Two types of accounts for saving pretax dollars to pay for healthcare expenses are available to many employed and self-employed people. Either a health reimbursement arrangement (HRA) or a health savings account (HSA) can cover expenses such as health insurance co-pays and qualified services that may not be covered by a health insurance policy. These include expenses for ambulances, chiropractors, dental and vision exams and treatments, infertility treatments, and hearing aids.
These two accounts help consumers pay the costs of high-deductible health plans. For 2022, the Internal Revenue Service (IRS) defines any plan with a deductible of at least $1,400 for an individual or $2,800 for a family as a high-deductible plan (rising to $1500 for an individual and $3,000 for a family in 2023). Total annual out-of-pocket expenses can’t be more than $7,050 for an individual or $14,100 for a family for in-network services (rising to $7,500 and $15,000 in 2023).
Both an HRA and an HSA will pay for qualified medical expenses with pretax dollars. The chief difference is that the HRA is created and funded by the employer, while an HSA is funded by either an employer, an employee or a self-employed worker. An HRA is in effect only as long as the person is employed by the company, while an HSA is a savings and investment account that belongs to the employee and can move from job to job.
While the number of enrollees in HRAs has held steady at about 7% of workers, the number of those enrolled in HSAs had risen to 24% in 2020, although it dropped to 21% in 2021. All told, 28% of workers were covered by a high-deductible health plan and an HRA or an HSA in 2021.
- Health reimbursement arrangements (HRAs) and health savings accounts (HSAs) are two ways to pay for healthcare expenses not covered by high-deductible health insurance.
- HRAs are funded by the employer as part of its health insurance benefit and may be combined with a high-deductible health insurance policy.
- HSAs are funded and controlled by an employee or a self-employed person with a high-deductible health insurance policy. Pretax dollars can be invested until needed for qualified expenses, and interest earned is tax free.
Advantages of an HRA
If an HRA is available from your employer, it’s a good deal, because the employer pays all expenses. Check carefully which expenses are covered and the dollar limits, as well as how much rollover from year to year is allowed. This will help you budget for upcoming expenses.
Advantages of an HSA
HSAs are more widely available, though access depends in part on the size of the company. For example, in 2019, 47% of workers in companies with 500 or more employees have access to HSAs, while only 18% of those in companies with fewer than 50 workers do.
Saving for future medical expenses in an HSA can let you pay for out-of-pocket expenses from your high-deductible health insurance plan while allowing you to pay with pretax dollars for services that are not covered by the policy, such as orthodontia.
HRAs vs. HSAs
The following table delineates the differences and similarities between the two accounts.
|Health Reimbursement Arrangement (HRA) vs. Health Savings Account (HSA)|
|Terms and Conditions||HRA||HSA|
|Eligibility||Employers decide the employment categories (e.g., full-time or part-time workers) covered and how much they will put into the HRA. The plan reimburses employees for medical expenses incurred up to a certain amount. All employees in the same class must receive the same HRA contribution.||Employed and self-employed workers with a qualified high-deductible health plan can create an account and contribute.|
|Expenses Covered||Depending on the type of HRA, funds may be used to reimburse qualified medical expenses and health, vision, and dental insurance premiums.||Qualified medical expenses include acupuncture, ambulance service, blood sugar test kits and strips, chiropractic therapy, hearing aids and batteries, infertility treatments, X-ray fees, dental and vision exams and treatments, and co-insurance plan fees.|
|Contribution Limits||Employers that offer traditional group health insurance can offer excepted benefit HRAs and reimburse employees for up to $1,800 a year (in 2022) in qualified medical expenses. The benefit increases to $1,950 in 2023. Individual-coverage HRAs and qualified small employer HRAs have different rules.||For 2022, individuals can contribute up to $3,650 (rising to $3,850 in 2023). The family limit is $7,300 (rising to $7,750 in 2023). Catch-up contributions (for ages 55 and older) are limited to $1,000.|
|Contribution Source||Employer||Employee or Employer|
|Rollover||Unused contributions may be rolled over to the following year. Employers may set a maximum rollover limit.||Unused contributions can be rolled over to the next year.|
|Withdrawals||Not allowed||Allowed but includes tax withheld plus 10% penalty|
|Interest Earned||None||Interest earned in the account is tax free.|
|Portability||No. An employee loses the benefit upon leaving the company.||Yes. An employee keeps the account in the event of a job change.|
|Contribution Amount||Employers may change their contribution amount under certain circumstances.||Employees can change the contribution amount during the year.|
Source: Internal Revenue Service
Internal Revenue Service. "Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans," Pages 3, 18.
Internal Revenue Service. "Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit)," Pages 5-9.
U.S. Office of Personnel Management. "Comparison Chart for Health Savings Account, Health Reimbursement Arrangement, Health Care Flexible Spending Account, and Limited Expense Health Care Flexible Spending Account."
Internal Revenue Service. "Rev. Proc. 2021-25."
Internal Revenue Service. "Rev. Proc. 2022-24."
Kaiser Family Foundation. "Percentage of Workers Enrolled in an HDHP/HRA or HSA-Qualified HDHP, 2006-2021 9085."
Internal Revenue Service. “Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans,” Pages 17-18.
U.S. Bureau of Labor Statistics. “Employee Benefits Survey: High Deductible Health Plans and Health Savings Accounts: Table 3. Percentage of Private Industry Workers with Access to Health Savings Accounts by Establishment Size.”
Internal Revenue Service. “Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans,” Pages 3-4.
Internal Revenue Service. "Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit)," Pages 5-15.
Internal Revenue Service. “Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans,” Pages 3-11, 17-19.
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