Physicians who want to take control of their health care budgets should know whether their employers offer HRA or HSA accounts. When deciding on a health spending account, knowing which one best suits your needs depends on understanding the differences, similarities and benefits of each.
The Big Picture
The goal of health spending accounts, both HRAs and HSAs, is to provide employees with healthcare coverage they can afford, while enabling the financial support needed to pay for medical expenses. This type of consumer driven plan inspires participants to become more involved in decisions that affect their well-being by giving them control over where their dollars are spent.
These two types of accounts are associated with a high deductible health plan (HDHP), the minimum amounts for which are determined on an annual basis. Each fund type has its advantages for those sponsoring the plans as well as its members, and are not subject to income tax. Both types of plans also allow unused funds to rollover to the following year. But the similarities end there. Eligibility requirements, account ownership, fund portability, and usage & contribution details help distinguish one from the other. If your employer offers both, these factors, along with your individual circumstances, will help answer the question, “Which should I use?”
Types of Health Spending Accounts
Health Savings Account (HSA)
Funded by individuals, using pre-tax earnings, this type of health reimbursement account is essentially a savings plan for healthcare expenses. How much money you can invest in the account is based on the number of people in your family, and the account itself is owned by you personally. The money can be withdrawn at any time without penalty, as long as it's used to pay medical expenses; any funds withdrawn for an alternate purpose are taxable and will incur a 20% penalty. Tax-free interest can accrue on an HSA, though the amount will vary by institution, and the funds are portable, meaning the balance is not forfeited if the employee changes jobs, or healthcare plans.
Health Reimbursement Arrangement (HRA)
Employees who are ineligible for an HSA, yet who are still enrolled in an HDHP, are eligible for an HRA. These types of employer funded health reimbursement accounts are available to the employee to cover out of pocket medical expenses, but unlike HSA funds, HRA accounts are not owned by the employee and are forfeited should you change healthcare plans or jobs. Unlike an HSA, the account is funded with credits, rather than actual dollars, which are supplied by the employer or health care plan; actual cash flow only occurs once money is needed to cover medical expenses. Contribution limits are capped by the employer, and the employee is unable to provide additional funds.
What Types of Expenses Are Covered?
While neither of these health reimbursement accounts can be used to pay health insurance premiums, HSA funds can be used to pay the deductible portion of a healthcare plan. An HSA may also be used to pay for the following:
- Cancer screenings.
- Well baby checkups.
- Orthodontic and other dental expenses.
- Vision care.
HRA's cover a number of expenses as well, including:
- Prescription and over the counter medications.
- Vision care.
- Preventive care.
Age Isn't Just A Number
If an employer offers both types of health reimbursement accounts, and you're 55 years of age or older, consider an HSA. This type of account allows for "catch up contributions", where employees between the ages of 55 and 65 can contribute as much as an additional one thousand dollars per year, until they are enrolled in Medicare, funds which can also be used as an income tax deduction.
Advantages For All
Sponsors and members alike, can enjoy the benefits of both HRA and HSA funds. From a sponsor's perspective, an HRA offers control over plan design, helps to retain employees, and has an added friendly benefit. Advantages of an HSA include:
- Less paperwork.
- Increased onus on members to manage funds and spending.
- Tax benefit to employers.
For members, an HSA offers a multitude of advantages including investment potential, payroll-based deductions, flexibility in choosing your preferred physician, and asset growth. Advantages of an HRA for members include fund availability from day one and employer-centric contributions.
Choosing between health reimbursement accounts, where an employer offers both HRA and HSA options, depends on your age, needs and eligibility. Both are designed to benefit both the employer and employee, and make healthcare more affordable, and accessible to all.
For more information about how HSAs and HRAs can lower your healthcare costs, reach out to one of our trusted advisors.