Is an HRA the Same as an HSA? Key Differences
Demystify health savings. Compare employer-funded and individual medical accounts to understand their unique benefits and uses.
Navigating healthcare costs can be a complex aspect of personal finance, particularly with the various tax-advantaged health accounts available through employer-sponsored benefits. These accounts are designed to help individuals manage medical expenses more efficiently by offering certain tax benefits. Understanding the different types of these mechanisms is important for making informed decisions about healthcare financial planning.
Health Reimbursement Arrangements
A Health Reimbursement Arrangement (HRA) is an employer-funded benefit plan designed to reimburse employees for qualified medical expenses. The employer solely funds these accounts; employees cannot contribute their own money. Funds within an HRA remain the property of the employer, distinguishing them from personal savings accounts. This arrangement allows employers to claim a tax deduction for their contributions, while reimbursements received by employees for eligible expenses are generally tax-free.
Employers maintain significant control over HRAs, setting specific rules regarding which medical expenses are eligible for reimbursement and whether unused funds can roll over from one plan year to the next. While HRAs are frequently paired with high-deductible health plans, they are not exclusively tied to them and can be integrated with various health insurance plans. However, the funds are not portable; if an employee leaves the company, they lose access to any remaining HRA balance, as the funds revert to the employer.
Health Savings Accounts
A Health Savings Account (HSA) is an individually owned savings account designated for qualified medical expenses. To be eligible for an HSA, an individual must be enrolled in a High-Deductible Health Plan (HDHP). HSAs offer a “triple tax advantage”: contributions are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free.
Individuals, employers, or both can contribute to an HSA, up to annual limits set by the IRS. For 2025, the contribution limits are $4,300 for self-only coverage and $8,550 for family coverage, with an additional $1,000 “catch-up” contribution allowed for those aged 55 and over. Funds in an HSA can be invested, allowing for potential growth over time, similar to a retirement account. These accounts are fully portable, meaning the individual retains ownership of the HSA and its funds even if they change employers or retire.
Comparing HRAs and HSAs
While both Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs) serve as tax-advantaged tools for managing healthcare costs, their fundamental structures and operational rules differ significantly. Employer contributions to both HRAs and HSAs are tax-deductible for the business.
A primary distinction lies in ownership: an HRA is employer-owned, and the funds revert to the employer if an employee leaves the company. Conversely, an HSA is individually owned, and the account remains with the employee. Funding also differs; HRAs are solely funded by the employer, while HSAs can receive contributions from the employee, employer, or both.
Portability is another key difference; HRAs are not portable, whereas HSAs are fully portable. Eligibility for an HRA is determined by the employer, while an HSA requires enrollment in a High-Deductible Health Plan (HDHP). Unlike HRAs, which do not offer investment options, HSAs allow account holders to invest their funds for potential growth. HSA funds can be withdrawn for non-medical expenses after age 65 without penalty, though subject to income tax, a feature not available with HRAs. Prior to age 65, non-qualified withdrawals from an HSA are subject to income tax and a 20% penalty.