HSA vs HRA | Comparing HSAs and HRAs | 2023

Want to compare HSAs and HRAs? The health insurance world is riddled with acronyms, and some are so similar, it’s tempting to believe that means they have more in common than they do. What do those mean exactly? How are they similar and how are HSAs and HRAs different? Let’s dive right in.

HSAs vs HRAs

Both Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs) are tax-advantaged tools that help individuals pay for out-of-pocket medical expenses for themselves and their families through set-aside funds. However, there are some key differences. 

What do HRAs and HSAs have in common?

The main thing these tools have in common is their tax-friendly design. It’s why we love them!

HSAs have three tax advantages:

contributions made by employers are pre-tax, contributions made by the employee are tax-deductible.
you don’t pay tax on account growth
withdrawals from the account (to pay for eligible expenses) are not taxed

Real world example: Since HSA contributions don’t count toward your tax burden, you will be taxed as though you make less money. So, for example, if you make $40,000 per year and you contribute $3,000 into your HSA, you will be taxed as though you make $37,000, thus lowering your tax burden.

Health Reimbursement Arrangements boast no payroll tax or employer tax for employers and no income tax for employees.

Let’s a look a bit more closely at what these tax-advantaged options actually are.

What’s the difference between an HSA and an HRA? 

What are HSAs? 

HSAs are: 

Funded by both employer and employee
Owned by Individual; employee takes funds with them when they leave
Employee has immediate access to money in account
Funds only for medical expenses that fall under the health plan’s deductible 
HSA funds cannot be used for insurance premiums
HSA participants must have a High Deductible Health Plan (HDHP) 
Typically come with a debit card for added convenience 
Tax deductible contributions, tax free reimbursements, and tax free accumulation of interest and dividends

How do HSAs work?

Employees can set up monthly contributions through payroll to add money to their HSA account. If they anticipate high expenses for the year (say, they are having a baby) it might be a good chance to bump up the contributions.

You can change contribution rates at any time. The idea is to have enough money in the HSA to cover that high deductible, which can be a pretty scary number sometimes.

But in the event something happens and you end up with an out of network deductible that would normally break the bank, if you’ve been diligent about putting money in your HSA, it will soften the blow and help you cover your costs.

If those costs never come, the HSA funds continues to grow and the account serves as a long-term investment account. 

Are there tax penalties with HSAs?

If you withdraw funds for non-qualified expenses before you turn 65, you’ll owe taxes on the money plus a 20% penalty. After age 65, you’ll owe taxes but not the penalty.

Once you’re over age 65 and enrolled in Medicare, you can no longer contribute to an HSA, but you can still use the money for out-of-pocket medical expenses.

What are health reimbursement accounts?

HRAs are:

Funded entirely by Employer (no employee contributions)
Account owned by Employer- funds stay with employer if employee leaves company
Reimburses health insurance premiums and medical expenses
Money is reimbursed for expenses/premiums after they are incurred and receipts are provided
Employees must have health insurance (minimum essential coverage) to participate
Tax free for both employee and employer

See how HRAs work in your location!

How do HRAs work in 2023?

An HRA is pretty straight-forward: the employer reimburses for premiums and medical expenses on a tax-free basis, and the employee chooses a plan that fits their needs. Employees are then reimbursed when they submit a claim.

There are a few HRAs available, but the newest (and dare we say, best) around are the ICHRA and QSEHRA. Both ICHRA and QSEHRA can work with HSAs.

We are so excited about these HRAs and all the benefits they offer, that we wrote comprehensive, in-depth guides to the ins and outs of both. 

Still have questions?

Hopefully we’ve cleared up some of the confusion, but perhaps you’re still wondering do HRAs and HSAs work together? The link above will spell that out for you, including the very specific IRS rules governing this topic. If your question is simply how do HRAs work, this post lists out a step by step guide. 

Other helpful resources: 

Need help making sense of how to get the most out of these two great tax-friendly tools? Our team of HRA experts is at the ready to chat with you on our website. You can also check out our guide on small business tax strategies for more ideas on how to play it smart. 

This post was originally published in 2022 and has been updated to reflect the latest regulatory and policy changes in 2023.