HRA vs. HSA: What’s the Difference?

Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs) are distinct financial tools designed to help individuals manage healthcare costs. Both offer tax advantages for medical expenses, but they operate under different structures and rules. This article clarifies how HRAs and HSAs function, highlighting their differences and similarities to guide readers in choosing the right option.

Understanding Health Reimbursement Arrangements

A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses. Only the employer contributes to an HRA; employees cannot add their own funds. This arrangement is a notional account, representing an employer’s promise to pay eligible expenses up to a set limit.

Employers set the rules for their HRA, including covered medical expenses and fund rollover. Reimbursements to employees are generally tax-free, and employer contributions are typically tax-deductible business expenses.

HRAs lack portability; funds are tied to employment and usually forfeited if an employee leaves. HRA funds cannot be invested. Common types include Integrated HRAs, linked to a group health plan, and Qualified Small Employer HRAs (QSEHRAs) for smaller businesses without traditional group health plans.

Understanding Health Savings Accounts

A Health Savings Account (HSA) is a tax-advantaged savings account for healthcare expenses, owned and controlled by the individual. Eligibility requires enrollment in a High-Deductible Health Plan (HDHP).

For 2025, an HDHP must have a minimum annual deductible of $1,650 for self-only coverage or $3,300 for family coverage. Annual out-of-pocket expenses cannot exceed $8,300 for self-only coverage or $16,600 for family coverage.

Eligibility also requires not being covered by another non-HDHP health plan, not being enrolled in Medicare, and not being claimed as a dependent. Employees, employers, or other individuals can contribute.

For 2025, the maximum contribution limit is $4,300 for self-only coverage and $8,550 for family coverage. Individuals aged 55 and older can make an additional $1,000 catch-up contribution annually.

HSAs offer a “triple tax advantage”: contributions are tax-deductible, investment earnings grow tax-free, and qualified withdrawals for medical expenses are tax-free. The account is portable, remaining with the individual even if they change jobs or retire.

HSA funds can be invested for potential long-term growth. Funds roll over indefinitely. After age 65, non-medical withdrawals are taxed as ordinary income but avoid the 20% penalty applied before age 65.

Key Differences and Similarities

HRAs and HSAs both help manage healthcare costs, but their structures and benefits differ significantly. A primary distinction is ownership: HRAs are employer-owned, while HSAs are individually owned. This impacts portability, as HRA funds are generally not portable upon leaving employment, unlike HSAs which move with the individual.

Funding also differs. HRAs are exclusively employer-funded; employees cannot contribute. HSAs allow contributions from employees, employers, or third parties, up to IRS limits. HSA funds can be invested for growth, while HRA funds cannot.

Eligibility also diverges. HRA qualification depends on employer offerings and terms. HSA eligibility requires enrollment in an IRS-compliant High-Deductible Health Plan. While both offer tax advantages on contributions and reimbursements, HSAs provide a broader “triple tax advantage” including tax-free investment growth.

Despite these differences, both HRAs and HSAs generally cover a wide range of qualified medical expenses for the account holder and their dependents.

Choosing Between Health Reimbursement Arrangements and Health Savings Accounts

Choosing between an HRA and an HSA requires evaluating personal healthcare needs, financial goals, and available options. First, determine the availability of each account. Employers offer HRAs with specific terms, while HSA eligibility depends on enrollment in an IRS-compliant HDHP.

Consider your anticipated health spending. Individuals with consistently high medical expenses might find an HRA beneficial if employer contributions are generous and cover a broad range of services. Those with lower current medical costs, or who save for future healthcare needs or retirement, may prefer an HSA’s long-term savings and investment potential.

The ability to invest HSA funds allows for tax-free growth, building a substantial healthcare nest egg. An HSA provides complete individual control over contributions, investments, and withdrawals. HRAs are managed by the employer, who dictates rules and access to funds.

Portability is another factor; an HSA’s inherent portability ensures funds remain accessible regardless of employment status, which is important for frequent job changes or nearing retirement. Finally, evaluate any potential employer contributions to either plan, as this significantly influences the financial benefit.