What’s the Difference Between an HSA and an HRA?
HSAs and HRAs offer distinct structures for managing medical costs. Understand how one functions as a personal asset and the other as an employer-funded benefit.
Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs) are tax-advantaged accounts offered by employers to help manage healthcare costs. Both allow for paying for medical expenses with pre-tax dollars, but they operate under different rules and offer distinct features.
Health Savings Account (HSA) Fundamentals
An HSA is a personal savings account that belongs to the employee, not the employer, granting the account holder complete control over the funds. Because the account is owned by the individual, it is fully portable. The entire balance and the account itself remain with the employee even after changing jobs, health insurance plans, or retiring.
Eligibility to contribute to an HSA is tied to enrollment in a High-Deductible Health Plan (HDHP). For 2025, the IRS defines an HDHP as a plan with a minimum annual deductible of $1,650 for self-only coverage or $3,300 for family coverage. These plans must also have a maximum out-of-pocket expense limit for 2025 of $8,300 for an individual or $16,600 for a family.
Contributions to an HSA can come from the employee, their employer, or family members. The IRS sets annual limits on the total amount that can be contributed. For 2025, the maximum contribution is $4,300 for individuals with self-only coverage and $8,550 for those with family coverage. Individuals aged 55 and older are permitted to contribute an additional $1,000 as a catch-up contribution.
The tax treatment of an HSA is often referred to as a “triple-tax advantage.” First, contributions are tax-deductible, lowering taxable income. Second, the funds can grow tax-free through interest or investment earnings. Third, withdrawals for qualified medical expenses—such as deductibles, copayments, and dental or vision care—are tax-free.
HSA funds can be used for a broad array of qualified medical expenses as defined by the IRS. Balances can be invested in mutual funds or other investment vehicles, similar to a 401(k), allowing for potential long-term growth. After the account holder reaches age 65, funds can be withdrawn for any reason without penalty; if used for non-medical expenses, the withdrawal is taxed as ordinary income.
Health Reimbursement Arrangement (HRA) Fundamentals
A Health Reimbursement Arrangement is an employer-owned and funded account. Unlike an HSA, an HRA is not a personal savings account but a formal arrangement where the employer promises to reimburse employees for medical expenses. The funds are owned by the company, and the employee is eligible to receive reimbursements from the account.
Because the employer owns the HRA, the funds are not portable. If an employee leaves the company, they typically forfeit any remaining balance. Some plans may have provisions for continuing coverage for a short period under COBRA, but the account itself does not transfer to the former employee’s control.
There is no federal requirement for an employee to be enrolled in a specific type of health plan, like an HDHP, to be eligible for an HRA. Employers can offer an HRA alongside any health insurance plan they provide. Eligibility rules and the classes of employees covered, such as full-time or part-time workers, are determined by the employer.
Only the employer can contribute to an HRA; employees are not permitted to add their own money. The employer determines the annual amount made available to each employee, and there are no federally mandated limits on the contribution for many common types of HRAs. The employer also decides whether any unused funds will roll over to the next year or be forfeited.
Employees receive reimbursements for qualified medical expenses tax-free. The employer, in turn, can deduct the contributions it makes to the HRA as a business expense. The scope of what is considered a qualified medical expense can be defined by the employer, but it must meet the general IRS definition. The employer can choose to limit reimbursements to a narrower set of expenses, such as deductibles and copayments only.
Coordinating HSA and HRA Usage
An individual generally cannot contribute to a Health Savings Account while also being covered by a standard, general-purpose HRA. The IRS considers eligibility for HRA reimbursement as “other health coverage,” which disqualifies a person from making HSA contributions. This rule prevents an individual from paying for an expense with tax-free HRA dollars while preserving their tax-advantaged HSA funds.
Certain types of HRAs are designed to be compatible with an HSA, allowing an employee to benefit from both. A Limited-Purpose HRA is one such example. This type of HRA restricts reimbursements to specific expenses, typically dental and vision care. This allows the employee to use the HRA for these costs while saving their HSA funds for medical expenses that apply to the deductible.
Another compatible option is a Post-Deductible HRA. This arrangement only begins to reimburse medical expenses after the employee has met the statutory minimum deductible for their HDHP. For 2025, this means the HRA would not provide benefits until the employee has paid $1,650 (self-only) or $3,300 (family) out-of-pocket. This structure ensures the employee remains eligible to contribute to their HSA.
A Retirement HRA is another design that works alongside an HSA. With this arrangement, the employer contributes to an HRA that the employee cannot access until after they retire. Since the funds are not available for current medical expenses, the employee maintains HSA eligibility during their working years. Upon retirement, the HRA funds become available to reimburse medical costs.