HSA vs. HRA: which is better to offer employees?

Since healthcare is a major concern for most employees, offering attractive benefits plans is one of the best ways to secure and retain top talent for your organization.

There are two types of accounts in particular that have a good track record among employees: Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs).

These plans both help employees take care of their yearly medical costs, but the way each plan works is different.

In brief, HRAs work by reimbursing a fixed amount of expenses to employees, whereas HSAs allow employees to contribute pre-tax dollars to a savings account, which can then be used to cover eligible medical costs.

These differences can create additional complexity for your benefits staff and stakeholders. So, to make things easier for you, we've decided to compare HRAs and HSAs, showcase their pros and cons, and ultimately help you decide what to offer at your organization.

Here’s everything you need to know about HRAs and HSAs.

Key takeaways

• HSAs are individually owned, allowing employees to contribute pre-tax dollars for qualified medical expenses. 
• HRAs are employer-funded, offering flexibility in plan design but typically lacking portability, meaning if you quit your job, you will lose access to that account.
• HSAs provide a triple tax advantage, portability, and the option for individuals to invest funds, making them suitable for long-term savings and personal control over healthcare finances.
• HRAs offer flexibility and employer control, allowing customization of plans, tax-deductible employer contributions, and predictability in managing healthcare expenses.
• Employers can strategically offer both HSAs and HRAs to create a versatile benefits package. 

What is the difference between HSA and HRA?

HSAs and HRAs are tax-advantaged medical accounts, but they have key differences in eligibility, ownership, funding sources, portability, and investment options. Let's look into them briefly.

Ownership

• HSA: HSAs are owned by individuals. Employees can open and contribute to an HSA if they have a qualifying high-deductible health plan (HDHP), and the account remains with the individual even if they change employers.
• HRA: HRAs are employer-funded accounts. Employers establish and fund HRAs, and employees can use the funds for qualified medical expenses. If employees change jobs, they typically lose access to the HRA.

Eligibility requirements

• HSA: To contribute to an HSA, individuals must be covered by a high-deductible health plan (HDHP) and cannot be covered by other non-HDHP health insurance. There are specific contribution limits set by the IRS. Annual HSA contribution limits for 2024 are $4,150 for individuals and $8,300 for family coverage.
• HRA: Employers decide who is eligible for an HRA, generally employees that enroll in the group health insurance plan. HRAs can be offered in conjunction with other types of healthcare plans and arrangements, including Healthcare FSAs. There are no specific eligibility requirements set by the IRS.

Funding sources

• HSA: Contributions to HSAs can come from both the individual and the employer. Contributions made by the individual are tax-deductible, and contributions made by the employer are excluded from the employee's income.
• HRA: HRAs are funded solely by the employer. Employees do not contribute to HRAs directly. The employer allocates a specific amount to the HRA to cover qualified medical expenses.

Portability

• HSA: HSAs are portable and belong to the individual. If an individual changes jobs or health plans, they can take their HSA with them, and the funds remain available for qualified medical expenses.
• HRA: HRAs are typically not portable. When an employee leaves the company, they usually lose access to the HRA, although there are variations, such as retiree HRAs or HRAs with rollover provisions.

Rollover of unused funds

• HSA: Unused funds in an HSA can roll over from year to year. There is no use-it-or-lose-it rule, and the account can continue to grow over time.
• HRA: The ability to roll over unused funds depends on the design of the HRA. Some HRAs may allow rollover of unused funds from one year to the next, while others may have a "use it or lose it" provision.

Investment options

• HSA: HSAs give employees the option to invest their HSA funds in various financial instruments, such as mutual funds, stocks, bonds, or other investment vehicles. 
• HRA: HRAs don't come with investment options. They are focused solely on reimbursing employees for qualified medical expenses.

If you also want to learn about the differences between LSAs (Lifestyle Spending Accounts), FSAs (Flexible Spending Accounts), and HSAs, check out our LSA vs HSA article.

What are the similarities?

While HSAs and HRAs differ in how they function, they also have a number of features in common. HSA and HRA similarities include tax advantages, employer contributions, qualified medical expense coverage, and integration with health insurance plans.

Tax advantages

Both HSAs and HRAs offer tax advantages. Contributions made by employers to HRAs and by individuals (and sometimes employers) to HSAs are tax-deductible. Additionally, HSA funds can grow tax-free if invested, and withdrawals for qualified medical expenses are tax-free.

Employer contributions

Employers can contribute to both HSAs and HRAs. In the case of HSAs, employers may make contributions to employees' accounts, and in the case of HRAs, employers fund the account to cover eligible medical expenses.

Used for qualified medical expenses

Funds from both HSAs and HRAs can be used to pay for qualified medical expenses, including deductibles, copayments, prescription medications, and other eligible healthcare costs. The IRS provides guidelines on what constitutes qualified medical expenses.

Integration with health insurance plans

Both HSAs and HRAs are used in conjunction with health insurance plans. While HSAs are associated with high-deductible health plans (HDHPs), HRAs can be paired with various health insurance options, including traditional plans and HDHPs.

HSA vs. HRA comparison chart

The advantages of an HSA

HSAs come with a number of distinct advantages for both employers and employees. Here is a summary.

1. HSAs are subject to triple tax advantage

The biggest advantage of HSAs is the so-called triple tax advantage. Simply put, HSA funds are not liable for taxation in three separate instances:

1. Contributions made to an HSA are tax-deductible, so the amount contributed is subtracted from the employees' yearly taxable income.
2. Any interest or investment gains on the HSA are tax-free.
3. Qualified withdrawals for eligible medical expenses are tax-free.

2. HSAs are portable

HSAs are owned by the employee, not the employer. If the employee changes jobs or health insurance plans, the HSA goes with them. This provides flexibility and continuity in managing healthcare expenses.

3. HSA funds roll over next year

There is no requirement to spend the entire balance in an HSA within a given year. Any unused funds roll over from year to year, allowing for the accumulation of savings.

If you want to offer Healthcare Savings Accounts at scale, check out our pre-tax accounts page.

The advantages of an HRA

HRAs provide several advantages for both employers and employees in managing healthcare costs. Some of them overlap with HSAs, but not all.

HRAs give employers flexibility

Employers can design HRAs to suit their specific needs and budget constraints. You can set custom limits for the plan, which makes HRAs a predictable expense and a lot easier to manage.

HRAs are tax-deductible

Employer contributions to HRAs are tax-deductible as a business expense. You can reduce your overall tax liabilities with HRAs, which improves revenue.

HRAs are employer-controlled

Employers have control over the amount of funds allocated to HRAs and can set reimbursement policies. This allows them to manage and predict healthcare expenses more effectively.

HRAs can cover a variety of expenses

HRAs can cover a broad range of qualified medical expenses, including deductibles, copayments, and other out-of-pocket costs. They are very flexible and thus well-suited to meet the demands of the modern labor force.

Learn more about creating custom Healthcare Reimbursement Arrangements on our Forma HRA page.

Can employees have both an HSA and an HRA at the same time?

Yes, employees can have an HSA and an HRA at the same time. But there are limits to combining them, and you have to meet each of their requirements.

In terms of eligibility, HSA requires employees to be covered with a High-Deductible Health Plan (HDHP). But if you as an employer offer an HRA that covers non-HDHP medical expenses, this could limit the employee's ability to sign up for an HSA. The HRA must be properly designed to offer along with an HSA.

Furthermore, employers need to ensure that there is no duplication of benefits between the HSA and the HRA. For example, an expense cannot be reimbursed under both the HSA and the HRA.

How many employers currently offer HSA or HRA provisions?

According to a recent survey by the KFF, an independent health policy research institute, 30% of US companies offer HDHPs/HRAs, HSA-qualified HDHPs, or both.

As for the contribution amount, the average annual premium for employees enrolled in HDHPs/HRAs is $1,421 for individuals, and $5,857 for families. The numbers are similar for plans other than HDHP/SOs.

In the case of HSA-qualified HDHPs, the average annual premium for employees enrolled in HSA-qualified HDHPs is $1,136 for individuals, and $5,173 for families. This is significantly less compared to plans that are not HDHP/SOs.

HRA vs. HSA: which is better?

The choice between offering HSAs, HRAs, or both requires you to consider your organization's goals, budget, and the needs of your employees.

If you're seeking a benefits option that empowers employees with long-term savings potential and flexibility, HSAs could be the preferred choice. Triple tax advantage, portability, and individual control over funds make HSAs attractive for employees looking to manage their healthcare expenses autonomously. However, you should be mindful of the HDHP requirement for HSA eligibility.

Conversely, if you prioritize customization, cost predictability, and providing direct financial assistance to employees for medical expenses, an HRA may be the better fit. HRAs offer customization options, allowing you to tailor plans to meet the specific healthcare needs of your employees. The ability to set contribution limits and covered expenses is especially important as it gives you a strategic tool for managing healthcare costs.

You might also consider a hybrid approach by offering both HSAs and HRAs. A combination of both makes for a versatile benefits package that caters to diverse employee needs. HSAs provide personal savings and investment opportunities, while HRAs offer direct contributions and a degree of control over the benefits structure. This dual strategy can enhance employee satisfaction and retention while providing a comprehensive solution for managing healthcare costs within budgetary constraints.

Making the choice: HSA vs. HRA

The best way to offer HRAs and HSAs to your employees is via a flexible benefits platform such as Forma.

Our benefits platform streamlines the administration of HSAs, HRAs, FSAs, LSAs, and other pre-tax spending arrangements. We offer a user-friendly system for easy enrollment, contribution management, and reporting, which greatly simplifies the workload of your HR staff, benefits managers, and other key stakeholders.

To look after your employees and their unique needs, visit the Forma flexible benefits platform and sign up for a consultation.

*This document is for informational purposes. Forma is not engaged in the practice of law. Nothing contained herein is intended as tax or legal advice nor is it intended to replace tax or legal advice from counsel. If you need tax or legal advice, please consult with counsel or a certified tax professional.