Is an HRA or HSA a Better Choice for Medical Expenses?

Health benefit accounts serve as valuable tools for individuals seeking to manage healthcare costs effectively. These accounts, including Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs), offer distinct advantages for covering medical expenses. While both provide tax benefits, their operational structures and eligibility requirements differ significantly. A comprehensive understanding of these differences is important for determining which option best aligns with individual financial and healthcare needs.

Understanding Health Reimbursement Arrangements

A Health Reimbursement Arrangement (HRA) is an employer-funded health benefit plan designed to reimburse employees for qualified medical expenses. The employer solely contributes funds, and these contributions are not included in the employee’s gross income. Employers establish the specific rules for their HRA plans, defining eligible medical expenses and setting annual maximum reimbursement amounts.

Funds within an HRA are notional, representing a promise from the employer to reimburse approved expenses up to a specified limit, rather than actual cash accounts owned by the employee. These funds typically revert to the employer if unused or upon an employee’s termination of employment, as HRAs are generally not portable. Reimbursements for qualified medical expenses are tax-free under Internal Revenue Code Section 105.

HRAs do not usually include an investment component, so funds do not grow over time through market gains. HRAs offer design flexibility, allowing employers to pair them with various health insurance plans, including those not high-deductible. Employers may also restrict eligible expenses beyond Internal Revenue Service guidelines.

Understanding Health Savings Accounts

A Health Savings Account (HSA) is a tax-advantaged savings account owned by an individual, specifically designed for healthcare expenses. A crucial eligibility requirement for opening and contributing to an HSA is being covered by a High-Deductible Health Plan (HDHP). Additionally, individuals cannot have other disqualifying health coverage, such as Medicare, or be claimed as a dependent on someone else’s tax return.

HSAs offer a “triple tax advantage.” Contributions are tax-deductible, or if made through payroll deductions, they are pre-tax, reducing taxable income. Funds can be invested, and any earnings or growth are tax-free. Withdrawals for qualified medical expenses are also tax-free.

Unlike HRAs, HSAs are portable; the account belongs to the individual, not the employer, and moves with the individual even if they change jobs or retire. The Internal Revenue Service sets annual contribution limits, which for 2025 are $4,300 for self-only coverage and $8,550 for family coverage. An additional catch-up contribution of $1,000 is permitted for individuals aged 55 and over. Unused funds roll over from year to year and can be saved and invested for future medical expenses, including in retirement.

Comparing Key Features

Key differences between HRAs and HSAs include:
Funding: HRAs are exclusively employer-funded, while HSAs can receive contributions from individuals, employers, or both.
Ownership and Portability: HRA funds remain the property of the employer and are generally not portable. HSA funds are owned by the individual and are fully portable.
Eligibility: HRAs can be offered with various health plans. HSAs strictly require enrollment in a High-Deductible Health Plan (HDHP) and absence of other disqualifying health coverage.
Tax Advantages: HRA reimbursements for qualified medical expenses are tax-free. HSAs provide a “triple tax advantage” with tax-deductible contributions, tax-free growth, and tax-free withdrawals.
Investment: HSAs typically offer investment options for long-term growth, whereas HRAs generally do not have an investment component.
Rollover: HSA funds always roll over and accumulate over time, while HRA funds may or may not depending on employer policy.
Control: Employers dictate the terms of an HRA. Individuals maintain control over their HSA, including investment choices and fund usage.

Determining the Right Fit

Choosing between an HRA and an HSA depends on your health coverage, healthcare spending patterns, and financial objectives. First, consider your health insurance plan type. An HSA requires enrollment in a High-Deductible Health Plan (HDHP), while an HRA can be paired with various plans.

Assessing typical healthcare spending habits is also important. Individuals with predictable and potentially higher annual medical expenses might find immediate relief from an HRA, which provides employer-funded reimbursements. Those with lower, more unpredictable healthcare costs, or those seeking a long-term savings vehicle, might benefit more from an HSA’s investment potential and rollover capabilities.

Considering long-term financial goals, such as saving for healthcare costs in retirement, can heavily influence the decision. The HSA’s ability to be invested and its portability make it an attractive option for accumulating tax-advantaged funds for future medical needs. Finally, review specific employer offerings, including any employer contributions to an HSA or the specific design of an HRA, to make an informed choice that aligns with your personal circumstances and financial priorities.

Citations

https://www.irs.gov/pub/irs-drop/n-02-84.pdf
https://www.irs.gov/pub/irs-prior/p502–2023.pdf
https://www.irs.gov/publications/pub969
https://www.healthcare.gov/glossary/health-savings-account-hsa/
https://www.investopedia.com/articles/personal-finance/090814/hsa-vs-hra-which-better-you.asp
https://www.shrm.org/resources-and-tools/hr-topics/benefits/2025-hsa-contribution-limits-rise-again/