Health reimbursement arrangements (HRAs) and health savings accounts share important characteristics: both allow tax-free reimbursement of medical expenses and can encourage employees to be more aware of how they spend health care dollars, promoting more conscious consumerism.
However, HRAs and HSAs differ in several important ways. If you are considering adding a health care account to your benefits program, take care to understand the ins and outs of each so you can choose the better fit for your company and your employees.
Funding. Only the employer contributes to an HRA; an HRA is a notional account with employer-funded reimbursements paid as claims are incurred. An employer, the employee, or both can contribute to an HSA, which is established as a trust or custodial account and offers tax-advantaged contributions. For a focused overview of HSA rules and how they work in practice, see Health Savings Accounts (HSA).
Design requirements and flexibility. HSAs must be paired with a high-deductible health plan and are subject to annual contribution limits and limits on out-of-pocket expenses under that plan. HRAs have no such requirement, and an employer can design HRA coverage features to encourage or discourage use of particular services or providers, including offering first-dollar coverage for selected benefits.
Unspent money and portability. An HSA is owned by the employee, so unused amounts remain in the account year to year with no statutory cap on accumulations, and the account stays with the employee when they leave an employer. With an HRA, the employer decides by plan design whether unused funds roll over or whether any balance is payable at termination; typically, balances do not transfer to the employee.
Which fund makes the most sense depends on your goals. Because HSA balances can accumulate and travel with employees, HSAs often create a stronger personal stake in the money and may drive greater consumer-conscious behavior. Employers that value design flexibility and want to link reimbursements to plans other than high-deductible coverage often prefer HRAs or plan options such as a Deductible Reimbursement Program, which can be adjusted to support specific plan design goals.
Both HRAs and HSAs can add a useful dimension to a benefits program and can help manage overall plan costs when used thoughtfully. Consider how an account fits with your broader benefits strategy and prepare comprehensive communications before implementing any changes.
If you need personalized guidance on choosing or designing an account, talk to an agent.
Frequently Asked Questions
What is the main difference between an HRA and an HSA?
An HRA is employer-funded and owned, with plan design set by the employer, while an HSA can be funded by the employer or employee, is owned by the employee, and typically requires enrollment in a high-deductible health plan.
Can employees contribute to an HRA?
No, HRAs are funded only by the employer; employees do not make contributions to an HRA.
Do HSA funds roll over year to year?
Yes, unused HSA funds remain in the employee's account and can accumulate without a statutory limit on total savings across years.
Will HRA balances transfer if an employee leaves?
Typically not; whether balances carry over or are payable at termination is determined by the employer's plan design.