Benefits of HSA vs. HRA
An HSA can yield unique benefits when saving for medical expenses
Health insurance can help with the bulk of medical care costs, but it almost never covers everything. There are co-pays, deductibles, and other expenses for patients to pay.
There are a couple of mechanisms out there to help you avoid getting sticker shock from out-of-pocket costs and medical bills: a Health Savings Account (HSA) and a Health Reimbursement Arrangement (HRA).
If either of these options is available to you, it's important to understand how an HSA compares with an HRA.
What Is an HSA?
As the name suggests, an HSA is a savings account that's meant to be used specifically for health care. These accounts are associated with high-deductible health insurance plans, which may be offered by your employer. You can also opt to enroll in a high-deductible plan with an HSA if you're self-employed.
An HSA can be used to pay for a broad range of medical expenses, including:
- Doctor visits
- Preventive care
- Specialty services
- Physical therapy
- Drug and alcohol treatment programs
- Weight-loss programs
- Organ transplants
- Lab tests
- Medical equipment and supplies
- Hospital services
- Dental services
- Vision services
- Prescription drugs
- Over-the-counter medications
The Internal Revenue Service limits how HSA funds can be used. For instance, you can't use the money in your HSA to pay for things like teeth-whitening services, vitamins, hair transplants, exercise equipment, or a gym membership.
Using your HSA funds is relatively easy. Your insurance company can provide you with a debit card linked to your health savings account. You can then swipe your card to pay for eligible medical costs, and your HSA provider will furnish a tax statement at the end of the year showing your total spending and annual contributions.
For 2019, you can contribute $3,500 to an HSA if you have single coverage. The limit increases to $7,000 if you have family coverage. Employers can make matching contributions to an HSA on your behalf. Total employee and employer contributions can't exceed the annual contribution limit, however.
What Is HRA Insurance?
A Health Reimbursement Arrangement is a type of health benefit funded by employers that essentially reimburses employees who have out-of-pocket medical expenses—it even pays health insurance plan premiums in certain cases. They are funded entirely through the employer, not through employee salary deductions.
An HRA differs from an HSA in several key ways:
It's not a savings account, nor is it health insurance. You don't make any contributions to the account; instead, your employer makes contributions for you.
Your employer has control over how you can spend the money. For example, if you incur medical expenses that insurance doesn't pay, you could tap your HRA to pay, then cover any remaining difference yourself. Alternately, your employer may set up your plan so that you cover a specific amount that's not covered by insurance, then your HRA pays the rest.
Contribution limits are different. Limits vary based on the type of HRA the employer has established. An Integrated HRA, which is linked to a high-deductible group health plan, has no annual contribution limit. A Qualified Small Employer HRA (QSEHRA), which is designed for businesses with 50 or fewer employees, has a contribution limit of $5,150 for individual coverage and $10,450 for family coverage in 2019.
The list of eligible expenses may be different form an HSA. Similar to HSAs, money held in an HRA can only be used for qualified medical expenses. Generally, that includes those expenses covered by your health insurance plan, such as doctor visits, hospital services, and prescription drugs. Your employer has the option to expand the scope of coverage to include the full range of expenses that are HSA-eligible, but this isn't mandatory.
Why HSAs Are Better
An HSA and HRA may seem equally advantageous in some cases, but HSAs yield some important benefits that HRAs don't.
HSA contributions are tax-deductible. Deductions reduce your taxable income for the year, which could result in a lower tax bill or a larger refund. HRA contributions are deductible, but only for your employer—you get no tax break for having one of these accounts.
You're not required to use your HSA funds until you need them. The money you contribute rolls over from year to year and continues to earn interest until you withdraw it. With an HRA, your employer decides whether to let you carry contributions over from one year to the next. If that's not an option, your HRA money essentially becomes use-it-or-lose-it.
You may be able to cover more expenses with an HSA than an HRA. If your employer doesn't opt to go beyond the expenses covered by your health care plan, you may find yourself paying more out-of-pocket for medical expenses that otherwise could be covered by an HSA.
An HSA can be used as a retirement planning tool. Ordinarily, withdrawals from an HSA for anything other than health care would be subject to a 20% tax penalty and ordinary income tax. If you stay healthy and continue to accumulate money in your account during your working years, you can withdraw money from your HSA at age 65 or older for any purpose, without incurring the 20% penalty. You'd still owe ordinary income tax on your withdrawal, but this can be a useful way to supplement Social Security benefits or retirement income from a 401(k) or individual retirement account.
What Does Your Employer Offer?
Contributing to an HSA, even if you don't max out your plan each year, could be useful in creating an additional source of savings for retirement. Reach out to your employer to find out what plans are offered and then weigh your options. An HRA is definitely worth having if that's all the employer is offering, but you should consider going for an HSA if one is available.