Want to compare HSAs and HRAs? 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. What do those mean exactly? How are they similar and how are HSAs and HRAs different? Let’s dive right in.
HSAs vs HRAs
If you're one of the many business owners looking to mitigate the risks of inflation and recession on your health insurance, you're probably asking yourself questions like "What are the difference between HSAs and HRAs?," "How do I compare HSA vs HRA?," or "Is an HSA or HRA better for my company??
You're in the right place.
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 do 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.
Health Reimbursement Arrangements boast no payroll tax or employer 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.
What's the difference 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 2024 HSA Contribution limits for self-only coverage will be $4,150, a 7.8 percent increase from the $3,850 limit in 2023. For family coverage, the HSA contribution limit jumps to $8,300, up 7.1 percent from $7,750 in 2023.The QSEHRA contribution limits for 2024 are $6,150 for individuals and $12,450 for families.
- While the ICHRA does not have annual contribution limits, the QSEHRA does.
What are HSAs?
- 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 do 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.
Are there tax 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.
What are health reimbursement accounts?
- 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
See how HRAs work in your location!
How do HRAs work in 2024?
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.
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.
- Here’s our guide to the individual coverage HRA.
- Here’s our guide to the qualified small employer HRA.
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.
Other helpful resources:
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.
This post was originally published in 2022 and has been updated to reflect the latest regulatory and policy changes in 2023.
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.