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. 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 and HSAs before you choose.
Both Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs) are tax-advantaged tools that help individuals pay for out-of-pocket medical expenses for themselves and their families through 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 eligibility, explore the ways in which they can integrate while keeping the IRS happy, and bullet out the types of HRAs that play nice with HSAs.
Here we go!
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 Individual; 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
Our friends at Lively HSA have a great HSA resource for learning more about this tool.
Now moving on.
An HRA (health reimbursement arrangement) is exactly how it sounds: the employer reimburses for premiums and medical expenses on a tax-free basis, 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 health insurance (minimum essential coverage) to participate
- Tax benefits: Tax free for both employee and employer
What to know: High deductible plans, HSAs, and HRAs
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.
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 (for 2020, this means $1,400 for single coverage and $2,800 for family coverage), 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.
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:
- If you are enrolled in a high deductible plan.
- If you opt out of your HRA's reimbursement of qualified medical expenses (you can keep reimbursement for premiums). This can be done on a yearly basis, in which case, you can contribute tax-free funds to your HRA for a year.
- 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.
Let's go over which HRAs can play well with HSAs.
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.
- Suspended HRA: Before an HRA coverage period begins, you can choose to "suspend" the HRA. What that means is that for that year, the HRA won't pay or reimburse medical expenses incurred except preventive care. When the year long suspension ends, you are no longer eligible to make contributions to an HSA unless you opt to suspend for another year. Two popular types of HRAs that this applies to include:
- Individual Coverage HRA: The new Individual Coverage HRA (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 ($3,550 for individuals, $7,100 for families). If they have kids, then the spouse could contribute the family rate.
- 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 it's 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 deductible and everything else you can reimburse after deductible.
- Retirement HRA: This type of HRA covers qualified medical expenses for retirees. You can use your HSA up until the point in time before 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.
With ICHRA, there’s a provision that allows employers to offer an entire class the option of medical expenses. They can choose to opt out of the medical expense reimbursement on a year to year basis (like the suspended HRA model above), 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.
2020 HSA limits are slightly higher than last year, with $3,550 for individuals and self-only HDHP coverage and $7,100 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.
Take Command Health is here to help
There are some other more complicated ways to structure your HRA and allow your employees to still contribute to their HSAs, but it's best to consult with a tax professional if you'd like to go that route.
Need help making sense of how to get the most out of these two great tax-friendly tools? Our team of HRA experts is at the 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.