HRA vs. HSA: Differences, How They Work & Which is Best for You

Health reimbursement accounts (HRA) and health savings accounts (HSA) are both used to reimburse employees for healthcare expenses using pretax dollars. The primary difference between them is that an HRA is funded by the employer whereas an HSA can be funded by either the employer or the employee if the employee is enrolled in a high-deductible health plan (HDHP).

To help compare the two side-by-side, HRA vs. HSA, we’ve provided a table with answers to common questions that you or your employees may have about the difference between an HSA and an HRA.

Do you find health reimbursement accounts, health savings accounts and their rules confusing? Consider working with an HR/benefits provider like Gusto that can help you choose the best employee benefits program for your team.

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HRA vs. HSA Comparison Table

What is an HRA?

An HRA provides a way for an employer to help employees pay for their medical expenses by reimbursement. The employer chooses an annual amount to contribute and also identifies the kinds of medical expenses that an employee can use the funds for.

Implementing an HRA

Setting up an HRA requires you to work with an HRA provider, such as PeopleKeep, Zenefits or Gusto. Your responsibility as an employer is to determine how much to contribute to the employer-funded HRA and how to administer it.

It’s in your best interest to provide training to employees on how to complete health reimbursement request forms. For complete information on setting up an HRA for your business read our HRA article.

HRA Rules

An HRA is employer-funded and employer-owned. Like a flexible spending account (FSA), employees cannot take any remaining funds with them if they quit or their employment is terminated. As of 2018, the maximum annual contribution that small business (under 50 employees) can make toward an employee’s HRA is:

• $5,050 per individual
• $10,250 per family

Employees may not contribute to an HRA. In addition, your employer contributions are made on a pretax basis so that employees don’t have to pay taxes on health reimbursements they receive — that includes federal, state, local and Social Security taxes.

You as the employer have the choice to allow employees to roll over unused funds from one year to the next. Since employers own the account, any unused funds are forfeited back to the employer when the employee quits or is fired.

Qualified Small Employer HRA (QSEHRA)

Small employers have a bit more latitude than larger ones when providing HRAs. Any business can offer an HRA but small businesses with fewer than 50 employees can offer what’s referred to as a qualified small employer HSA, or QSEHRA. That basically means that if you meet two criteria — you’re a small business and no health insurance is offered — you can allow your employees to use their HRA to pay for insurance premiums.

Businesses with more than 50 employees are required to provide health insurance. As such, an HRA can’t be used to contribute to an employee’s health insurance premiums, but it can be used for all other employer-approved health-related expenses.

For example, if your business has fewer than 50 employees, and you don’t offer Affordable Care Act (ACA)-compliant health insurance, then you can let your employees use their QSEHRA account to pay their own health-insurance premiums.

What is an HSA?

An HSA is a pretax employee-owned savings account that can only be obtained in conjunction with an HDHP. As a savings account, the HSA belongs to the employee, who can choose to roll it over to another HSA or convert it to an IRA. The combination of an HDHP with an HSA constitutes a common health plan offering.

HSA + HDHP

In 2018, an HDHP is a health plan with a deductible of at least $1,350 for an individual or $2,750 for a family. It doesn’t matter the type of health plan (such as PPO or POS) — all that matters is that it has a high deductible.

An HSA helps compensate for that high deductible by giving employees a savings account they can contribute pretax dollars to and use in combination with the HDHP to pay their deductibles and co-pays. However, it’s important to note that HSA funds may not be used to help pay for healthcare premiums.

Implementing an HSA

An HSA is easier to administer than an HRA because no reimbursement forms are required. Once you set up the HSA with a bank like Optum or a benefits provider like PeopleKeep, they’ll issue participating employees a debit card. The employee uses the debit card for expenses and anything they don’t use remains in their HSA savings account, even if they leave your employment.

Of course, another way to set up an HSA is to talk to your payroll provider or HR outsourcing company to see if they offer benefits insurance like an HDHP. If they do, they’ll typically also include an HSA option with the plan. Read our HSA article for more information.

HSA Rules

Like an HRA, an HSA is a pre-tax option that allows an employee to pay for medical expenses. However, unlike an HRA, an HSA is a savings account that’s owned by the employee. Either an employer or employee can contribute to an HSA on a pretax basis as long as they (individually or combined) don’t exceed the maximum contribution limits. As of 2018, the maximum contribution limits are:

• $3,450 per individual
• $6,850* per family

Another difference between HSAs and HRAs is that an HSA can be used as a long-term investment account. Employees can direct investments in their HSA similar to a 401(k). In addition, employees can use the savings for other non-medical expenses but they’ll have to pay tax on those funds. Furthermore, if HSA account holders are age of 65 or younger, any funds used to pay for non-eligible healthcare purchases will be subject to a 20 percent penalty.

*On March 18, 2018, the IRS HSA family contribution limit was lowered by $50 from $6,900 to $6,850. No changes were made to the individual contribution limits at that time.

Why HRAs and HSAs Matter

HRA and HSA accounts are both important options for small businesses that want to attract and retain top talent. Health insurance costs are high, and even if you can’t afford to provide ACA-compliant health insurance, you can provide these reimbursement or savings options to offset health expenses for your staff and their families.

While an HRA may seem like a more generous option because you, the employer are providing 100 percent of the funding, an HSA is an account the employee can take with them if they have an HDHP purchased through you, your professional employer organization or on their own.

The Bottom Line Regarding HRA vs. HSA

When it comes down to HSA vs. HRA, both have a place in your benefits offerings. If you’re a small employer who can’t offer health insurance, an HRA is a terrific option. However, if you are able to offer health insurance and your employees choose the HDHP option, you can still help them out by offering a pretax HSA, whether you contribute funds to it or not.

As a payroll provider with benefits offered in 19 states, Gusto can help you choose the best employee benefits program for your team.

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