What Is the Difference Between an HRA and an HSA?
Understand key differences between two common health benefit accounts. Clarify your options for managing healthcare costs effectively.
Health reimbursement arrangements (HRAs) and health savings accounts (HSAs) are employer-sponsored benefits that help individuals manage healthcare costs. While both offer tax advantages for medical expenses, their structures and rules differ significantly. Understanding these distinctions is important for effective healthcare financial management, as they cater to varying needs.
Health Reimbursement Arrangements
Health Reimbursement Arrangements (HRAs) are employer-funded plans that reimburse employees for qualified medical expenses and, in some instances, health insurance premiums. The employer establishes the plan and determines the amount of funds available each plan year. An HRA is not a pre-funded account; instead, the employer reimburses the employee after an eligible expense is incurred.
HRAs are owned by the employer, so funds generally remain with the company if an employee leaves their job. While some HRA plans allow unused balances to roll over, the employer ultimately retains ownership of any remaining funds upon termination. Reimbursements from an HRA are not subject to federal income tax when used for qualified medical expenses.
Health Savings Accounts
Health Savings Accounts (HSAs) are individual savings accounts available only to those enrolled in a high-deductible health plan (HDHP). Contributions can be made by the individual, an employer, or a third party, up to annual limits set by the Internal Revenue Service (IRS). For 2025, the contribution limit is $4,300 for self-only coverage and $8,550 for family coverage, with an additional $1,000 catch-up contribution for individuals aged 55 and older. The account is owned by the individual and is fully portable.
HSAs offer a “triple tax advantage”: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are tax-free. This allows HSAs to function as a long-term savings vehicle for healthcare costs, similar to a retirement account. Funds can be invested in various options, such as mutual funds, stocks, and bonds. Any unused funds roll over from year to year without limit.
Key Distinctions
The fundamental differences between HRAs and HSAs lie in their ownership, funding, portability, eligibility, and tax implications. An HRA is employer-owned, with funds provided solely by the employer, and is generally not portable if an employee leaves the company. Conversely, an HSA is individually owned, allowing contributions from the employee, employer, or others, and is fully portable.
Eligibility requirements also differ. HRAs do not require employees to be enrolled in a specific health plan, while HSAs are exclusively for individuals covered by a high-deductible health plan (HDHP). The IRS sets specific criteria for HDHPs, including minimum deductibles and maximum out-of-pocket limits. For 2025, an HDHP must have an annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage.
Regarding tax treatment, both accounts offer tax-free reimbursements for qualified medical expenses. However, HSA contributions are tax-deductible for the individual and grow tax-free through investments, which is not a feature of HRAs. HRAs do not offer investment options for the funds.
Withdrawal rules also vary. HRA funds can only be used for qualified medical expenses and cannot be “cashed out” for non-medical purposes. HSA funds, while primarily intended for medical expenses, can be withdrawn for non-medical purposes. If an HSA withdrawal is made for non-medical expenses before age 65, the amount is subject to income tax and an additional 20% penalty. After age 65, non-medical withdrawals are subject only to ordinary income tax, with no penalty.