Like a lot of regular expenses, health care costs have been going up. To help employees manage these costs, employers may offer access to several types of tax-advantaged accounts. Though they have similar acronyms and help you save money on qualified medical expenses, health savings accounts (HSAs) and health reimbursement arrangements (HRAs) are very different benefits.
Here's what you need to know to help you evaluate an HRA vs. an HSA.
What is an HSA?
A health savings account (HSA) is a tax-advantaged savings and investment account that lets you (and perhaps your employer) contribute money to pay for current and future medical expenses. You can choose if, when, and for what you use your HSA funds, so long as they're IRS-approved qualified medical expenses.
HSAs are often called "triple-tax-advantaged" accounts because they can be funded with dollars you haven't paid taxes on yet, they can grow and earn interest on a tax-deferred basis (provided the money stays in the account), and you don't have to pay taxes on any funds you withdraw for qualified medical expenses.1 These factors help your medical spending dollars stretch further.
What is an HRA?
A health reimbursement arrangement (HRA) is an account your employer contributes to that can be used to pay for qualified medical expenses. Your employer decides how much they will put into an HRA, when you can use your HRA, and what expenses it will cover. Most HRAs are aimed at helping current employees defray the health expenses they have now. However, a separate type of HRA, called a retiree HRA, helps former employees deal with health care expenses in retirement.
HSA vs. HRA: Key differences
HRAs and HSAs differ in a few important ways.
You need a specific health plan to contribute to an HSA
To put money into an HSA, you must be covered exclusively by an HSA-eligible health plan. Meanwhile, there are several types of HRAs. Some may be available to employees with any type of health plan, and others may be available with no requirement of a qualifying health plan. HRAs are not available if you're self-employed.
You and your employer can contribute to an HSA
While you and your employer can contribute to your HSA, up to the HSA contribution limits, only your employer can put money into an HRA. Check with your employer to see how much your HRA may have each year. There is no limit on the amount of money your employer can contribute to the accounts.
You own your HSA
Even if you get your health plan through work and your employer chips into your HSA, your account belongs to you. That means if you leave your job, you keep all the money you've saved up in your HSA and can transfer it. You can also open an HSA if you're enrolled in an HSA-eligible health plan and your employer does not provide one—or if they do but you prefer a different account provider.
This isn't the case with an HRA. Because your employer owns the account, you don't get to choose who your HRA provider is and you likely will lose access to the money in your HRA when you part ways with your job, unless you have a retiree HRA. If you aren't sure about what will happen to your HRA money when you leave your employer, check your Summary Plan Description.
HSA funds carry over from year to year
Money held in an HSA never expires. You can carry over any funds from year to year and job to job. This removes the pressure to use any unused health care dollars before the end of each year. It also makes HSAs valuable tools for funding future medical expenses, which could cost you a lot in retirement.
HRAs, on the other hand, vary by plan. Some may let you carry over unused funds while others may make you forfeit them. Check with your employer to make sure you don't leave money on the table. If you have a retiree HRA benefit, make sure to keep track of it between now and when you retire.
You can invest money held in your HSA
Unlike other tax-advantaged accounts that help with health expenses, HSAs allow you to invest the funds held in them, which may let them earn compound returns and potentially grow your savings to use for future medical expenses. Despite its wealth-building potential, this is an underused benefit of HSAs. Only 24% of HSAs are invested, according to Fidelity.2 If you aren't sure how to get started, check out our guide to HSA investing.
By contrast, you do not control funds in an HRA and cannot invest them. Some retiree HRAs, however, do pay interest.
HSAs can be used like workplace plans and IRAs in retirement
Starting at age 65, there's no penalty to use HSA money for ineligible and/or nonmedical expenses, granting HSAs greater flexibility than other health spending accounts. You may still have to pay income tax, though, making them function similarly to traditional 401(k)s and individual retirement accounts (IRAs). Before age 65, any ineligible withdrawals may be subject to a 20% penalty plus any applicable taxes.
If you have a retiree HRA, you can only use the money in it for qualified medical expenses.
| HRAs vs. HSAs: Key similarities and differences | HSA | HRA |
|---|---|---|
| You can spend money on qualified medical expenses. | X | X |
| Your employer can contribute. | X | X |
| You can contribute. | X | |
| You can invest funds for potential tax-free growth. | X | |
| Your account belongs to you, not your employer. | X | |
| You must have an HSA-eligible health plan as your only health insurance. | X | |
| Your account balance carries over each year, regardless of your plan. | X | |
| You can use funds for ineligible and non-medical costs once you reach age 65. | X |
Can you have both an HSA and an HRA?
Yes, you can actively contribute to an HSA and have an HRA, but it must be a limited purpose HRA that can be used to pay for qualified dental and vision expenses. You may also have an HSA and a retiree HRA.
HSA vs. HRA: Which is better?
You might not be able to control whether you have an HRA or an HSA, depending on your employer's benefits. If your employer offers both, consider the costs and benefits of the health plans that may be required for each and how they fit with your finances, health, and long-term goals. It may make sense for you to use just one or a combination of both. If you're not sure which works best for you, your employer may be able to provide guidance.
If you don't have access to both, don't stress. HSAs and HRAs can each help you manage health care costs, which can be a financial win. And even those without access to either can still prepare for health costs by budgeting for those expenses, both now and in the future.