Q: Can I Have an HRA and an HSA at the Same Time?

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.

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 There’s no “use it or lose it” rule for HSAs, so the money keeps growing from one year to the next if it’s not withdrawn.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).
  • 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  • HSA money can be withdrawn tax-free to pay for qualified medical expenses at any time.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.)
  • 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. 
  • For 2021 and 2022, the contribution limits are:
Coverage Type2021 annual contribution limit2022 annual contribution limit
Individual HDHP$3,600$3,650
Family HDHP$7,200$7,300

Note: If the HSA account holder is 55 or older, these contribution limits are increased by $1,000.

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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. It cannot, however, reimburse any costs associated with the employee’s HDHP deductible.

A limited-purpose QSEHRA is compatible with an HSA, but only if coupled with a premium-only QSEHRA (a QSEHRA that reimburses only premiums, not other health care expenses).

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.

For 2021 and 2022, the minimum HDHP deductibles are:

Coverage type2021 minimum deductible2022 minimum deductible
Individual HDHP$1,400$1,400
Family HDHP$2,800$2,800

Keep in mind, employers can choose higher minimums for their post-deductible HRAs. Here’s why: 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. As an employer, you’ll need to determine what you can afford while providing support for your employees.

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.

What’s an Individual Coverage HRA?

An Individual Coverage HRA (ICHRA) can be compatible with an HSA, but only if the employee has individual insurance not purchased through an exchange, and the ICHRA needs to be reimbursing only premiums and not medical expenses, though employees can fund the HSA simultaneously.

Otherwise, if employees want to use the ICHRA and HSA for premium and medical-expense reimbursements at the same time, the employee needs to be on a high-deductible health plan, the employer can’t offer a group health plan to other employees, and the ICHRA needs to be set up in a way where additional conditions are met and restrictions apply.

Gusto offers full-service support to employers by helping to select and provide the right benefits package. This can include administering small group health insurance or a QSEHRA, when combined with Gusto’s payroll services.

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