A Health Reimbursement Account, or HRA, and a Health Savings Account, or HSA differ in terms of eligibility requirements, who contributes into them, how the contributions work, who has ownership of the account, how portable funds are, and how the funds can be used. Members enrolled in a high-deductible health plan, or HDHP, are eligible for an HSA only if they are not simultaneously covered by Medicare or any other insurance that is not an HDHP. HDHP plan members who are not eligible for an HSA are eligible for an HRA.
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. Funds taken out of an HSA are not taxed if used for medical expenses. The savings within an HSA are owned by the individual, are carried over from year to year, and are not forfeited when the individual changes employers or health plans. Funds can be moved from one HSA bank to another, some of which allow one to invest a portion of his or her savings. Most HSA banks charge small monthly or annual fees for their services.
What is an HRA?
HRA stands for Health Reimbursement Arrangement. HDHP members who are 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 they are not owned by the individual and are forfeited when she changes plans or employers.
The following video provides a brief overview of HSA, HRA and FSA accounts:
Individuals are eligible for a HSA if they meet all of the following criteria:
- They are members of a high deductible health plan (HDHP). In 2015, this means a deductible of at least $1,300 for single individuals or $2,600 for families and out-of-pocket expenses of less than $6,450 (single) and $12,900 (family).
- They are not covered by Medicare or any other non-HDHP health insurance.
- They do not have an FSA account.
- And they are not a dependent on someone else's tax return.
HDHP members who are not eligible for an HSA are eligible for an HRA. If an employer offers an HRA plan, all employees are eligible for it. HRA plans are not available to self-employed individuals.
Making Contributions to an HRA or 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 to cover medical expenses. The employer or health plan contributes credits, either monthly or in one lump sum at the beginning of the year, to every member's account. These credits are not considered taxable income for the employee or plan member. Contribution limits are set by the employer, and individuals cannot contribute their own funds into the account. Funds only exist as 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 an employee's salary, but self-employed individuals frequently self-fund HSAs as well. Individuals can choose to make additional contributions up to the limits prescribed by the IRS. Money in an HSA account should only be used to fund health expenses (or perhaps for investment in cases where an HSA bank supports such an option). Withdrawing funds from an HSA account for non-medical expenses will result in a 20% penalty tax for those under 65. After age 65, funds can be withdrawn for non-medical expenses and will be taxed as regular income.
Contribution Limits for 2015
The employer sets the maximum contribution to an HRA. For HSAs, the IRS sets the limit. In 2015, the HSA contribution limit for individuals is $3,350 and $6,650 for families.
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.
An HRA is owned by the employer. This means that if an individual changes jobs or health plans, she will lose any money available in the HRA. There is usually an exception to this for retirees.
HSAs are owned by individual members so they have access to the funds even if they change jobs or health plans.
HRAs cover many expenses, including prescriptions, dental, vision, over the counter, and therapy and preventative care. They do not cover cosmetic procedures.
HSAs can be spent immunizations, well-baby programs, mammograms, pap tests, and cancer screenings, as well as non-medical expenses such as dental, orthodontics and vision. HSA funds can also be used to cover a health plan deductible.
Neither HRAs nor HSAs can be used to pay for health insurance premiums.
Tax Implications of HSA and HRA Accounts
Employer HRA contributions are not included in wages, and so they are not taxed. Employers may deduct the reimbursed medical expenses as a business expense.
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 20% penalty for those under 65. In this regard, an HSA is similar to an IRA or 401(k) plan.
HRAs do not earn interest, while HSAs do. The interest accrued in an HSA is also tax-free.
Using an HSA for Investment Purposes
Some banks that offer health savings accounts allow subscribers to invest some or all of their savings into stocks and bonds and/or similar investment tools. Occasionally young and healthy individuals will opt to use an HSA like an IRA and instead pay for their minimal health expenses with their taxed earnings (as opposed to the pre-tax dollars from an HSA).
Different HSA banks offer different savings and investment options. For example, HSA Administrators allows subscribers to invest their health savings in Vanguard mutual funds, and HSA Bank provides investment options via a partnership with TD Ameritrade, a brokerage firm.
Before deciding to use an HSA as an investment vehicle, it is wise to ask for an HSA bank's fee schedule and investment options.