Key takeaways
- The biggest difference between a Health Reimbursement Arrangement (HRA) and a Health Savings Account (HSA) is ownership. Employers own and fund HRAs. Employees own HSAs and can contribute alongside their employer if they're eligible.
- HSA ownership gives employees portable healthcare savings they can carry from job to job and build over time.
- For employers, an HSA can support cost management as well as employee financial security. Employers that deployed a best-practice-enabled HSA saved $1,630 per employee annually in healthcare costs.1
Think about what happens to an employee's healthcare savings when they leave your organization.
With an HRA, access to unused employer funds generally ends with employment, depending on the plan. With an HSA, the employee takes the account (and every dollar already in it) with them.
Both accounts can help employees pay qualified healthcare expenses, but the way employees experience them is distinct.
As a benefits leader, if you're deciding between the two, you may ask:
- How much ownership do I want employees to have over the healthcare dollars available to them?
- What do I want those dollars to accomplish over time?
What is the difference between an HRA and an HSA?
An HRA is an employer-owned arrangement funded by the employer to reimburse employees for qualified healthcare expenses according to the plan's terms.
An HSA is an employee-owned account available to eligible individuals. Employers and employees can both contribute to an HSA, subject to IRS rules.
| HRA | HSA | |
|---|---|---|
| Ownership | Employer | Employee |
| Who contributes? | Employer only | Employer and eligible employee |
| Employee contributions | Not permitted | Permitted, often through pretax payroll deductions |
| What happens when an employee leaves? | Funds generally remain with the employer, subject to plan design | The employee keeps the account and balance |
| Do unused funds roll over? | Depends on plan design | Yes |
| Tax treatment | Employer contributions and qualified reimbursements are generally tax-free to the employee2 | Triple-tax advantage: pretax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses2 |
| Eligibility | Depends on HRA type and plan design | Requires HSA eligibility, including enrollment in an HSA-qualified HDHP and no disqualifying coverage |
| Can employees invest? | No | Investment options may be available3 |
| Long-term savings potential | Depends on plan design and continued employment | Balance can accumulate throughout the employee's life |
There are several types of HRAs with different rules, so the specifics of any HRA will depend on its design. But for employers comparing an HRA with an HSA, ownership is the most useful place to start.
Is an HRA or HSA better for employees?
It depends on what an employee needs from the benefit.
An HRA can be valuable because the employer funds it. Employees receive reimbursement for eligible healthcare expenses without having to contribute their own money.
Eligible employees who want more control over their healthcare savings may get additional opportunities from an HSA.
Consider an employee who has a relatively healthy year and doesn't need to spend everything available in their HSA. That money stays in the account. The following year, they can add more. So can their employer. Over several years, the account can become a larger pool of money available when a more expensive healthcare need eventually arrives.
That creates three ways for employees to use an HSA:
- Spend HSA dollars tax-free on qualified medical expenses they have today.
- Save unused money for healthcare expenses next year or years from now.
- Invest eligible balances for potential long-term growth when investment options are available.
The value isn't simply having a bigger account balance. A larger balance can mean having money available when an unexpected bill arrives, when healthcare needs increase later in life, or when an employee is no longer working for the employer that originally contributed to the account.
What are the tax advantages of an HSA vs. an HRA?
Both accounts offer tax advantages, but they work differently.
With an HRA, employer contributions and reimbursements for qualified expenses are generally tax-free to employees.
An HSA offers a triple tax advantage:
- Contributions can be made pre-tax.
- Earnings can grow tax free.
- Withdrawals for qualified medical expenses are tax free.
Because unused HSA money can remain in the account, those tax advantages can extend beyond this year's healthcare spending. Employees can build savings over time and use those dollars for qualified healthcare expenses later.
That makes an HSA both a healthcare spending account and a potential long-term savings tool.
Why would an employer move from an HRA to an HSA?
If an HRA already helps employees pay healthcare expenses, why make a change?
HealthEquity research found that employers deploying a best-practice-enabled HSA saved $1,630 per employee annually in healthcare costs.4
But simply offering an HSA isn't the strategy. Plan design, employer contributions, and employee engagement all affect whether employees can get meaningful value from the account.
For example, moving from an HRA means employees go from relying on an employer-funded reimbursement arrangement to owning an account they can fund themselves. That's a meaningful change. Plus, HRAs can be paired with any kind of health plan, while HSAs can only be paired with qualifying high-deductible health plans (HDHPs).
If employees don't understand why contributing matters, how rollover works, or why they might leave some money in the account rather than spend it immediately, much of the HSA's long-term value may be lost on them.
Benefits leaders can overcome these hurdles with targeted benefits education to help boost HSA enrollment and ensure members understand how to maximize their plans.
When does an HRA still make sense?
Moving toward an HSA shouldn't be the goal simply because HSAs offer employee ownership and long-term savings potential.
An HRA can make more sense when employer control is important to your plan strategy. You may want to determine which expenses employer dollars reimburse, serve employees who aren't HSA-eligible, or design reimbursement around the needs of a particular population.
And an HSA requires an HSA-qualified health plan and compliance with applicable eligibility rules. That alone means an HSA won't fit every benefits strategy.
With an HRA, you retain more control over the benefit. With an HSA, eligible employees gain more control over the money. Which matters more depends on what you're trying to accomplish.
What should you consider before moving from an HRA to an HSA?
Start with what the change would mean for your employees.
What are you trying to accomplish?
If your priority is tighter employer control over healthcare reimbursements, an HRA may still fit. If you want to combine healthcare cost management with employee ownership and long-term healthcare savings, an HSA deserves a closer look.
Can your employees contribute?
An HSA gives employees the ability to contribute their own money, but ability and willingness aren't the same thing. Consider how employees with different income levels and healthcare needs could experience the plan.
How will you fund the HSA?
Employer contributions can give employees money to work with from the start. Your contribution amount and timing should support the broader goals of your plan design. For example, consider an employer contribution tied to the HDHP's deductible, so employees feel supported and confident signing up for these plans.
What happens when someone has a high-cost year?
Look beyond average. Consider what the plan and HSA funding strategy mean for someone who needs significant care early in the plan year or hasn't yet accumulated a large balance and plan your employer contribution strategy accordingly.
Do employees understand what ownership gives them?
Someone accustomed to an HRA may think of the HSA as another account for this year's bills. Education should explain that the money rolls over, stays with them when they leave, and can become a resource for future healthcare expenses.
Choose based on what you want the benefit to accomplish.
An HRA can give you control over employer healthcare dollars and how they're reimbursed.
An HSA asks you to give up some of that control. Once you contribute money, it belongs to the employee.
But that's also where much of the HSA's value comes from.
Employees can contribute their pre-tax dollars. They can carry the account from job to job. They can let unused balances grow instead of starting over each year. And they can build a healthcare resource that may still be there long after they've left your organization.
For employers that want to manage healthcare costs while helping employees build greater healthcare cost security, that's a meaningful difference.
Learn more about HealthEquity HSAs.
