What's the Difference Between an HSA and an HRA?

Although they may sound quite similar, a Health Savings Account (HSA) is fundamentally different from a Health Spending Arrangement (HRA). They both allow you to use tax-advantaged dollars to pay for medical expenses, but that's where the similarities end. 

How is an HSA different from an HRA?

An HSA is a triple tax-advantaged savings account that you can use to spend tax-free on eligible medical expenses. And although you can certainly use it as a traditional interest-yielding savings account, the HSA particularly shines when you use your savings to invest. With most HSA administrators, you can access stocks, bonds, mutual funds, and ETFs within your HSA, which is a great financial tool for your future. An employer can offer an HSA as a part of your benefits package, and you can also open one yourself as long as you're on a qualifying High Deductible Health Plan (HDHP). Right now, that requires an annual minimum deductible of $1,400 for individuals and $2,800 for families.

An HRA is an employer-funded program that allows employers to give employees tax-free reimbursements for certain eligible health-related expenses. While that may sound pretty similar to the HSA, there are a few key differences:

1. Ownership

You are the account holder—aka the owner—of an HSA (even if your employer provides it). So if you got your HSA from your employer, it's yours—whether you quit, change jobs, or go freelance, that HSA is yours as long as you continue to be covered by an HDHP. 

Your employer is the account owner of an HRA. If you have an HRA and leave your employer, it doesn't go with you. What's more, any account balance that's still left in the HRA defaults to the employer.

2. Control over spending and contributing

With an HSA, you can contribute up to the annual limit—for 2021, that's $3,600 for individuals and $7,200 for families. You're free to use the funds on qualified expenses in any way you like.

With an HRA, only your employer contributes and can decide how much you can spend. Think of it as an allowance your employer provides for qualified medical expenses. However, you can't withdraw from an HRA to pay for eligible expenses with that money. Instead, you have to incur the expense and then apply for reimbursement. You can request reimbursements from your employer for medical expenses incurred up to the amount your employer has decided. The employer also decides whether balances carry over or not, whereas HSA balances automatically do.

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3. Type of coverage required

While being covered by a qualified HDHP is a requirement for owning an HSA, that's not the case for an HRA. An HRA isn't limited by what kind of health insurance plan you're covered by, as long as you have the minimum essential coverage.

4. HRAs cover insurance premiums

Another key difference between the two accounts is that HRAs can cover insurance premiums, while HSAs are designed to cover expenses that fall under the deductible of your health insurance plan. HSAs are supposed to alleviate the costs associated with HDHPs (which usually have lower monthly premiums). HRAs, on the other hand, are designed to help cover health benefits. Depending on the type of HRA, dental care and vision care premiums could also be covered.

5. Tax benefits

While an HSA has clear tax advantages for the account holder, an HRA only holds tax advantages for the employer. That's because reimbursements through the HRA are 100% tax-deductible for an employer. 

An HSA, on the other hand, boasts a triple tax advantage: HSA contributions are either pre-tax (if you're contributing via payroll deductions) or tax-deductible (if you're contributing on your own), and you don't pay taxes on the account's growth (which is why it's an excellent tool for investing in high-yielding stocks, ETFs, and mutual funds). Plus, if you make withdrawals for eligible medical expenses, you don't pay tax on those withdrawals. 

Are HSAs and HRAs compatible?

The eligibility requirements of an HSA are pretty strict, which is why it's not uncommon to wonder whether you can still have an HSA if your employer offers HRAs. The answer is that it's possible to use the two together if certain conditions are met. The main condition is that the HRA is HSA-compatible. That means that your employer offers a Post-Deductible HRA, which does not allow you to be reimbursed for medical expenses until you've met the minimum annual deductible of a HDHP ($1,400 for individuals and $2,800 for families). 

Another way to ensure your HSA and HRA play nice is if your employer offers a so-called Limited-Purpose HRA, which only reimburses you for dental, vision, and preventative services. Participating in a Limited-Purpose HRA does not impact your eligibility to contribute to an HSA because reimbursement for the services covered under an LPHRA doesn't disqualify you from contributing to an HSA. 

Whether you choose to use your HSA alone or combine it with a compatible HRA, what's most important is that you're saving for the future and making smart financial choices, which is vital in keeping yourself and your family happy and healthy.