Small Business

HSA vs HRA: what you need to know

by Keely S.

The health insurance world is riddled with acronyms, and some are so similar, it’s tempting to believe that means they have more in common than they do. Take, for example, the HSA vs HRA. What do those mean exactly? How are they similar and how are they different? Let’s dive right in.

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. However, there are some key differences. 

What HRAs and HSAs have in common

The main thing these tools have in common is their tax-friendly design. It's why we love them!

HSAs have three tax advantages:

  • contributions made by employers are pre-tax, contributions made by the employee are tax-deductible.
  • you don't pay tax on account growth
  • withdrawals from the account (to pay for eligible expenses) are not taxed

Real world example: Since HSA contributions don’t count toward your tax burden, you will be taxed as though you make less money. So, for example, if you make $40,000 per year and you contribute $3,000 into your HSA, you will be taxed as though you make $37,000, thus lowering your tax burden.

HRAs boast no payroll tax for employers and no income tax for employees.

Let's a look a bit more closely at what these tax-advantaged options actually are.

Key differences between an HSA and an HRA

  • With HSAs, you avoid the “use it or lose it” stipulation. It’s not like an FSA (flexible spending account) where you lose the funds at the end of  the year. Funds are also portable, meaning they remain the employees’ to keep even if they don’t stay at the company.

    This is also different than the QSEHRA, where the funds stay with the employer. 
  • HSA grows like an investment and an HRA does not. 
  • To take full advantage of HSA tax savings, it is suggested that you make the maximum contribution as set by the IRS. The 2021 HSA Contribution limits have just been announced. The contribution limits for 2021 are $3,600 for individuals and $7,200 for families. If you are 55 or older, a $1,000 catch-up contribution still applies.
  • While the ICHRA does not have annual contribution limits, the QSEHRA does. The 2020 contribution limits for QSEHRA are $5,250/year (or $437.50/month) for individuals. For a family: $10,600/year (or $883.33/month).

All about health savings accounts

HSAs are: 

  • 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) 
  • Typically come with a debit card for added convenience 
  • Tax deductible contributions, tax free reimbursements, and tax free accumulation of interest and dividends

How HSAs work

Employees can set up monthly contributions through payroll to add money to their HSA account. If they anticipate high expenses for the year (say, they are having a baby) it might be a good chance to bump up the contributions. You can change contribution rates at any time. The idea is to have enough money in the HSA to cover that high deductible, which can be a pretty scary number sometimes. But in the event something happens and you end up with an out of network deductible that would normally break the bank, if you’ve been diligent about putting money in your HSA, it will soften the blow and help you cover your costs. If those costs never come, the HSA funds continues to grow and the account serves as a long-term investment account. 

Taxes and penalties with HSAs

If you withdraw funds for non-qualified expenses before you turn 65, you'll owe taxes on the money plus a 20% penalty. After age 65, you'll owe taxes but not the penalty.

Once you’re over age 65 and enrolled in Medicare, you can no longer contribute to an HSA, but you can still use the money for out-of-pocket medical expenses.

All about health reimbursement accounts

HRAs 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 free for both employee and employer

How HRAs work

An HRA is pretty straight-forward: 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 HRAs available, but the newest (and dare we say, best) around are the ICHRA and QSEHRA.

We are so excited about these HRAs and all the benefits they offer, that we wrote comprehensive, in-depth guides to the ins and outs of both. 

Still have questions?

Hopefully we’ve cleared up some of the confusion, but perhaps you’re still wondering do HRAs and HSAs work together? The link above will spell that out for you, including the very specific IRS rules governing this topic. If your question is simply how do HRAs work, this post lists out a step by step guide. 

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. 

Take Command Health is proud to offer our members a completely FREE HSA account for individuals through our partner Lively. No catches, no gimmicks, no sneaky fees. Ask one of our team members about our Smart Benefits today! 

Picture of Keely S.

Hi, I'm Keely S.! A wife to one and mother to four, Keely does all of the things. She’s also dabbled in personal finance blogging and social media management, contributed to MetroFamily magazine, and is passionate about good food, treasure hunting and upcycling. With a B.S. in Psychology from the University of Oklahoma and a knack for a witty punchline, it’s no surprise that Keely’s social posts are as clever as they get. In her (very little) free time, you’ll find Keely with her nose in a book or trying out a local restaurant with her family.