What Is the Difference Between an HRA and an HSA?

Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs) help individuals manage healthcare costs. These tools provide ways to pay for medical expenses, often offering tax advantages that can reduce the financial burden of healthcare. Understanding how each operates is important for personal financial planning, especially when considering health coverage options.

Health Reimbursement Arrangements

A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for out-of-pocket medical expenses and, in some cases, health insurance premiums. Employees cannot contribute to an HRA. It is a notional account, meaning funds are set aside by the employer for eligible reimbursements rather than held in a physical bank account.

HRA funds remain the property of the employer. If an employee leaves the company, the funds typically do not follow them, although some specific HRA types or employer policies may allow for exceptions. HRAs are often integrated with the employer’s health plan. Employees pay for medical expenses first and then submit claims for reimbursement from their HRA.

Reimbursements from an HRA are generally tax-free for eligible employees, provided they are used for qualified medical expenses. While employers determine the allowance amount, some HRAs, such as Qualified Small Employer HRAs (QSEHRAs) and Excepted Benefit HRAs (EBHRAs), have annual maximum contribution limits set by the IRS. For 2025, a QSEHRA can offer up to $6,350 for self-only coverage and $12,800 for family coverage, while an EBHRAs has a limit of $2,150. Employers can allow unused HRA funds to be carried over to the next plan year.

Health Savings Accounts

A Health Savings Account (HSA) is a tax-advantaged savings account for qualified medical expenses. Unlike HRAs, an HSA is owned by the individual and is fully portable, staying with them even if they change jobs or retire. Eligibility to contribute to an HSA requires enrollment in a High Deductible Health Plan (HDHP). For 2025, an HDHP must have an annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage, and its out-of-pocket maximum cannot exceed $8,300 for self-only or $16,600 for family coverage.

Both individuals and their employers can contribute to an HSA, up to annual limits set by the IRS. For 2025, the maximum contribution is $4,300 for self-only coverage and $8,550 for family coverage. Individuals aged 55 and older can make an additional “catch-up” contribution of $1,000 annually. These accounts offer a “triple tax advantage”: contributions are tax-deductible or made pre-tax, the funds grow tax-free, and withdrawals for qualified medical expenses are tax-free.

HSA funds can often be invested once a certain balance is reached, allowing the money to grow over time. After age 65, individuals can withdraw funds for non-medical expenses without a penalty, though these withdrawals will be subject to income tax. Funds used for qualified medical expenses remain tax-free regardless of age.

Comparing HRAs and HSAs

The eligibility requirements for Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs) represent a primary distinction. HRAs are employer-defined benefits, with eligibility determined by the employer’s plan design, often tied to enrollment in their group health insurance. In contrast, an HSA requires enrollment in a High Deductible Health Plan (HDHP).

Funding mechanisms also differ. HRAs are exclusively employer-funded. HSAs, however, allow contributions from both the individual and their employer, up to annual IRS limits.

Ownership and portability are other key differentiating factors. An HRA is owned by the employer, and the funds generally do not transfer with the employee if they change jobs or retire. Conversely, an HSA is owned by the individual, making it fully portable.

Regarding tax treatment, HRAs typically offer tax-free reimbursements for qualified medical expenses. HSAs provide a “triple tax advantage”: contributions are tax-deductible (or pre-tax), earnings grow tax-free, and qualified withdrawals are tax-free. HSAs also offer investment opportunities for accumulated funds.

The flexibility of withdrawals also sets them apart. HRA funds cannot be cashed out by the employee and are strictly for reimbursement of qualified medical expenses. HSA funds, while primarily for medical expenses, can be withdrawn for any purpose after age 65 without penalty, though non-qualified withdrawals will be subject to income tax. HRAs are linked to an employer’s health plan, while HSAs require an HDHP but are independent of a specific employer’s plan once established, offering individuals greater control over their healthcare savings.

Qualified Medical Expenses

Both Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs) can only be used for expenses defined by the IRS as “qualified medical expenses.” The IRS outlines these eligible expenses. These expenses generally encompass a broad range of medical, dental, and vision care services and products.

Common examples of qualified medical expenses include:

• Doctor visits
• Prescription medications
• Dental work
• Vision care
• Copayments
• Deductibles
• Certain over-the-counter medicines without a prescription
• Medical equipment like crutches
• Supplies such as bandages

The primary purpose of the expense must be to alleviate or prevent a physical or mental illness.

For HRAs, employees typically pay for the expense first and then submit receipts to their employer or plan administrator for reimbursement. With HSAs, individuals often use a dedicated debit card to pay directly for services or products, or they can pay out-of-pocket and then reimburse themselves from their HSA. For both account types, using funds for non-qualified expenses can result in penalties or taxable income, particularly for HSAs before age 65.