Should Your Business Offer an HRA or HSA?
HRAs and HSAs are two very popular, tax-advantaged healthcare savings plans. These plans differ in several ways, including who is eligible to participate, where contributions come from, and what kind of health plans can be combined with them. Before deciding which one is better for your company, it is important to understand what these plans are, what benefits they provide, and the key differences between them.
What Are HRAs and HSAs?
An HRA is a health reimbursement account, designed to help employees pay for qualified medical expenses. It is owned by the employer, and only the employer can fund it. There is no limit to the amount an employer can contribute to an HRA. Unspent funds accumulated in an HRA are forfeited when the employee leaves the company.
An HSA is a health savings account. It is specifically linked to a high deductible health plan (HDHP) and designed to offset out-of-pocket expenses with this type of plan. In 2021, the maximum employee contribution to an HSA allowed by the IRS is $3,600 for an individual and $7,200 for a family. HSAs can be funded through pre-tax payroll deductions, which lowers the employee’s tax bill. Employers may also contribute to HSAs, but the cap remains the same.
What Are the Benefits of Offering HRAs and HSAs?
HRAs and HSAs have several important benefits in common:
- It is easy for employees to participate in these healthcare savings plans.
- Both types of accounts will allow you to contribute as an employer, demonstrating that you are invested in your employees’ and their families’ health and welfare.
- Tax-advantaged spending power with both HRAs and HSAs promotes healthcare and enables employees to take better care of themselves. Healthier, happier employees means less time away from work and greater productivity.
- Both HRAs and HSAs allow employers to make distinctions in plan level and how much to contribute, based on genuine business classifications, provided they do not discriminate in favor of highly compensated individuals. Examples of such classifications include full-time vs. part-time, type of occupation, and length of service.
What Are the Key Differences Between an HRA and an HSA?
HRAs and HSAs offer different advantages for both employers and employees.
HRAs have several important advantages over HSAs, including:
- Unlimited contributions
- Plan design options (i.e., “first dollar” or “last dollar”)
- Employer recouping of contributions (unspent balances expire at end of plan year; employees leaving the company forfeit the funds)
- Encourages health spending (“use it or lose it” aspect)
- Available with more types of health plans (not only HDHPs)
- Fewer eligibility restrictions
- Funds can be used to pay health insurance premiums
HSAs also offer certain advantages, including:
- Lower premiums with HDHPs
- Unspent balances rollover
- Balances can be invested for compound growth opportunities
- Easier and less expensive to administer
- Encourages employees to be more educated healthcare consumers
Both HRAs and HSAs have benefits for employers and employees. No matter which you decide your business should offer, our knowledgeable agent can help.