HSAs vs HRAs (Savings Accounts vs Reimbursement Arrangements)
For Most Businesses, HRAs are Superior to HSAs
Which is better: A Health Reimbursement Arrangement (HRA) or a Health Savings Account
(HSA)? The answer depends on what you are trying to accomplish and whether you are an employer or an employee.
HRA vs HSA - What is a Health Reimbursement Arrangement (HRA)?
A Health Reimbursement Arrangement, or HRA, is notional account that employers use to reimburse employees’ healthcare expenses. Funds do not accumulate in a separate account; rather, employers pay only after their employees incur expenses.
HRA vs HSA - What is a Health Savings Account (HSA)?
A Health Savings Account, or HSA, is a financial account established by an individual to pay for qualified medical expenses. HSAs must be linked with a qualified high-deductible health insurance plan, and anyone can contribute to it.
HRA vs HSA - Which One is Right for Your Business?
Several characteristics make HRAs superior for employers, while still benefiting employees. HSAs generally favor employees but are more costly to employers. Here are key similarities and differences you should remember:
HRA vs HSA - Similarities
Employer contributions to both HRAs and HSAs are tax-deductible. Employees aren’t taxed on these contributions: Employer HRA contributions are excluded from wages, while employees deduct HSA contributions on their personal tax returns.
Both HRAs and HSAs encourage employee "consumerism," helping them pay attention to healthcare costs and use healthcare more prudently. They’re rewarded by having unused funds roll forward each year.
Generally, HRAs are better for employers while still very beneficial for employees. To make the right decision, however, you need to understand the key differences between HRAs and HSAs.
HRA vs HSA - Important Differences
The differences between HRAs and HSAs relate to control, flexibility, and simplicity.
Control. Employers have more control over costs with HRAs. Only employers may contribute to HRAs and use these funds to reimburse actual expenses; with HSAs contributions are made whether or not expenses are incurred. Employers also have more freedom to select expenses covered by HRAs. Employees forfeit unused HRA funds when they change jobs but keep all unused HSA employer contributions.
Flexibility. With HRAs, employers can adjust contributions by class of employee (e.g. management, IT, clerical). HRAs can be used with any type of health insurance—or none at all. Additionally, HRAs are easier to use in conjunction with other employee benefits like cafeteria plans and FSAs.
Simplicity. HRAs are easier to understand, administer and manage. Employees don’t have to store receipts for multiple years, worry about tax deductions or pay monthly administrative fees to their bank or broker.
Health Reimbursement Arrangement (HRA)
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Health Savings Account (HSA)
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Control
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Employers pay when expense is incurred, and only to extent of contributions
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Employer pays full amount at beginning of year, whether or not expenses are incurred.
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Funds stay with the employer when the employee leaves the company.
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Funds go with the employee when he/she leaves the company.
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Only employers may contribute.
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Employers, employees or third parties may contribute.
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Flexibility
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Employer selects maximum contribution.
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IRS determines maximum contribution.
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No restrictions on health insurance.
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Must be paired with qualified high deductible plan.
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Contributions vary by class of employee.
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All employees receive same employer contribution.
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May be used with FSA with few restrictions.
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May be used only with restricted, limited-purpose FSA.
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Simplicity
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Funds paid from company bank account.
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Employee sets up account with bank or brokerage and has separate policy with insurance company.
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Employee submits receipts for payment.
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Employee manages account and submits expenses for payment.
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Rules driven by broad IRS guidelines and company plan design.
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Complex IRS regulations govern expenses, funding, participation and fiduciary requirements.
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The best-in-class hra software platforms provide the flexibility to create and administer separate employee classes, choose what expenses you’ll cover, control how much you’ll pay and accommodate different health plans and carriers. It lets you create electronic plan documents and communicate your new plan. It also ensures your plan will be fully compliant with all regulations.
HRAs are easier to understand, administer and manage. Employees don’t have to store receipts for multiple years, worry about tax deductions or pay monthly administrative fees to their bank or broker.
With HRAs, employers can adjust contributions by class of employee (e.g. management, IT, clerical). HRAs can be used with any type of health insurance—or none at all. Additionally, HRAs are easier to use in conjunction with other employee benefits like cafeteria plans and FSAs.
What do you think?
Note: This should not be taken as legal or tax advice.
