As an employer, you have a range of health insurance options to choose from when creating your employee benefits package. While it’s great to have more choices, there’s no denying that picking between them can feel overwhelming. You have all of the acronyms to deal with for a start. What does HSA mean? What about HRA or FSA? And how do all of these types of accounts differ from one another?
You need the answers to those questions before you can decide which account is best for your company and its people. And that’s where this article comes in. We’ll discuss the various plans available to your organization before honing in on the difference between HSA and HRA insurance accounts.
Understanding the health insurance accounts available to your business is the first step to making your decision. The good news is that you won’t have to spend ages sifting through an HSA, HRA, FSA comparison chart to do that. We’ll run through the basics of each type of plan so you know what you’re getting beforehand.
The HSA acronym stands for Health Savings Account. An HSA is a savings account held by an individual that allows them to save pre-tax dollars. The individual must be enrolled in a Health Plan-High Deductible (HPHD) to access this type of account. HSAs allow people to accumulate funds over time, which grow due to the interest rate attached to the account. They can then spend those funds on qualifying medical, optical, or dental expenses without paying tax on the money spent. HSAs can be used during an individual’s employment and into their retirement.
HRA stands for Health Reimbursement Account. These are employer-funded plans that repay employees for qualifying medical expenses, such as health insurance premiums. Think of them as an agreement between employer and employee. The employer reserves funds for the HRA, which go to the employee based on their health insurance needs. Employers can claim tax deductions for any reimbursements made via the HRA. Employees benefit too because the money they receive from the HRA is usually tax-free.
You can stop your search if you’ve been looking for an HSA vs FSA comparison chart or an FSA savings comparison table. If you’re wondering “what is the difference in a FSA and an HSA?” the answer is fairly simple.
FSA stands for Flexible Spending Account. The use of the word flexible should clue you into the key difference between FSA and HSA. Where the funds in an HSA can only be used for healthcare expenditures, employees are free to use the money in an FSA however they see fit. Beyond that, the funds in the account come from payroll contributions, like those in an HSA. Furthermore, the funds aren’t taxed, again like an HSA. However, there’s another key difference. An FSA is a spending account whereas an HSA is a savings account. As such, an FSA won’t generate interest on the money placed into it.
A Health Care Flexible Spending Account (HCFSA) is a cross between an HSA and an FSA. It’s similar to an HSA in that the money placed into the account goes towards healthcare expenses. HCFSAs differ from HSAs because they don’t require participation in an HPHD.
HCFSAs are similar to FSAs because these are spending accounts rather than savings accounts. But they differ because the funds can only be withdrawn for qualifying healthcare events. So, you get an account that’s tied into healthcare but doesn’t require you to be a member of a specific plan. That offers some flexibility, though an HCFSA is more restrictive than a standard FSA.
Now that you understand some of the insurance saving and spending accounts you can make available to your employees, it’s time to make a choice. Assuming you’ve decided not to offer a flexible plan, that decision boils down to choosing between a health reimbursement account vs. health savings account. These accounts differ in several ways.
As an employer, you have some HSA options when choosing how to fund the account. You could have employees save funds themselves. But you can also choose to fully or partially fund the account yourself, which would make the HSA similar to an HRA.
This is one of the most useful HSA options available to companies that want to use an HSA as part of their benefits package. By funding the HSA yourself, you relieve a financial and mental burden from your employees and provide assurance that their healthcare needs are met.
However, companies that don’t have the financial resources to provide an HSA can still offer one that employees fund directly. While this isn’t as directly beneficial as an employer-funded HSA, you can still use the interest generated by these accounts as a plus point when creating a benefits package.
You don’t have these HSA options with an HRA. All HRAs are fully funded and managed by the employer. That’s great for employees. But it means companies foot the bill for reimbursements. Furthermore, employees can’t put any of their own money into an HRA.
A big difference between HSA and HRA lies in the health insurance plans they can be integrated into. HSAs are limited in this regard. They can only be offered alongside an appropriate HPHD. By contrast, you can pair an integrated HRA with any type of group health insurance your business offers. Standalone HRAs offer similar flexibility because they pair with any individual health policies
Some of your employees may prefer this flexibility because it gives them more options when choosing healthcare providers. An HSA ties them to whatever providers and policies are built into the HPHD associated with the account, limiting employee choices in the process.
HSAs are bank accounts that an employee or employer pays into. These accounts generate interest on the deposited funds and allow the employee to make withdrawals depending on their healthcare needs.
Despite having the word account in the name, a Health Reimbursement Account is not a bank account. Instead, it’s an arrangement made between employer and employee. The employee makes healthcare payments from their own bank account. Then, the employer reimburses them for the sum of the payment.
This difference between HSA and HRA is important to understand because of what happens to each if the employee leaves your company. Employees can keep their HSA if they retire or change jobs. But an HRA is tied to the employer offering it, meaning the employee can’t take it with them if they leave.
As a straightforward savings account, an HSA allows your employees to withdraw funds as and when they’re needed. In this way, HSAs work like debit accounts, with the added component of generating interest on the funds placed into them.
Access to funds isn’t as simple with an HRA. As mentioned, the employee pays for their own healthcare expenses under an HRA. They then have to submit a reimbursement claim with their employer to recover those funds. This requires the employee to offer proof of their medical procedure, as well as forcing them to handle an upfront cost that might not be affordable.
Both an HSA and HRA help employees to handle healthcare expenses. But there’s a difference between HSA and HRA in terms of the types of expenses each account can cover.
Your employee can use an HRA to cover a wide range of healthcare costs, including direct medical expenses and the premiums they pay on any health-related insurance policies they have. HSAs are more restrictive because the employee can only use them to pay for qualified medical expenses. The expenses that qualify are outlined in the HPHD the HSA is tied into.
Unfortunately, health insurance premiums are not part of those expenses in most cases. If the employee has a personal healthcare policy, they have to handle the premiums using their post-tax income. However, an HSA can be used to cover insurance premiums once the account holder turns 65. There are also some specific instances where an HSA can cover premiums for those under 65.
As mentioned, HSAs are savings accounts that allow the account holder to use the funds they deposit as an investment tool. The funds deposited into these accounts can grow year over year, leaving a fortunate employee with a small nest egg of available healthcare funds when they retire.
HRAs aren’t investment tools, so the money placed into them doesn’t generate more money.
Generally speaking, an HRA isn’t subject to any maximum contribution limitations. In most cases, the employer can reimburse expenses without worrying about hitting a maximum total. The only possible exception to this is a Qualified Small Employer HRA (QSEHRA). These HRAs are available to companies that have less than 50 employees. QSEHRAs come with contribution limits of $5,450 per year for individuals and $11,050 for policies that cover families.
Though these limitations may be irritating for your employees, they’re higher than those applied to HSAs. An individual employee can contribute a maximum of $3,650, with this figure rising to $7,300 for families. Those aged 55 or older can also make additional catch-up contributions totaling $1,000 per year if they fell behind with contributions when they were younger.
It’s important to note that these contribution limits change annually. Employers should track these changes so they can inform their employees when needed.
Though both types of accounts have participation requirements, there’s a difference between HSA and HRA criteria.
The employee must meet the following criteria to be eligible for an HSA:
HRA requirements are far less restrictive:
Another difference between HSA and HRA accounts lies in the tax implications.
The funds that employees contribute to their HSA come from their pre-tax earnings. This is one of the reasons why HSAs can be effective investment vehicles. Account holders can generate income on earnings without paying tax on them, in addition to being able to pay for medical expenses without worrying about income tax.
HRAs have tax benefits too. However, these benefits apply mostly to the employer rather than the employee. Employers can deduct any contributions made to an HRA from their business taxes. In some cases, employees may also be able to pay for medical expenses using pre-tax income, which is then reimbursed via the HRA. But this isn’t a given, meaning the employee may have to use taxed income.
Both HRAs and HSAs offer benefits to employers and employees. With an HSA, your employee gains access to an investment vehicle that covers their healthcare needs. They can also make pre-tax contributions to their account. The main downsides are that HSAs are tied into specific health insurance vehicles, meaning they lack flexibility. Employers can also choose not to contribute, which places the cost of healthcare on the employee’s plate.
HRAs are employer-funded, which makes them a great benefit to offer to employees. This funding comes with strings attached though, with the main one being that employees have to pay for their own healthcare before submitting a reimbursement claim. This may not be possible for those who don’t have money saved. Still, HRAs are more flexible in terms of the types of healthcare costs they cover and because they provide employees with more choices when it comes to providers.
Weigh up your HRA and HSA options before making your choice. Finding the balance between the benefits each plan offers to your people and your business is key to your decision. That’s where Taylor Benefits Insurance Agency can help. With over 25 years of experience in creating group health insurance plans, we can help you to determine if an HSA or HRA is best for your business. We’ll also help you build the account you choose into your benefits package.
Todd Taylor, oversees most of the marketing and client administration for the agency with help of an incredible team.
Todd is a seasoned benefits insurance broker with over 35 years of industry experience. As the Founder and CEO of Taylor Benefits Insurance Agency, Inc., He provides strategic consultations and high-quality support to ensure his clients’ competitive position in the market.
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