HSA vs. HRA: Which Health Account Is Better?
Understand the differences between HSAs and HRAs. This guide helps you compare these health accounts to make the best choice for your healthcare savings.
Understand the differences between HSAs and HRAs. This guide helps you compare these health accounts to make the best choice for your healthcare savings.
Tax-advantaged health accounts offer a valuable mechanism to mitigate the financial burden of medical care. These accounts enable individuals to save or be reimbursed for qualified medical expenses using pre-tax or tax-free dollars, reducing overall healthcare expenditures and taxable income. Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs) are widely utilized options, each assisting with medical costs through distinct structures.
A Health Savings Account (HSA) is a personal savings account for qualified medical expenses. To be eligible, an individual must be enrolled in a High-Deductible Health Plan (HDHP) and have no other disqualifying health coverage. For 2025, an HDHP requires an annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage, with annual out-of-pocket expenses not exceeding $8,300 for self-only or $16,600 for family coverage. Individuals not enrolled in Medicare and not claimed as a dependent on someone else’s tax return also qualify.
Contributions to an HSA can be made by the individual, an employer, or both, and are tax-deductible or pre-tax through payroll deductions. For 2025, the maximum contribution limit is $4,300 for self-only HDHP coverage and $8,550 for family HDHP coverage. Individuals aged 55 and older can contribute an additional $1,000 as a catch-up contribution. These contributions reduce taxable income.
An HSA offers a “triple tax advantage”: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are tax-free. Qualified medical expenses are broadly defined by IRS guidelines and include services like doctor visits, prescriptions, and dental care. Funds withdrawn for non-qualified expenses before age 65 are subject to income tax and a 20% penalty.
HSAs are portable; the account belongs to the individual, remaining with them even if they change employers or health plans. Unused funds roll over year after year and can accumulate indefinitely, allowing for long-term savings for future healthcare costs, including retirement. The account also offers investment potential, enabling tax-free growth.
A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses. Only employers can contribute to an HRA; employees cannot add their own funds. The employer maintains ownership and control, and funds typically revert to the employer if an employee leaves, though some plans allow limited rollovers. Reimbursements for eligible medical expenses are generally tax-free to employees, and employers can claim a tax deduction for these reimbursements. The employer determines specific eligible expenses within IRS guidelines.
A Qualified Small Employer HRA (QSEHRA) is for small businesses (fewer than 50 full-time equivalent employees) without a group health plan. It allows reimbursement for individual health insurance premiums and other medical expenses. For 2025, QSEHRA reimbursement limits are $6,350 for self-only coverage and $12,800 for family coverage. An Individual Coverage HRA (ICHRA) can be offered by employers of any size, allowing tax-free reimbursement of individual health insurance premiums and other medical expenses if employees are enrolled in an individual health plan. ICHRAs have no federal maximum contribution limits, offering employers flexibility. Integrated HRAs work with a group health plan to cover expenses not fully paid by primary insurance.
HRA rollover rules are set by the employer’s plan design. Some HRAs allow funds to roll over, while others operate on a “use it or lose it” basis, where unused amounts are forfeited to the employer at year-end. HRAs are generally not portable, meaning funds do not move with the employee if they change jobs.
The fundamental difference between HSAs and HRAs lies in ownership and funding. An HSA is an individually owned account, giving the account holder complete control over the funds. Conversely, an HRA is employer-owned and controlled, with funds typically reverting to the employer upon an employee’s departure.
Regarding contributions, HSAs allow contributions from both the individual and their employer. In contrast, HRAs are solely employer-funded; employees cannot contribute their own money. HSA contributions are subject to annual IRS limits, while HRA limits are determined by the employer, with some types like ICHRA having no federal maximums.
Tax treatment also varies. HSAs offer a “triple tax advantage”: tax-deductible contributions, tax-free growth, and tax-free qualified withdrawals. HSAs also allow for tax-free investment. For HRAs, reimbursements for qualified medical expenses are tax-free to the employee, and employer contributions are tax-deductible for the business, but HRAs do not offer investment options.
Portability is a key differentiating factor. An HSA is fully portable; funds belong to the individual and can be taken with them if they change jobs or health plans. HRAs are generally not portable, and unused funds are typically forfeited back to the employer upon job separation. HSA balances roll over indefinitely year after year. HRA rollover rules are set by the employer, and while some plans permit rollovers, others do not.
Eligibility for these accounts is tied to specific health plan types. HSAs require enrollment in a High-Deductible Health Plan (HDHP). HRAs can be paired with various health plans, including traditional group health plans, or function as standalone options like QSEHRAs or ICHRAs for individual coverage. The scope of eligible expenses for HSAs is determined by IRS guidelines. For HRAs, the employer defines which specific medical expenses are eligible for reimbursement under their particular plan.