Industry Articles
HRA vs. HSA
There are several accounts that employers and employees may use to help fund employee healthcare expenses. Two major accounts are the Health Reimbursement Arrangement (HRA) and the Health Savings Account (HSA). These accounts can be used to pay for healthcare expenses not otherwise covered by a health plan. The accounts vary by tax treatment, who can contribute, what expenses can be covered and other factors.
The HRA is a type of account that reimburses employees for qualified medical expenses. These accounts consist of funds set aside by employers to reimburse covered individuals for the cost of services incurred. Employers can deduct the cost of, a HRA as a business expense under Internal Revenue Code 162. The HSA, on the other hand, is an account that is owned by an employee where contributions to the account are set aside to pay for current and future medical expenses. These accounts are used in conjunction with a “High Deductible Health Plan” (HDHP), but qualified participants cannot be enrolled in Medicare or be a dependent on someone else’s tax return. Below is a chart that shows some of the differences of these two accounts:
| Factor | HRA | HSA |
|---|
| Who Can Fund the Plan? | Employer Only | Individual, Employer and/or Employee |
| Funding Requirements | No Pre-Funding Required | Must be funded into a trust account – limited by the value of the HDHP each tax year OR $2,600 for single and $5,150 for family |
| Excluded Persons | S-Corp, LLC, LLP, Partnership Owners & Spouses, Sole Proprietors, Non-dependent Domestic Partners (Can also exclude part-time, temporary, seasonal and union employees, and non-resident aliens) | Medicare eligible person and Non-dependent Domestic Partners |
| Allowed Insurance | All insurances | Must own HDHP |
| Eligible Medical Expenses | All Eligible Code 213 Medical Expenses (excludes long term care services) | All Eligible Code 213 Medical Expenses (includes long term care services) |
| Can plan be funded by Salary Reduction? | No | Yes |
| COBRA Requirement | Yes | No – HSA Trust Account dollars owned by account holder |
| Discrimination Rules | Yes – must be non-discriminatory in design; not in utilization | Yes – if employer contribution made, must be comparable for similar persons (single v. family coverage) |
| Portability of Funds | No | Yes |
| Catch Up Funding | No | Age 55 and older can add $500 per year |
| Tax Treatment | Employer: deductible by the employer
Employee: non-taxable to the employee | Employer: non-taxable to the employee and deductible by the employer
Employee: funding is typically a post-tax contribution and deductible as a personal expense on the 1040 |
| Carry Over | Unused funds may be carried forward to subsequent years | Funds may be invested and earn interest non-taxable |
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