HRAs and HSAs are both tax-advantaged ways to help employees pay for medical expenses. But they work very differently, and there are specific rules that have to be followed in order to use both of them at the same time.
Let’s start by understanding the difference between HRAs and HSAs and how they work.
How does an HSA work?
A Health Savings Account, or HSA, is an account in which eligible individuals can save pre-tax money to pay for future medical expenses.
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That money can be in a regular interest-bearing account, or it can be invested. There’s no “use it or lose it” rule for HSAs, so the money keeps growing from one year to the next if it’s not withdrawn.
There are a few basic rules—set by the IRS—that come with HSAs:
- In order to contribute money to an HSA, the person must have an HSA-qualified high deductible health plan (HDHP).
- Contributions to an HSA can be made by the employer, the employee, or anyone else, but the combined contributions can’t exceed the annual limits set by the IRS. In 2018, the maximum HSA contribution is $3,450 for individuals and $6,900 for family HDHP coverage. (If the HSA account holder is 55 or older, those contribution limits are increased by $1,000.)
- Once the money is in an employee’s HSA, it’s theirs to keep. If they leave the job, they get to take it with them.
- HSA money can be withdrawn tax-free to pay for qualified medical expenses at any time. This is true even if the person no longer has HDHP coverage. (You can’t contribute to an HSA if you no longer have HDHP coverage, but you can still withdraw money that’s already in the account.)
How does an HRA work?
A Health Reimbursement Arrangement, or HRA, allows employers to reimburse their employees for medical expenses.
Contributions are tax-deductible for the employer and tax-free for the employee. Unlike with HSAs, only employers can fund HRAs, and the money is only disbursed to employees when a qualifying medical expense is submitted.
There are also other IRS rules for HRAs:
- Employers can only offer HRAs in conjunction with group health insurance coverage.
- There is no contribution limit, and employers are allowed to reimburse any medical expense allowed by the IRS. But they can choose to reimburse only some of those expenses.
There is one important exception, however. Employers that have fewer than 50 full-time equivalent employees and do not offer group health insurance options can establish a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). QSEHRAs have contribution limits, but they can be used to reimburse employees for the cost of health insurance that the employees purchase themselves.
Can you have an HSA and an HRA at the same time?
Yes, but the IRS has some very specific rules that have to be followed in order for an employee to be contributing to an HSA and simultaneously receiving HRA reimbursements.
Typically, an individual has to have only HDHP coverage in order to contribute to an HSA. The exceptions are a few types of supplemental coverage like dental, vision, workers’ compensation, critical illness, accident, and fixed indemnity plans. The idea behind HDHPs is that individuals have to use their own money (which can come from their HSA) to pay expenses before the HDHP deductible is met, so employees who have access to HRA reimbursements for their deductible would not be eligible to contribute to an HSA.
But the IRS has created solutions that allow employees the best of both worlds: limited-purpose HRAs, post-deductible HRAs, suspended HRAs, and retirement HRAs.
What’s a limited-purpose HRA?
Limited-purpose HRAs allow you to reimburse your employees for expenses such as dental, vision, and preventive care costs. You can offer this limited-purpose HRA in conjunction with a group HDHP, allowing your employees the opportunity to use HSAs to save for future medical expenses.
The same expenses can be reimbursed with a limited-purpose QSEHRA, which can also be used to reimburse your employees for their health insurance premiums. It cannot, however, reimburse any costs associated with the employee’s HDHP deductible.
What’s a post-deductible HRA?
Post-deductible HRAs are also compatible with HSAs. A post-deductible HRA is essentially an HRA that has its own deductible. It can be used to reimburse employees for regular medical expenses—even before they’ve met their full HDHP deductible—but only after they’ve paid at least the minimum allowable HDHP deductible amount.
In 2018 and 2019, the minimum HDHP deductible is $1,350 for an individual and $2,700 for a family, but employers can choose higher minimums for their post-deductible HRAs. For example, if an employee has an HDHP with a $5,000 deductible and you offer a post-deductible HRA that allows reimbursements after the employee’s medical costs reach $1,500, there would be a clear benefit for the employee if they end up with more than $1,500 in medical expenses.
What’s a suspended HRA?
Suspended HRAs are another option for employees who have HDHP coverage and want to make HSA contributions. Before the HRA coverage period begins, the employee elects to suspend access to HRA reimbursements, which allows them to remain HSA-eligible. Employees with suspended HRAs can still receive reimbursements for expenses such as dental, vision, and preventive care costs, just as they could from a limited-purpose HRA.
What’s a retirement HRA?
With a retirement HRA, you can continue to contribute money to an employee’s HRA (and the balance can be invested and grow over time), but the money is not available until the employee retires. The HRA can only reimburse post-retirement medical expenses. Since the HRA funds aren’t available for withdrawal pre-retirement, the employee can still contribute to an HSA at the same time as long as they have HDHP coverage.
Note that these restrictions don’t apply if an employee has funds in an HSA but isn’t currently contributing to it. Those with HSAs can withdraw funds from their HSA and receive HRA reimbursements in the same year. But as is always the case when it comes to tax-advantaged accounts, there’s no double-dipping allowed: you can’t pull tax-free money out of an HSA and also seek a tax-free HRA reimbursement for the same medical expense.