Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs) are two tools that your clients can use to manage their spending. While both provide support to pay for healthcare expenses, HSAs and HRAs differ in key ways.
By being informed about each tool and the options they present, you can guide your clients effectively and help them make investment decisions that are in their best interest.
What is an HSA?
A Health Savings Account (HSA) is a tax-favored account that must be linked with a high-deductible health care plan. As the name suggests, it’s a savings account intended to pay for a large range of medical expenses — from doctor visits to prescription drugs. HSAs typically come with a debit card or checkbook.
Most people contribute to an HSA through pre-tax payroll deductions, which helps lower their tax obligations. For 2019, individuals with single coverage can contribute up $3,500 per year to an HSA. Families can contribute up to $7,000.
What is an HRA?
A Health Reimbursement Account (HRA) is controlled by an employer and 100 percent employer funded. Although HRAs can be offered with any type of health care plan, most don’t pay interest or allow individuals to contribute directly. Unlike HSAs, many HRAs do not have contribution limits.
Comparing HSAS and HRAs
Because of their similar sounding acronyms, it can be easy to confuse HSAs and HRAs. To help your clients choose between a HSA or HRA, here is a breakdown of the key differences.1. Rollover eligibility
There are two types of HSA rollovers. The first simply involves carrying over unused funds from one year to the next. HSAs allow clients to save unused funds and accrue interest. If clients are happy with their current HSA, they can let the funds grow protected from taxation.
The second type of HSA rollover involves withdrawing funds from one HSA and depositing them in another. The rollover must be completed within 60 days of the distribution or you’ll pay income taxes plus a 20% penalty on the amount. Clients are limited to one HSA rollover per year. Rollover contributions aren’t deductible or taxed as income. If your clients are looking to roll over their HSA, inform them about the IRS’ rules and potential fees charged by the provider for transferring funds.
The money in an HRA, on the other hand, might not roll over from year to year, depending on the plan. Some HRAs are truly “use it or lose it.” Unused funds in those plans revert back to the employer at the end of the year.
2. Tax advantages
HSAs provide three appealing tax benefits:
- Contributions are tax-deductible (or if made through a payroll deduction, they are pretax).
- Earnings accrue tax-free.
- Withdrawals for qualified health care expenses are tax-free.
- HRAs also offer tax savings. Since HRAs are funded by employers, reimbursements are tax-free for employees and excluded from their gross income.
3. Impact on retirement
HSAs can function like a traditional Individual Retirement Account (IRA) in retirement. Those aged 65 or older can withdraw HSA funds for non-medical expenses without being charged the 20% penalty. Withdrawals for qualified medical expenses will still be tax-free.
In most cases, HRA funds are not available to employees after retirement, although some companies have introduced a special HRA known as a Retiree Health Reimbursement Account (RHRA). Clients should speak with their employer about options available to them.
In general, both HSAs and HRAs can offer great value when it comes to managing health care costs. When helping clients plan for the future, consider the differences and similarities between HSAs and HRAs to help them prepare for inevitable expenses and plan for years of retirement ahead.
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