What Is the Difference Between an HSA and an HRA?

Healthcare costs are a significant financial consideration. Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs) offer tax-advantaged ways to manage these expenses. Both help cover medical expenditures but operate under distinct structures and rules. Understanding their features is important for optimizing healthcare savings and spending. This article clarifies the characteristics of HSAs and HRAs.

Health Savings Accounts Explained

A Health Savings Account (HSA) is a tax-advantaged savings account specifically designed for individuals covered by a High-Deductible Health Plan (HDHP). It provides a triple tax benefit: contributions are tax-deductible, funds grow tax-free, and withdrawals are tax-free when used for qualified medical expenses. This makes HSAs a powerful tool for both current healthcare needs and long-term savings.

To be eligible for an HSA, an individual must be enrolled in an HDHP that meets specific Internal Revenue Service (IRS) criteria. For 2025, an HDHP must have a minimum deductible of at least $1,650 for self-only coverage or $3,300 for family coverage. The plan’s annual out-of-pocket maximum, which includes deductibles, co-payments, and other amounts but not premiums, cannot exceed $8,300 for self-only coverage or $16,600 for family coverage.

Contributions to an HSA can be made by the individual, an employer, or even family members. The IRS sets annual limits on these contributions; for 2025, the maximum contribution is $4,300 for individuals with self-only HDHP coverage and $8,550 for those with family HDHP coverage. Individuals aged 55 and older can contribute an additional $1,000 annually as a catch-up contribution. These contributions are tax-deductible, reducing an individual’s taxable income for the year.

HSAs are entirely employee-owned, meaning the account belongs to the individual regardless of changes in employment or health plans. This portability ensures that funds accumulated in an HSA remain accessible for future healthcare expenses, even into retirement. Funds can be used to pay for a wide range of qualified medical expenses, including deductibles, co-pays, prescriptions, and even vision and dental care. Unused HSA funds roll over from year to year and can be invested, allowing the balance to grow over time, similar to a retirement investment account.

Health Reimbursement Arrangements Explained

A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses and, in some cases, insurance premiums. Unlike HSAs, employees cannot contribute to an HRA; funding comes solely from the employer. The employer establishes the rules for the HRA, including which expenses are reimbursable and the maximum amount an employee can be reimbursed.

HRAs are employer-owned, meaning the funds generally do not belong to the employee and are typically not portable if the employee leaves the company. The employer retains control over the funds, and any unused amounts usually revert to the employer upon an employee’s departure. This structure allows employers flexibility in designing benefits packages tailored to their workforce’s needs.

The tax benefits of HRAs are significant for both employers and employees. Employer contributions to an HRA are tax-deductible for the business, serving as a deductible expense. For employees, the reimbursements received from an HRA for qualified medical expenses are generally tax-free, provided the expenses meet IRS guidelines. This tax-free reimbursement helps employees manage out-of-pocket healthcare costs without incurring additional tax liabilities.

While HRAs are employer-controlled, various types exist to suit different business sizes and employee needs. For example, a Qualified Small Employer HRA (QSEHRA) allows small employers who do not offer a group health plan to reimburse employees for individual health insurance premiums and other medical expenses. Another type, the Individual Coverage HRA (ICHRA), provides employers of any size with a way to reimburse employees for individual health insurance premiums and medical costs, allowing employees to choose their own health plans. The specific design of an HRA, including carryover rules for unused funds, is determined by the employer, though some HRAs may allow limited carryover of funds from one year to the next.

Comparing HSAs and HRAs

Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs) both help manage healthcare costs, yet they differ fundamentally in their structure, funding, and ownership.

A primary distinction lies in their funding source. HSAs can receive contributions from individuals, employers, or both, offering flexibility in how funds are accumulated. In contrast, HRAs are exclusively employer-funded, meaning employees cannot contribute their own money.

Ownership is another key difference. An HSA is an individual’s account, giving the employee complete control over the funds. This personal ownership means the HSA is fully portable, allowing the funds to move with the individual even if they change jobs or health plans. Conversely, an HRA is employer-owned, and the funds typically remain with the company if an employee leaves, limiting their portability.

Eligibility also sets them apart. To contribute to an HSA, an individual must be enrolled in a High-Deductible Health Plan (HDHP) that meets specific IRS criteria. HRA eligibility, however, is determined by the employer and does not necessarily require enrollment in an HDHP, offering broader flexibility in health plan choices.

Contribution limits differ significantly. HSA contribution limits are set annually by the IRS, with specific maximums for self-only and family coverage, along with a catch-up contribution for those aged 55 and older. For HRAs, the employer determines the reimbursement limits, which can vary based on the type of HRA and the employer’s specific plan design.

The ability to invest funds is a unique feature of HSAs; account holders can invest their HSA balance, allowing the money to grow tax-free over time, similar to a retirement account. HRAs do not offer investment options as they are reimbursement arrangements, not investment vehicles.

Tax treatment also varies. HSA contributions are tax-deductible for the individual, and withdrawals for qualified medical expenses are tax-free. HRA reimbursements are tax-free to the employee, and employer contributions are tax-deductible for the employer.

Finally, the handling of unspent funds at year-end differs significantly. HSA funds generally roll over from year to year without limit, creating a long-term savings vehicle for healthcare expenses. HRA funds, however, are subject to employer-defined rules regarding carryover; while some HRAs may allow a limited amount to roll over, many operate on a “use-it-or-lose-it” basis, where unused funds are forfeited at the end of the plan year.