HRA vs HSA: Which benefit is better for your business?

With healthcare costs steadily rising, additional healthcare benefits are an increasingly important part of a competitive package. 

For US-based businesses, two such benefits are Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs). These accounts help employees pay for medical costs not covered by their standard health insurance plans.

In this article, we’ll break down the differences between HRAs and HSAs, and help you decide which is the right fit for your business.

First, we’ll look at HRAs.

What is an HRA? 

An HRA is an employer-owned and funded plan that reimburses employees for the medical expenses not covered by their health insurance. All employees are required to receive the same HRA allowance.

Although HRAs are often referred to as accounts, they are actually reimbursement agreements between you, the employer, and your employees.

Note that employees can only be reimbursed for “qualified” medical expenses, as defined by the Internal Revenue Service (IRS). These are typically “costs incurred to alleviate or prevent a physical or mental ailment,” such as prescription medications or annual physical exams. 

Employers determine which qualified medical expenses can be reimbursed and outline this information in their HRA plan. 

Some types of HRAs also allow employees to use funds to purchase their own health plans from the Health Insurance Marketplace, which saw a record-breaking 15 million enrollments for 2024. 

Typically, employees pay for medical expenses upfront and then provide proof of payment in the form of receipts or invoices. If the claim is accepted, they will be reimbursed. Alternatively, employers can provide employees with designated HRA debit cards for making payments toward qualified expenses. 

The biggest advantage of HRAs is their flexibility. On the employer side, they offer a less expensive alternative to traditional health insurance plans. Certain HRAs also give more control to employees by allowing them to opt for plans that suit their specific needs.

In addition, HRAs have tax benefits. Employees are able to use the money for medical expenses tax-free, and contributions are 100% tax-deductible for companies. 

A disadvantage of HRAs, however, is that employees can’t contribute to them. Employers have total control over contributions and allowed uses. Additionally, HRA funds are not typically portable. This means that when an employee leaves a job, the funds will stay with the employer. 

Types of HRAs 

There are several types of HRAs employers can choose from to suit their business needs, such as:  

Integrated (Standard) HRA: Integrated HRAs are combined with group health insurance to help employees cover out-of-pocket healthcare costs. Employees must be enrolled in the company’s group plan in order to participate.  

Individual Coverage HRA (ICHRA): An ICHRA is a new type of HRA that gives employees an individualized alternative to group health coverage. Some employers will choose to only reimburse insurance premiums, while others will also cover additional expenses approved by the IRS. ICHRAs are gaining popularity, with employee enrollments up significantly in recent years. 

Excepted Benefit HRA (EBHRA): This is another newer HRA that supplements a group health insurance plan. It involves employers putting aside a fixed amount of money to reimburse employees for additional “excepted” expenses that aren’t covered by health insurance. Employees don’t have to be enrolled in the company group plan to participate. 

Qualified Small Employer HRA (QSEHRA): QSEHRAs are designed for small businesses with under 50 employees that don’t offer group health insurance. They allow employees to be reimbursed for certain healthcare expenses, such as insurance premiums, which cost more than $8,000 per year.

Who is an HRA for?

An HRA can be especially valuable for smaller or newer businesses that may not be able to afford a traditional group health plan. 

Since the employer sets a fixed contribution amount and determines reimbursable expenses, you ultimately have more control over costs. This helps you avoid high premiums and other unexpected expenses that often come with standard group health insurance. 

Companies with US-based remote workers can also benefit from HRAs. This is because HRAs help reduce the administrative work involved in managing traditional health plans. A reimbursement arrangement is an easier alternative to navigating multiple plans across different locations.

What is an HSA? 

Conversely, an HSA is an employee-owned account that can be used to cover qualified medical expenses. It helps offset the risk of high costs of a high-deductible health plan (HDHP). 

Employees decide how much money to contribute to their HSA each pay period and do not have to pay taxes on their contributions. The IRS sets the maximum contribution amount, which is currently limited to $4,150 for individuals and $8,300 for family coverage. Withdrawals are not taxed as long as they are used for medical expenses. 

A notable advantage of HSAs is that there is no “use it or lose it” policy. Any unused balances at the end of the year can be carried forward. They are also portable, which means that the money will stay with the employee even if they leave their job. Contributions can even be invested, supporting your employees’ long-term savings plans. 

However, employees must be enrolled in an HDHP. These types of plans involve higher out-of-pocket healthcare costs before benefits kick in, which may not be suitable for all individuals. 

Another drawback is that HSAs can be complex to understand. According to Forbes, 40% of people with HSAs don’t know how they work, meaning you may be required to provide additional education.

Who is an HSA for?

An HSA is well-suited for companies that offer an HDHP and want to help employees save on healthcare expenses. They are also ideal for businesses that prioritize tax advantages. 

Employee contributions to HSAs are tax-deductible for businesses, and employers don’t pay payroll taxes on employees’ pre-tax contributions. HDHPs also have lower premiums, which can reduce cost-sharing expenses.

In addition, HSAs allow employers to go beyond standard healthcare by giving employees more ownership over their decisions and helping them save for the future. As an indication, the average HSA balance was $4,397 in the first six months of 2023. 

It’s a popular choice for employees, who have the opportunity to invest their funds and stay prepared for out-of-pocket costs (or medical costs during retirement). Money in HSAs can also serve as a cushion for unexpected medical emergencies, helping employees feel more secure.

As a result, this is an excellent benefit to offer.

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HRA vs HSA: The key differences

As you can see, both HRAs and HSAs help reduce healthcare costs by allowing employees to use funds to pay for qualified expenses. They also provide several tax benefits for both employees and employers. 

However, the two vary greatly in terms of functionality. Here are some of the main differences:

Participation

In order to be eligible for an HRA, employees need to work for an employer who offers this arrangement as part of their benefits package. They do not have to be enrolled in a specific type of health plan, but do need to meet the specific eligibility requirements the employer has set. 

As mentioned, an HSA is only available to employees who are enrolled in an HDHP. They can’t participate if they are covered under another type of health insurance plan or enrolled in Medicare. In addition, they are unable to contribute to an HSA if they are claimed as a dependent on someone else’s tax return.

Ownership 

An HRA is fully owned and funded by the employer. This means employers have total control over the plan’s design, requirements, and limits. As such, when an employee leaves a job, the funds in the HRA will typically remain with the employer. 

An HSA, on the other hand, is owned by employees, which gives them more ownership over planning their healthcare and managing expenses. The funds in HSAs are also portable. Employees are able to keep the money after leaving a job, switching to a lower-deductible plan, or retiring. 

Contributions 

Only employers can contribute to HRAs. While there is no annual contribution limit for standard HRAs and ICHRAS, QSEHRAs and EBHRAs have IRS-established annual limits. Contributions are also tax-deductible for employers and tax-free for employees. Plus, employers are able to change their contribution amount in specific circumstances. 

On the other hand, the employer, the employee, and the employee’s spouse and family members can all contribute to an HSA. These contributions are made with pre-tax dollars, and the IRS determines the maximum contribution limit. Employees have the opportunity to adjust their contribution amounts throughout the year. 

Investing

HRA funds can’t be invested and do not grow year over year. 

Money in HSAs, however, can be invested. This gives employees an opportunity to grow their funds tax-free and save for retirement. 

Withdrawals

With HRAs, employees typically need to pay for expenses upfront and are reimbursed afterward. Funds can be used for qualifying medical expenses, which are established by the employer.

With an HSA, employees are able to withdraw money to pay for medical costs. These funds can technically be used for any reason. However, withdrawals that are not for qualified medical expenses before the person reaches age 65 will result in a 20% tax penalty. 

Rollovers 

In most cases, unused funds in HRAs are subject to the “use it or lose it” rule. This means the money must be spent in the same year it is contributed; it will not roll over to the next year.

However, the money does not have to be used in the same year as the contribution for HSAs. Leftover funds in HSA accounts can be rolled over from year to year.

HRA vs HSA: Which is best for your business?

HRAs and HSAs both offer unique advantages, and deciding which one to use ultimately depends on your company’s specific structure and circumstances. 

An HRA is a good choice for smaller businesses and other companies with budget restrictions, as it gives employers the opportunity to control costs. There are also several different types that can be customized to your needs, which makes them ideal for companies that value flexibility. In addition, HRAs offer remote employers a simpler way to manage employee benefits across multiple locations. 

If your company currently offers HDHP, an HSA may be a better fit. HSAs also support your employees’ long-term financial wellness and empowers them to become more engaged in their healthcare decisions. This can give your company a competitive advantage when recruiting talent. 

Offer competitive benefits with Remote

Deciding to offer an HRA or HSA gives your company a definite edge in the US job market. These accounts offer tax advantages, flexibility, and peace of mind, helping you to attract — and retain — the best talent.

However, it can be challenging to manage benefits, especially if some or all of your workforce are based remotely.

When you use Remote’s employer of record (EOR) service, you can handpick the best benefits for your new and existing hires. Our local experts can provide guidance on which benefits are the most suitable for your business, whether your people are based in the US or abroad.

To learn more about how it works — and how you can start providing a game-changing benefits package — speak to one of our friendly experts today!

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