a tax professional if you'd like to go that route.

Need help understanding how to get the most out of these two great tax-friendly tools? Our team of HRA experts is ready to chat with you on our website. You can also check out our guide on small business tax strategies for more ideas on how to play it smart. 

This post was originally published in 2020 and has been updated with new information and insights for 2023. 


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