HCRA vs HSA: What’s the Difference and Which One Is Right for You?

Choosing between a Health Care Reimbursement Account (HCRA) and a Health Savings Account (HSA) can impact your financial planning for medical expenses. These accounts have distinct features, so understanding their differences is essential to making a decision that fits your healthcare needs and financial goals.

Employer-Sponsored Features

Employer-sponsored features set HCRAs apart from HSAs. HCRAs are part of flexible benefit packages, allowing employees to allocate pre-tax dollars for medical expenses. Employers determine contribution limits, which can vary annually based on company policy and IRS guidelines. For 2024, the IRS maximum contribution limit for HCRAs is $3,050, though employers may adjust this.

HSAs, linked to high-deductible health plans (HDHPs), are owned by employees, offering portability and flexibility. For 2024, the IRS set HSA contribution limits at $3,850 for individuals and $7,750 for families, with an additional $1,000 catch-up contribution for those 55 and older. Unlike HCRAs, HSAs stay with the employee even after a job change.

Employers manage HCRAs, handling claims and compliance, while HSAs require less involvement. Employees manage their HSAs independently, deciding how to spend or invest their funds.

Contribution Methods

HCRA contributions are made through salary reduction agreements, lowering taxable income. These contributions are subject to employer-determined caps and enrollment periods.

HSAs offer more flexibility. Contributions can be made via payroll deductions or direct deposits and are allowed until the tax filing deadline, typically April 15 of the following year. This flexibility helps employees adjust contributions based on financial needs. Contributions to HSAs are tax-deductible, even when made with after-tax dollars, providing an additional tax advantage.

Eligible Medical Costs

HCRA-eligible expenses are defined by the employer’s plan and IRS guidelines, often covering co-pays, deductibles, prescription medications, and certain over-the-counter drugs. Coverage may also include vision and dental care, depending on the plan.

HSAs adhere strictly to IRS-defined eligible expenses but offer broader options, such as long-term care services and Medicare premiums under certain conditions. This flexibility can accommodate diverse healthcare needs.

Both accounts require detailed record-keeping to verify expenses. Improper claims can result in penalties, such as a 20% penalty for non-qualified HSA withdrawals, emphasizing the need for accurate documentation.

Tax Treatment and Filing

HCRAs provide a straightforward tax benefit by allowing pre-tax contributions, reducing taxable income. Contributions and reimbursements are not reported on tax returns, simplifying filing. However, employees must use all funds within the plan year or risk forfeiture unless specific rollover or grace period provisions are offered.

HSAs provide triple tax advantages: tax-deductible contributions, tax-free earnings, and tax-free withdrawals for qualified expenses. Account holders must report contributions and distributions on IRS Form 8889, ensuring compliance and avoiding penalties for non-qualified expenses.

Rollover Possibilities

HCRAs are typically subject to a “use-it-or-lose-it” rule, meaning unspent funds are forfeited unless the employer offers a grace period or allows a rollover of up to $610, per IRS guidelines for 2024. These provisions are not guaranteed, requiring careful planning to avoid losing unused funds.

HSAs automatically roll over unused funds without limitation, allowing account holders to build significant balances over time. This feature makes HSAs ideal for long-term healthcare and retirement planning, as funds can grow tax-free through investments.

Withdrawing Funds

HCRA withdrawals are restricted to eligible medical expenses incurred during the plan year. Employees must submit claims with documentation for approval, and reimbursements are limited to the annual election amount, even if not fully funded yet.

HSAs allow greater flexibility. Funds can be withdrawn at any time without pre-approval. Withdrawals for qualified expenses are tax-free, while non-qualified withdrawals incur income tax and a 20% penalty if the account holder is under 65. After 65, non-qualified withdrawals are taxed as ordinary income, similar to a traditional IRA.

HCRA funds must be used within the plan year or grace period, creating a time-sensitive dynamic. HSA funds, however, have no expiration, allowing account holders to delay withdrawals and grow their balance through investments. This long-term approach can make HSAs a valuable financial tool, combining healthcare savings with retirement planning.