What is the difference between an HSA vs HRA?
What is an HSA?
A Health Savings Account (HSA) is an excellent resource for those enrolled in a high deductible health plan (HDHP). Individuals with a minimum deductible of $1,250 and families with a minimum of $2,500 can contribute to a tax-exempt HSA to cover deductible costs, as long as they are less than 65 years young.
Making its debut in 2003, HSAs paired with HDHPs were created to help curb the rising cost of healthcare. The thinking behind it is that people will spend more wisely if they are paying with their own money, and physicians would be more willing to negotiate prices to gain competing business.
What are the pros of an HSA?
An HSA is owned by the individual/employee, not the employer or insurance company. Plan purchasers decide how much to contribute and how much to spend. The options for the quality and cost of care rest solely in the hands of the insured. Plus, it provides a financial safety net for unpredicted ailments and/or injuries.
Then there’s the tax exemption! Like an IRA, HSA contributions are 100% tax deductible up to $3,350 for an individual and $6,650 for a family in 2015. Withdrawals to cover IRS approved medical expenses are 100% tax-free. And any interest earned on your HSA is tax-deferred.
What are the Cons of an HSA?
Cost transparency is still a work in progress; it’s hard to find exact costs of medical care procedures. Care facilities and providers are working diligently to solve this problem, especially since health plan and healthcare providers now face market competition.
Using an HSA for a non-medical reason before the age of 65 results in the total amount being taxed and a 20% fee being added. This can often lead people to withhold contributions if they’re unsure of their current financial standing or keep them from seeking needed medical attention.
Is an HSA the Right Option for You?
If you are an overall healthy person, HDHPs and HSAs could be an attractive choice. HSAs often offer reduced premiums, so the cost for a healthy person could be much lower over the course of the year if doctor visits are minimal. However, if you predict or expect expensive medical costs over the year, it may be hard to afford such a high deductible.
If your employer contributes to your HSA, then it’s a no brainer. Once the employer puts the money into the HSA, it’s yours, forever. And if you’re near retirement, the money in your HSA can offset after-retirement medical care costs.
What is an HRA?
Whereas HSAs are aimed at individuals and employees, Health Reimbursement Accounts (HRA) are employer-funded. There are two main requirements for an HRA:
- The employer must fund the HRA; it cannot be funded by salary reduction.
- The HRA can only cover substantiated medical expenses.
An HRA is not an insurance plan but instead provides financial reimbursement for qualified out-of-pocket medical expenses. Employers determine the amount contributed to the HRA, either monthly or annually.
What are the Pros of HRAs?
Similar to an HSA, the HRA encourages prudent healthcare spending and is often paired with an HDHP. If the employer keeps the same plan from one year to the next, unused balances roll over annually. However, instead of providing a specified amount to an employee-owned account, employers only have to reimburse for already accrued qualified charges. This is especially helpful for industries that have higher turnover rates, such as retail or food service.
In the case of HRAs, employers determine covered expenses, which can provide more flexibility than an HSA. For example, employers have the option to reimburse prescription drugs, which are typically excluded from deductible expenses. And if the employer wants a plan with a lower deductible amount than an HSA, an HRA can fulfill that requirement.
Also, provided the employer keeps the same plan, unused balances roll over, and because the employer contributions are being used towards qualified medical expenses, they are tax-free for the employee.
What are the Cons of HRAs?
HRAs work in favor of an employer if the employee doesn’t incur healthcare charges very often, but the employer could be affected at a later date if a significant charge comes after the rolled over amount has built up. There are no government maximums set on out-of-pocket expenses, so an HRA may cost an employee more over the life of the plan than an HSA would.
Do HSAs and HRAs Go Together?
HSAs and HRAs go great together. An HRA can cover any remaining balance that may be left between the deductible and the out-of-pocket maximum. For example, if Person A receives a medical bill for $10,000, and they have both an HSA and HRA, the payments would break down like this:
- Individual HDHP deductible = $2,350
- Coinsurance = 75%
- Out-of-pocket maximum = $6,350
- Post-deductible HRA fund = $4,000
- Amount in HSA account = $1500
Having both an HSA and HRA drastically helps Person A handle this charge by only requiring them to pay $2,350 for their deductible but crediting them $4,262.50 toward their $6,350 out-of-pocket maximum. They are now only responsible for $2,087.50 until they reach the out-of-pocket maximum and insurance takes over 100% of payments. Conveniently, they still have that exact amount in their HRA account for their next medical expense. And with the HSA savings of $1500, only $850 of $10,000 came out of pocket.
To review, HSAs offer many financial perks are a great option for individuals with high deductible health plans. HRAs are a great way for employers to save money on their healthcare costs. And HSAs and HRAs go together like “shoo-bop sha wadda wadda yippity boom de boom.”
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