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Differences Between HRA and HSA

Healthcare costs continue to rise each year, putting an increasing burden on people all around the country. To help offset some of those costs, the U.S. government has made available multiple savings accounts and reimbursement plans.

Two of the most popular are Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs). Each was designed to do the same thing — reduce the burden of health expenses on people.

However, there are some key differences between an HRA and HSA that are important to understand. Let’s take a look at those differences in-depth below.

Account Ownership

The owner of the account is the biggest difference in these two types of health accounts. For an HRA, the employer is the owner. For an HSA, the employee is the owner.

Who owns the account actually has far-reaching implications for these accounts. When an employee leaves a company, for instance, they can take their HSA with them, since they own it. However, with an HRA, the funds that are still in the account will revert to the company, since they own the account.

Ownership also affects how contributions are made. With an HSA, both employees and employers can make contributions. Only employers can make contributions to HRAs, though, and they also get to decide how the plan is designed.

Those are the basic overarching differences between an HRA and HSA, but there are a few others as well.

Health Reimbursement Arrangement

An HRA is truly a big perk that a company can provide its employees. Since the company is the only entity that can make contributions, it’s essentially free money that employees can use to help pay for health expenses, provided completely by the employer.

An employer has to pair an HRA with a group health-care plan, which is one of the restrictions that the IRS sets up. However, there are no monetary limits to how much an employer can contribute to an HRA on an annual basis, which differs from HSAs — as we’ll soon see.

Since they own the account, employers have the choice of whether employees can roll unused funds over from year to the next. They also can restrict which purchases for qualify to be reimbursed under the plan.

From a tax perspective, employees are provided with tax-free funds that they can use for any medical expense that qualifies under the plan. In addition, the business can deduct 100% of the contributions they make to employee HRAs.

Health Savings Account

An HSA is a bank account that has a special purpose. The employee opens the account, and then can make contributions directly to it — unlike an HRA. Employers can also make contributions to the plan, which would be an added benefit that they could offer to their workers.

The IRS does set annual contribution limits for this type of plan. Individual accounts have an annual limit of $3,850 for 2023, while families have a limit of $7,750. The IRS typically re-assesses and revises this limit each year.

There are great tax benefits to HSAs as well. From the employee perspective, contributions can be made directly from their paycheck on a pre-tax basis, just like their health insurance premiums and employer-sponsored retirement plans.

Because of this, employers can realize a savings in the FICA taxes they owe. Plus, any contributions the employer makes to an HSA for their employees’ benefit are deductible.

Employees can use these accounts as savings vehicles for the long-term that they can even use in retirement. That’s because there aren’t any rules for rolling over funds in an HSA from one year to the next. This is how the funds can grow in the account over time, even though there is an annual contribution limit.

They’ll never pay taxes on the contributions, the investment earnings of the account or on any withdrawals they make — as long as the money is used on qualified medical expenses.

Not everyone can set up an HSA, though. Only plans that qualify as high-deductible health plans can have a complementary HSA. These plans typically result in higher out-of-pocket costs for subscribers, since they exchange a lower monthly premium for higher costs when they use the plan.

Offer HRAs and HSAs  Through Beckham Insurance Group

With health-care costs continually on the rise, employees are looking for some relief wherever they can get it. Because of this, HRAs and HSAs have become great benefits that employers can offer their employees to help them reduce their medical expenses.

But, choosing which plan is right for your business — and for your employees — can be challenging.

At Beckham Insurance Group, we help businesses in the South Carolina and Georgia area understand the differences between HRAs and HSAs, and determine which type of plan would work best for them.

Contact us today to find out more.