Is HRA Better Than HSA? Which Is Right for You?
Deciding between an HRA and HSA? Learn which healthcare account aligns with your financial goals, health plan, and medical spending.
Healthcare costs can be a significant financial burden, making strategies to manage these expenses increasingly relevant for individuals. Health savings accounts (HSAs) and health reimbursement arrangements (HRAs) are two distinct financial tools designed to help cover medical costs. While both offer tax advantages, they differ significantly in their structure, ownership, and flexibility. Understanding these differences is helpful for individuals seeking to optimize their healthcare spending and savings.
Understanding Health Reimbursement Arrangements
A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for eligible medical expenses. The employer retains ownership of the funds, meaning employees cannot contribute their own money to an HRA. The employer sets the plan’s terms, including the maximum reimbursement amount, covered expenses, and whether unused funds roll over.
HRA funds are not portable; employees typically lose access to any remaining balance if they leave their job. Qualified medical expenses eligible for reimbursement are determined by the employer, usually aligning with IRS-defined medical expenses like deductibles, co-payments, coinsurance, dental, vision, and prescription drugs. Employer contributions to an HRA are tax-free for the employee, and reimbursements for qualified medical expenses are also tax-free. For employers, contributions to HRAs are tax-deductible business expenses.
Understanding Health Savings Accounts
A Health Savings Account (HSA) is a personal savings account for healthcare expenses, owned by the individual. To be eligible for an HSA, an individual must be enrolled 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. The out-of-pocket maximum for an HDHP cannot exceed $8,300 for self-only coverage or $16,600 for family coverage in 2025.
Both the individual and an employer can contribute to an HSA, up to annual IRS limits. For 2025, the contribution limit is $4,300 for self-only coverage and $8,550 for family coverage. Individuals aged 55 and older can contribute an additional $1,000 as a “catch-up” contribution annually.
These contributions are tax-deductible, and if made through payroll deductions, they are pre-tax, reducing taxable income. HSA funds can be invested for tax-free growth, and withdrawals are tax-free when used for qualified medical expenses. This combination of tax-deductible contributions, tax-free growth, and tax-free withdrawals is often referred to as the “triple tax advantage.”
HSAs are fully portable, meaning the account belongs to the individual and moves with them. Qualified medical expenses for HSAs are broad, including many healthcare services, equipment, and medications as defined by the IRS. If funds are withdrawn for non-qualified expenses before age 65, they are subject to income tax and an additional 20% penalty. After age 65, non-qualified withdrawals are taxed as ordinary income but are not subject to the penalty.
Key Distinctions Between HRAs and HSAs
The primary distinction between HRAs and HSAs lies in ownership and control. HRAs are employer-owned and controlled, with the employer setting terms and funding. HSAs are individually owned accounts that remain with the individual even if they change jobs. This distinction impacts portability; HRA funds are generally forfeited upon leaving an employer, while HSA funds are fully portable and remain with the account holder.
HRAs are solely employer-funded, and employees cannot contribute their own money. In contrast, HSAs allow contributions from both the individual and their employer, up to annual IRS limits. Eligibility also differs: HSAs mandate enrollment in a High-Deductible Health Plan, whereas HRAs do not have such a specific health plan prerequisite.
HSAs offer investment potential, allowing tax-free growth similar to a retirement account, while HRAs typically do not. Tax implications also differ: both offer tax-free reimbursements, but HSAs have a “triple tax advantage” with tax-deductible contributions, tax-free growth, and tax-free withdrawals. Non-qualified withdrawals are generally not permitted from an HRA. For HSAs, they are allowed, but incur tax and potential penalties if taken before age 65.
Factors Guiding Your Choice
An individual’s specific circumstances play a significant role when evaluating whether an HRA or HSA is more suitable. Employer offerings are a primary consideration, as HSA access requires enrollment in an HDHP, which may not always be available. If an employer only provides an HRA, the choice might be limited.
Health status and anticipated medical costs also influence the decision. Those with predictable, recurring medical expenses might find HRA reimbursement beneficial, as it directly offsets out-of-pocket costs without requiring personal contributions. For individuals with lower, less frequent medical needs, an HSA could be more advantageous due to its long-term savings and investment potential.
Financial goals also guide the choice. If long-term savings and investment growth for future healthcare expenses, including retirement, are priorities, an HSA offers distinct advantages with its tax-free growth and portability. Conversely, if the focus is on immediate cost-sharing and reducing current out-of-pocket expenses, an HRA might be more appealing. Willingness to accept a high deductible is also a factor, as HSA qualification necessitates HDHP enrollment. Finally, the desire for individual control over healthcare funds versus employer-managed funds is a personal preference.