HRA or HSA: What’s the Difference and Which is Right for You?

HSAs and HRAs (Health Savings Accounts and Health Reimbursement Arrangements) can help you cover healthcare-related expenses. However, the two are structured quite differently and have different pros and cons.

It won’t be a shock to you to learn that healthcare costs in the US are out of control. In fact, in the past 75 years, the average annual US healthcare inflation was 5 percent, over 40 percent higher than the 3.5 percent average of the general Consumer Price Index (CPI) increase.

You may not think an extra 1.5 percent is a big deal, but it adds up over 75 years. In that time, the cost of the general CPI basket increased over 13-fold.

In comparison, the cost of healthcare increased over 40-fold or over three times higher!

Unsurprisingly, healthcare affordability is a major concern for Americans, which far too often leads to falling into debt.

A Kaiser Family Foundation (KFF) survey says, “About four in ten adults (41%) report having debt due to medical or dental bills, including debts owed to credit cards, collections agencies, family and friends, banks, and other lenders to pay for their health care costs…”

KFF adds, “About four in ten U.S. adults say they have delayed or gone without medical care in the last year due to cost…”

The problem is exacerbated when you’re living on a fixed income in retirement, and healthcare needs go up at the same time that healthcare inflation becomes a greater concern.

According to Fidelity, the 2022 Retiree Health Care Cost Estimate reports that the average 65-year-old retired couple will need about $315k saved (after tax) to cover healthcare expenses in retirement. As if it isn’t hard enough to save for retirement in general!

While all this is a major problem for employees and retirees, all is not lost.

Employer Healthcare Benefits

Your first line of defense as an employee is your employer’s health insurance plan (if offered), usually deeply discounted relative to its full cost. According to KFF’s 2022 Employer Health Benefits Survey, employers cover, on average, 72 percent of the cost of health insurance premiums.

However, KFF reports that 88 percent of these plans don’t offer full coverage of all healthcare costs. Employees pay significant amounts out of pocket between copays, coinsurance, and deductibles.

Enter Healthcare Savings Accounts (HSAs) and Healthcare Reimbursement Arrangements (HRAs).

The Healthcare Savings Account for Employees (and the Self-Employed)

According to Healthcare.gov, an HSA is “a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in a Health Savings Account (HSA) to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall healthcare costs. HSA funds generally may not be used to pay premiums… you may contribute to an HSA only if you have a High Deductible Health Plan (HDHP)… For plan year 2022, the minimum deductible for an HDHP is $1,400 for an individual and $2,800 for a family… For 2022, if you have an HDHP, you can contribute up to $3,650 for self-only coverage and up to $7,300 for family coverage into an HSA. HSA funds roll over from year to year if you don’t spend them. An HSA may earn interest or other earnings, which are not taxable.”

Even if you’re self-employed, you can set up an HSA for yourself and your family if your health insurance plan is HSA-compliant HDHP.

The Healthcare Reimbursement Arrangement (for Employees Only)

Healthcare.gov defines HRAs as “employer-funded group health plans from which employees are reimbursed tax-free for qualified medical expenses up to a fixed dollar amount per year. Unused amounts may be rolled over to be used in subsequent years. The employer funds and owns the arrangement. Health Reimbursement Arrangements are sometimes called Health Reimbursement Accounts.”

Unfortunately, if you’re self-employed, you may not set up an HRA for yourself or your spouse.

The Differences Between HSAs and HRAs

HSAs and HRAs can both help you cover various healthcare-related expenses. However, the two are structured quite differently and have different pros and cons.

Eligibility: To contribute to an HSA, you must have a qualifying HDHP. HRAs, on the other hand, simply need to be paired with a group healthcare plan.

Account Ownership: HSAs are owned by the employee, while HRAs are owned by the employer. This means that you take your HSA with you once you leave employment. The HRA, however, reverts to your employer.

Funding Source: HSAs can be funded by both the employee and the employer, while HRAs are funded solely by the employer.

Funding Limit: HSAs have annual contribution limits set by the IRS. For 2023, the limits are $3850 for individual accounts and $7750 for families. If you’re older than 55, you can add another $1000 to the HSA. The IRS does not limit employer contributions to some HRAs, specifically for Individual Coverage HRAs (ICHRAs), but your employer likely does. For Qualified Small Employer HRAs (QSEHRAs), the IRS does limit contributions in 2023 to $5,850 for individuals or $11,800 for families.

Investment Options: HSA funds can earn interest, or you can invest your HSA in, e.g., mutual funds (if offered by the HSA provider). On the other hand, you cannot invest HRA funds.

Tax Benefits: HSAs get funded with pretax dollars, saving you taxes on your contributions. Since this reduces your taxable wages, it saves your employer the payroll taxes on your contributions. If your employer contributes to your HSA, that contribution is a tax-deductible cost to the employer. In the longer term, any investment earnings on your HSA aren’t taxable, and contributions aren’t taxable if used for healthcare expenses. Since the HRA is funded purely by the employer, all tax benefits are to the employer (though you pay no taxes on HRA money used to reimburse you for healthcare expenses).

Rolling Over: Money in HSAs rolls over from year to year until you use it (or die). Your employer determines whether all, any, or none of the unused money in the HRA rolls over.

Funds Use: You can withdraw money from your HSA for any reason. However, withdrawals for non-medical expenses are taxable that year, and if you’re less than 65 years old, your withdrawal may be subject to a 20 percent penalty. Health insurance premiums aren’t generally considered qualified medical expenses for HSAs. Withdrawals from HRAs are for medical expenses only, subject to your employer’s rules, which (for some HRAs) may allow you to use them to pay your health plan premiums.

A Comparison of an HRA vs. HSA Account

Features and Benefits	HRA (Health Reimbursement Arrangement)	HSA (Health Savings Account)
Eligibility	You’re eligible if your employer offers an HRA and a group health plan. Only employers can open an HRA (excludes the self-employed)	If you’re covered by an HDHP only (i.e., no other plan and no Medicare) and are not claimed as someone else’s dependent on their tax returns.
Account Ownership	Owned by your employer and reverts to them when you leave employment (unless you sign up for Consolidated Omnibus Budget Reconciliation Act, or COBRA, coverage).	Privately owned by you, and stays yours when you leave employment.
Funding Source	Funded solely by your employer.	Can be funded by you, other people, and/or your employer.
Funding Limits	No IRS limit for ICHRAs, but limited by your employer. IRS limits contributions to QSEHRAs, but limits are higher than for HSAs.	Annual limits set by the IRS, including catchup contributions past age 55.
Investment Options	Funds cannot be invested nor earn interest.	Contributed funds can earn interest and/or be invested (depending on plan specifics).
Tax Benefits	Money contributed by your employer is fully deductible for the employer. You pay no taxes on any reimbursements.	Contributions aren’t taxable to you (employer contributions are deductible for the employer). You pay no taxes on earnings and/or withdrawals used for medical expenses.
Rolling Over	Your employer determines what portion (if any) of unused funds rolls over or reverts to the employer.	Your HSA balance rolls over indefinitely until used (or you die).
Funds Use	You can only be reimbursed for medical expenses per your employer’s guidelines, possibly including your health insurance premiums.	HSA funds are yours to use as you please. However, if you withdraw them for non-medical expenses they become taxable income. If you’re under 65, you’ll likely be assessed a 20-percent penalty. Health plan premiums generally don’t qualify.

Are HSAs or HRAs Better for Employees?

As is often the case in personal finance, the answer starts with “that depends.”

In the short term, HRAs are better for you in that they completely remove the burden of medical costs allowed by your employer’s plan, potentially including even your insurance premiums! HSAs, on the other hand, only provide a tax deduction, but unless your employer contributes to your plan, the cost of medical expenses is yours to bear. Also, insurance premiums aren’t qualified medical expenses for HSAs.

In the long term, HSAs offer a hard-to-beat combination of advantages. Funds roll over rather than revert to your employer. You can invest your HSA balance to grow it beyond contributed funds. Finally, earnings and withdrawals are tax-free (if used for qualified medical expenses). This makes HSAs great retirement accounts since you’re very likely to have far more medical expenses than you’re likely to accumulate in the plan.

It’s true that (mostly) HRA contributions aren’t limited by the IRS, while HSA contributions are. However, employers’ HRA contributions may be far short of the IRS’s HSA contribution limits, so the lack of IRS limits isn’t as helpful as it might otherwise become.

If your employer offers a so-called Individual Coverage HRA (ICHRA), you might be able to buy an HSA-compliant HDHP, and use the ICHRA funds to cover all or a portion of your insurance premiums. Then, you can open your own HSA and use those funds to cover costs such as copays, coinsurance, and deductibles. Alternatively, you could roll over your HSA funds until retirement and use them to cover your medical expenses, which as we saw above could be multi-six figures.

What Do the Pros Say?

Allen Mueller, CFA, MBA, Founder and Financial Planner, 7 Saturdays Financial, says, “HSAs and HRAs sound very similar but are functionally quite different.

“An HSA is an account that an individual owns and can take with them when they change jobs. The money also rolls over year to year and can be invested, providing a fantastic opportunity to build tax-free wealth. HSAs are typically funded as a payroll deduction, like retirement plan contributions. Many companies contribute to their employees’ HSAs as well. It’s important to note that HSA eligibility is tied to HDHPs, which have higher out-of-pocket costs than other options, so it’s important to evaluate if this is the best choice for your family’s circumstances.

“Employees can’t contribute to an HRA because they’re fully funded by the employer. The downside is that they aren’t portable when an employee leaves and the money cannot be invested. HRA funds are considered “use it or lose it” because they mostly don’t roll over into the next year. Funds may be used to reimburse health insurance premiums, vision and dental insurance premiums, and, like HSAs, qualified medical expenses (depending on the plan). HRA eligibility doesn’t require having an HDHP.”

Blaine Thiederman MBA, CFP says, “HSAs provide a triple tax benefit. They decrease your income in the year you contribute, you don’t pay tax on dividends or capital gains, and when you withdraw, you pay no taxes as long as you use the funds on HSA-qualified expenses. These are POWERFUL accounts that can make it easy to save enough to pay for healthcare post-retirement.

“HSAs offer the greatest benefit to healthy, high-earners. If you’re in good health and earn over $200k, and don’t expect any major medical bills, you should probably consider an HDHP and maxing out your HSA contributions every single year. Once you leave your employer, you take this money with you, so the benefit continues to compound tax-free the longer you have the money in there. 

“HSAs, without a doubt, only benefit people who can afford to save in them and provide these people with a massive benefit. The question should be: What if you’re not in good health or aren’t earning a lot of money? In that case, an HRA may be more beneficial because your employer is reimbursing you for your medical expenses every year, normally up to a limit.” 

The Bottom Line

HSAs and HRAs both offer important benefits but in very different ways. As a result, each has a different set of pros and cons, making each better for you as the employee in certain circumstances.

In general, if you’re healthy and highly compensated, you may benefit more from having an HSA, while HRAs may be best for you if you have high medical expenses and/or low income.

Ideally, you may be able to benefit from both an HRA and an HSA, as long as you qualify for both.

What to Read Next:

• How Much Does a Financial Advisor Cost?
• What is a Certified Financial Planner?

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.