HRA vs. HSA Health Insurance: A Basic Guide

Two well-known types of tax-advantaged health plans are Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs). And there’s a lot to think about when deciding between HRA vs. HSA health plans, including their benefits and costs. Despite their similarities, there are a few key differences between these two plans. 

Group health insurance has evolved since the Affordable Care Act, so it’s worth understanding how the two types of plans function in unique ways to help you manage your healthcare expenses.

Before making a decision about a plan, check out our guide to understanding the difference between HRAs and HSAs below.

Health Savings Accounts (HSAs)

HSAs are personal savings accounts that are owned by the employee and help cover eligible medical expenses. HSAs can be funded by both the employer and the employee, depending on the plan structure and arrangement with your employer.  

Additionally, you can take your HSA with you if you switch jobs, so it’s not exclusive to one job. Remember: You own it. And your funds can be used for qualified medical expenses. This makes the funds taxable but won't carry a penalty. 

Here are some of the qualified expenses you can use your HSA funds for:

• Most medical care
• Most dental care
• Most vision care
• Prescription drugs
• Over-the-counter drugs

When choosing between HRA and HSA plans, there are some key points to consider.  First, you must have an HSA-eligible plan under the Affordable Care Act, or a qualified health plan through your employer. HSA-eligible health plans are typically classified as high-deductible health plans or HDHP. 

High-deductible health plans offer lower premiums in exchange for higher deductibles. So HSAs might be especially beneficial to you if you’re relatively healthy and don’t have a chronic condition that may require ongoing medical care. 

Usually, your HSA funds roll over from year to year, which allows your funds to accumulate and grow, eventually providing a significant financial cushion for medical expenses.

Health Reimbursement Arrangements (HRAs)

HRAs are employer-funded plans that reimburse employees for eligible healthcare expenses. Unlike HSAs, HRAs are funded entirely by the employer and do not require employee contributions. Employers set aside a specified amount of money for each employee, and employees can then use those funds to pay for qualified medical expenses. 

HRA plan highlights include:

• Entirely employer-funded
• Covers a wide range of medical expenses
• Tax-deductible reimbursements
• Doesn’t require a high-deductible health plan

All of the reimbursements you make under an HRA plan are tax-deductible. With an HSA, you will be able to pull money from your account to pay for services when they're rendered. But with an HRA plan, you’d have to pay the upfront cost then receive reimbursement. Overall, HRAs can offer more flexibility for employers, which is why they're often preferred by many businesses.

Choosing Between HRA vs. HSA Health Plans

When evaluating HRAs vs. HSAs, you should know that your employer will set the rules behind your plan, including annual contribution limits. So it's essential to consider your healthcare needs and financial situation carefully. 

While HRAs can offer more flexibility, they are tied to your employer, so you may lose your reimbursements if you switch jobs. Meanwhile, HSAs provide more control over your healthcare expenses and offer long-term savings benefits. 

When deciding between an HRA and HSA health plan, here are 4 factors to consider:

1. Medical Needs: Evaluate your current medical needs to determine if the amount of coverage you need aligns with your projected medical expenses over the next year.
2. Healthcare Costs: Besides premiums and deductibles, be sure to consider other costs like coinsurance, copays, and out-of-pocket maximums. Analyze your budget to choose a plan that fits your limitations. 
3. Provider Networks: While you can use your HSA or HRA to cover treatments that your insurance plan may not cover, it’s wise to stick with healthcare providers who are in-network with your plan. Ensure your primary care physicians and specialists are covered under the plan you choose.
4. Career: If you expect to switch jobs often, having a health plan that will transfer jobs with you can be extremely beneficial when considering HRA vs. HSA plans. For example, you may be more comfortable with an employer-owned HRA if you plan to stay with your company for the long-term future. 
    

HRA vs. HSA: Conclusion

HRA and HSA plans each have perks to make them appealing to those looking for options outside of traditional health insurance. Here’s a recap:
 

HRAs

• Entirely funded by your employer and your employer sets the rules & limits
• Covers a range of medical expenses that your traditional insurance plan may not cover
• You pay upfront for medical costs then get reimbursed for medical expenses
• No interest is earned on your HRA
• Good for those who prefer a predictable healthcare cost and do not want to manage and contribute to a personal savings account

HSAs

• Funded by you and your employer and you can decide how much you want to contribute
• Covers medical expenses via a debit card that uses pre-tax dollars 
• Interest is earned on your HSA
• Typically require a high-deductible health plan, which is good for those who are in good overall health and do not require a lot of medical care