HSA (Health Savings Account) and HRA (Health Reimbursement Arrangement) differ in terms of eligibility, who contributes into them, how the contributions work, ownership of the account, portability of funds and what the funds can be used for. Members enrolled in a high-deductible health plan (HDHP) are eligible for a Health savings account or HSA only if they are not simultaneously covered by Medicare or any other insurance that is not an HDHP. HDHP plan members not eligible for an HSA are eligible for an HRA.
Contents: HRA vs HSA
edit What is HSA?
HSA stands for Health Savings Account. It is a savings account funded by individuals using pre-tax income and is available to those who are enrolled in high-deductible health plans. Distribution of funds from an HSA is not taxed if used for medical expenses. Funds are owned by the individual, are carried over from year to year, and are not forfeited when the individual changes employers or health plans.
edit What is HRA?
HRA stands for Health Reimbursement Arrangement. HDHP members not eligible for an HSA are eligible for an HRA. In an HRA, the employer or health plan (not the individual member) contributes "credits" to the account. Credits accumulated in the account are not considered taxable income for the member and are available for medical expenses. Like an HSA, funds (credits) roll over from year to year but are not owned by the individual and are forfeited when she changes plans or employers.
Individuals are eligible for a HSA if (a) they are members of a high deductible health insurance plan (HDHP). In 2013, this means a deductable of at least $1,250 for single individuals or $2,500 for families with out-of-pocket expenses less than $6,250 (self only) and $12,500 (family); (b) they are not be covered by Medicare or any other non HDHP health insurance; (c) do not have an FSA account; and (d) they are not a dependent on someone else's tax return.
HDHP members not eligible for an HSA are eligible for an HRA. If an employer offers a HRA plan, all employees are eligible for it. HRA plans are not available to self-employed individuals.
edit Contributions to HRA and HSA
An HRA is a somewhat fictitious account in that the health plan credits the account with notional funds. Actual cash flow happens only when funds are required for distribution to cover medical expenses. The employer or health plan contribute credits, either monthly or in one shot at the beginning of the year, to every member's account. These credits are not considered taxable income for the employee/plan member. Contribution limits are set by the employer and individuals cannot contribute their own funds into the account. You can only access money to the tune of credits in the account, but unused funds roll over year after year and stay in the account indefinitely.
On the other hand, an HSA is funded by pre-tax contributions from the plan member. Usually this is in the form of deductions from the salary. Individuals can choose to make additional contributions up to the limits prescribed by the IRS. You can only access money that has already been deposited in the HSA but just like an HRA, unused funds stay in the account indefinitely.
edit Contribution Limits for 2013
The employer sets the maximum contribution to a HRA. In 2013, the HSA contribution limit for self-only is $3,250 and $6,450 for families.
edit Catch-up contributions
Individuals over the age of 55 may contribute up to $1,000 more to their HSA per year until they turn 65 and are enrolled in Medicare. This contribution is an "above the line" income tax deduction. No such "catch-up" contributions are allowed for HRAs.
edit Account Ownership
An HRA is owned by the employer. This means that if an individual changes jobs or health plan, they lose any money available in the HRA. There is usually an exception to this for retirees.
HSAs are owned by the individual members so they have access to the funds even if they change jobs or health plans.
edit Expenses Covered
HRAs cover many expenses, including prescriptions, dental, vision, over the counter, therapy and preventative care. They do not cover cosmetic procedures.
HSAs can be spent on preventative care such as annual physicals, immunizations, well-baby programs, mammograms, Pap tests and other cancer screenings, as well as non-medical expenses such as dental, orthodontics and vision. It can also be used to cover the health plan deductible. HSAs cannot be used to pay for insurance itself.
edit Tax Implications of HSA and HRA
Employer HRA contributions are not included in wages, and so they are not taxed. Employers may deduct the reimbursed medical expenses as a business expenses.
HSAs earn tax-free interest and contributions are tax-deductible. Qualified withdrawals are also untaxed, but non-qualified withdrawals are subject to income tax and a 10% penalty. In this regard, an HSA is similar to an IRA or 401(k) plan.
edit Interest Accrued
HRAs do not earn interest, while HSAs do. The interest accrued in an HSA is also tax-free.