HSA vs HRA: A Comprehensive Comparison of the Two Plans
HSA vs HRA: A Deeper Look
Healthcare spending has become a significant expense for today’s workforce. Fortunately, there are tax-advantaged ways to reduce the burden of healthcare costs. One way is through an employee health savings account (HSA). An HSA is a tax-advantaged savings plan that is coupled with a high deductible health plan (HDHP). HSAs can be an excellent way to save money on healthcare expenses. An HRA, on the other hand, is a type of employee benefit that isn’t quite as beneficial as an HSA. In this article, we compare these two healthcare benefits in detail and explain which one you should choose based on your personal situation and needs.
What is an HSA?
An HSA is a tax-advantaged savings account that works in conjunction with a high-deductible health plan (HDHP). HDHPs are often coupled with HSAs because they are cheaper than traditional health insurance plans. HDHPs have lower premiums, which means workers save money upfront. Moreover, employees can use their HSA funds to pay out-of-pocket medical expenses (i.e., copayments, deductibles, coinsurance, etc.). HSA funds roll over from year-to-year, so you can use them to pay for future medical expenses tax-free. Unlike with an HRA, you control the HSA funds and can withdraw them at any time without incurring a penalty. HSA funds can also be used to pay for things other than healthcare, such as vision and dental care.
What is an HRA?
An HRA stands for health reimbursement arrangement. An HRA is a type of employer-sponsored benefit that allows employees to access cash to cover qualified medical expenses. Unlike an HSA, an HRA requires you to incur the expenses before you can access the funds. On the flip side, you don’t have to worry about paying taxes on the funds you receive as with an HSA. HRA funds have to be used for qualified medical expenses, but the list of qualifying expenses is much shorter than that of an HSA. For example, you can use HRA funds to cover copayments, coinsurance, and deductibles. You cannot use HRA funds to pay medical bills such as monthly insurance premiums. You must incur the medical expenses before you can access the funds.
How does an HRA differ from an HSA?
There are three major differences between an HSA and an HRA. First, HSA funds roll over from year-to-year, whereas HRA funds do not. In other words, you can keep contributing savings to your HSA each year and growing your account. You cannot do this with an HRA. Second, you control the HSA funds. You can withdraw HSA funds at any time without incurring a penalty. You cannot withdraw HRA funds until you incur qualified medical expenses. Third, you can use HSA funds to pay for things other than healthcare. Whereas HRA funds can only be used to cover medical expenses.
Bottom line
There are many benefits to using an HSA. First, you can put more money in an HSA than an HRA. Here is what you need to know about the HSA contribution limits for the 2022 calendar year:
Each year, the Internal Revenue Service (IRS) sets contribution limits for health savings accounts (HSAs). This year, contribution limits have increased by $50 for individuals and $100 for families. (2022)
An individual with coverage under a qualifying high-deductible health plan (deductible not less than $1,400) can contribute up to $3,650 — for the year to their HSA. The maximum out-of-pocket has been capped at $7,050.
An individual with family coverage under a qualifying high-deductible health plan (deductible not less than $2,800) can contribute up to $7,300 — up $100 from 2021 — for the year. The maximum out-of-pocket has been capped at $14,100.
Next, you don’t have to pay taxes on HSA funds. You do have to pay taxes on HRA funds unless you use them to cover medical expenses. And finally, you can use HSA funds to pay for anything. You can only use HRA funds to cover medical expenses.
There is no one-size-fits-all type of healthcare plan. If you are an employee, you should do your research and decide which healthcare plan and if a HSA or HRA is right for your situation. If you are self-employed, a HSA can be a great route, as it is not tied to employment.
Ready to speak to a Licensed Advisor?
No matter what your situation is, give Emmanuel Lopez, health insurance consultant and expert a free call to review your options to set you up with the best health coverage for your needs and budget. You can contact Emmanuel at 757-281-8178 or through the contact form here.
