Understanding the difference between HSA (Health Savings Account) and HRA (Health Reimbursement Arrangement) is crucial for individuals and employers alike. Both are tax-advantaged accounts designed to help cover medical expenses, but they operate under different rules and offer distinct benefits.
HSAs are individual accounts that are only available to those enrolled in a high-deductible health plan (HDHP). Contributions to an HSA are made with pre-tax dollars, which means they reduce the amount of income subject to taxes. The funds in an HSA can be used to pay for qualified medical expenses, including deductibles, copayments, and prescriptions. One of the key advantages of an HSA is that the funds roll over from year to year and can be withdrawn tax-free for qualified medical expenses, even after retirement.
On the other hand, HRAs are employer-established accounts that can be used to reimburse employees for medical expenses. Unlike HSAs, HRAs are not tied to an individual’s enrollment in a high-deductible health plan. Employers can contribute to an HRA, and the funds are tax-free as long as they are used for qualified medical expenses. However, unlike HSAs, the funds in an HRA do not roll over from year to year, and there is a “use it or lose it” rule. This means that any unused funds at the end of the plan year are forfeited to the employer.
One significant difference between HSAs and HRAs is the ownership of the funds. With an HSA, the account belongs to the individual, and they can take the funds with them if they change jobs or retire. In contrast, HRAs are employer-owned, and the funds are tied to the employer’s plan. If an employee leaves the company, they may lose their HRA benefits, depending on the employer’s policy.
Another difference is the contribution limits. For 2021, the annual contribution limit for an HSA is $3,600 for individuals and $7,200 for families. There is also a catch-up contribution limit for individuals aged 55 or older, which is $1,000. In contrast, HRA contribution limits are set by the employer and can vary widely. Some employers may offer a fixed annual contribution, while others may provide a specific amount for each type of qualified medical expense.
In conclusion, while both HSAs and HRAs are designed to help cover medical expenses, they differ in terms of eligibility, contribution limits, ownership, and rollover rules. Individuals and employers should carefully consider these differences when choosing between the two options to ensure they are making the most informed decision for their specific needs.
