Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.
It’s time for you to elect your new insurance benefits at work. You’re presented with several options, which can easily become overwhelming.
Health reimbursement accounts (HRAs) and health savings accounts (HSAs) are two common health care terms that seem similar but have major differences.
Both help you pay for eligible health care expenses. However, each product differs in how you fund it, how you use it for purchases, its tax advantages and more.
Let’s dive into HRA vs. HSA, and explore which option is better for you.
HRA vs. HSA: Differences
Much like it sounds, a health reimbursement account is an account that your employer funds with tax-free money to cover eligible health care costs.
A health savings account, on the other hand, is more like a true savings account. It is one you own and to which you contribute.
|Who’s eligible?||Eligible employees with W-2s, as deemed by employer||Those with a high-deductible health plan (HDHP)|
|Who funds it?||Your employer||Anyone (you, your employer, your family)|
|Who owns it?||Your employer; you don’t keep it if you switch jobs||You; you’re able to transfer when you switch jobs|
|Ability to earn interest?||No||Yes, depending on the account|
|Use for nonmedical expenses||No||Yes, with 20% penalty tax (no penalty starting at age 65)|
|Balance rollover||Depends on employer||Yes|
|2019 self-only contribution limit||N/A||$3,500|
HRA vs. HSA: Eligibility
You can have an HRA if it’s available through your employer’s insurance benefits. HRAs are generally not available for those who are self-employed.
HSAs, meanwhile, are offered in conjunction with high-deductible health plans, or HDHPs. HDHPs tend to take out less from your paycheck each month, but they require you to meet a high out-of-pocket deductible before your policy starts covering certain costs. Luckily, HSAs can help you offset that deductible.
As for what expenses are eligible, that depends on your insurance provider and employer. It can include doctor’s visits, medications, medical supplies and more.
HRA vs. HSA: Funding
HRAs are owned and funded by your employer with pretax dollars. The funds are typically available on the first day of your health care coverage. If you don’t use all the available funds, they may roll over into the next plan year should your employer’s policy allows for it. Some employers may limit the amount you can carry over, too.
Opposite from HRAs, HSAs are funded with money deposited from your paycheck before that money is taxed. Your employer, spouse and other individuals may also deposit money into the account. Depending on the HSA your employer has chosen to provide, it may earn interest, with some of the best HSAs earning up to 2% APY.
Just keep an eye out on your HSA contributions, as you’re limited to $3,500 in HSA contributions per year if you’re the only one covered on your plan. Family coverage accounts have an HSA contribution limit of $7,000. If you’re 55 or older, you’re allowed an additional $1,000 in catch-up contributions (both self-only and family coverage).
HRA vs. HSA: Use
HRAs tend to vary by employer, depending on the insurance companies they use. When you have an HRA, the funds can come directly out of the account, or you can submit a claim for the service amount for reimbursement.
This distinction may depend on the service for which you’re paying. For example, your doctor may bill your insurance company, at which point the funds would be automatically deducted from your HRA. But when you go to the pharmacy, you are required to pay upfront. In that case, you’d need to provide documentation, such as a receipt, to submit a claim to your insurance company. Note that not all insurance plans and companies allow for prescription coverage under an HRA, so be sure to check your policy.
After you’ve used all the money in your HRA, you must start paying for medical expenses out of pocket until you reach your deductible. However, using an HRA helps you pay down your deductible.
For example, let’s say your plan’s deductible is set at $4,500. That means you would normally need to pay $4,500 on your own before coinsurance kicks in. However, your employer’s plan may include a $1,500 HRA, essentially lowering your deductible to $3,000.
HSAs are a bit more straightforward to use. They can come with a debit card that you use to pay for medical expenses upfront without having to submit a claim.
Make sure you check — and double-check — what your plan constitutes as an eligible medical expense. Using your HSA for non-eligible expenses can result in a 20% penalty tax, besides needing to pay income taxes on what’s withdrawn. The 20% tax is waived, however, once you reach the age of 65. Then, you can use your HSA during retirement, withdrawing funds for nonmedical reasons — although you’ll still have to pay income taxes.
You can also choose to invest your HSA funds, depending on the HSA provider, which may require you to meet a minimum balance. Investing your HSA funds allows you to grow your savings a bit more than just by earning interest. This can prove helpful for the long term if unexpected medical emergencies pop up. To access your investment savings in cash, you’d need to sell them like any other investment and wait for the trade to clear, which can take a few business days.
Should I open an HRA?
Now you know the differences between the two accounts. But which one should you choose?
An HRA works best if you’re looking for a better health plan but don’t want to pay too much out of pocket. This account helps you start off your coverage year by paying expenses until you reach the limit. As you begin paying out of pocket, you don’t have to worry about reaching the full deductible amount.
- Employer-funded — money doesn’t come out of your paycheck
- Allows you to consider a more expensive plan
- Pays down the deductible
- Funds could roll over from year to year
- Your employer keeps the funds if you leave
- Cannot be used in retirement
Should I open an HSA?
HSAs are generally better for those who don’t have ongoing medical needs. Since you must have an HDHP to have an HSA, that means you’ll end up paying more out of pocket. With HDHPs, you’re paying lower premiums throughout the year. Plus, since HSAs are funded with pretax money, it lessens your taxable income, giving you more (medical) spending room.
An HSA can also provide some peace of mind that your money won’t go to waste or be lost. The account is in your name, so if you ever leave your job, you get to keep ownership of the account and its funds.
- Easy access with debit card
- Can earn interest on balances
- Money transfers with you if you leave your job
- Funded with pretax money
- Funds roll over from year to year
- Requires an HDHP, which can increase out-of-pocket costs
- Deducts from your paycheck
Can I have an HRA and HSA?
Since both accounts work a little differently, having both an HRA and HSA can help you maximize your health care coverage.
For starters, however, don’t forget that you can only have an HSA if you also have an HDHP and don’t have any other health insurance that’s not high-deductible. Normally, this would prevent you from having an HRA as well, since the HRA provides coverage without a high deductible.
Instead, you’d have to have what’s known as a limited purpose HRA. This essentially limits how you’re able to use your HRA. So if you want to use both your HSA and HRA, you’d limit yourself to using the HRA for health insurance premiums, wellness/preventive care (such as checkups or mammograms), dental expenses, vision expenses and long-term care premiums.
Again, be sure to check your employer’s options to see whether their HRA plans are HSA-qualified.
HRA vs. HSA alternative: What is an FSA?
If neither an HRA nor an HSA sound quite right for your health care needs, see whether your employer offers an FSA, or flexible spending account, option. (It’s sometimes referred to as a flexible spending arrangement.)
It’s a kind of mix between HRA and HSA features. FSAs work best if you don’t have an HDHP and don’t qualify for an HSA, or if you want the flexibility of a savings account over an HRA. FSAs are employer-sponsored savings accounts used for medical expenses, from copays to prescription medications.
Plus, you can use FSAs to pay for other family members’ medical expenses. FSAs don’t require dependents to be covered under your plan, either. So even if your spouse has their own health care plan, you can still use your FSA to cover them.
You fund FSAs with pretax contributions from your paycheck, which lessens your taxable income. The IRS imposes a $2,700 FSA contribution limit for 2019.
Unlike an HRA or an HSA, FSA funds must be used by Dec. 31 of the contribution year. Employers may sometimes choose to offer a grace period and carryover amount option, but if not, any leftover funds will not roll over and will go to your employer. Since they’re employer-sponsored, FSAs generally don’t travel with you when you leave a job. Employers also aren’t required to offer FSAs. Further, self-employed folks won’t qualify for an FSA, either.
When comparing HRA vs. HSA, make sure to consider all your options.