Difference Between HRA and HSA

HSAs and HRAs are both tax-advantaged ways to help employees pay for medical care. 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 a Health Savings Account (HSA) and a Health Reimbursement Arrangement (HRA), also referred to as a Health Reimbursement Account—along with how both of these types of accounts work.

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How does an HSA work?

An 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 There’s no “use it or lose it” rule for HSA funds, so the money keeps growing from one year to the next if it’s not withdrawn.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 HSA tax benefits:

In order to contribute money to an HSA, the person must have an HSA-qualified high deductible health plan (HDHP), which tends to have a lower premium than a traditional health plan.
Once the money is in an employee’s HSA, it’s theirs to keep for healthcare costs. If they leave the job, they get to take it with them. They can also us it to pay COBRA premiums for continuation coverage.
HSA money can be withdrawn tax-free to pay for qualified medical expenses at any time.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.)
HSA distributions are also tax-free when they’re used to pay for or be reimbursed for qualified medical expenses.
Contributions to an HSA can be employer-funded, employee-funded, or they can be funded by anyone else, but the combined contributions can’t exceed the annual limits set by the IRS.
HSAs and flexible spending accounts (FSAs) can’t be used together unless it’s a limited-purpose or dependent-care FSA.
For 2023 and 2024, the contribution limits are:

Coverage Type	2023 annual contribution limit	2024 annual contribution limit
Individual HDHP	$3,850	$4,150
Family HDHP	$7,750	$8,300

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

How does an HRA work?

An HRA allows employers to reimburse their employees for medical expenses. If a small employer also can’t offer a health insurance plan to employees, HRAs provide an alternative option.

Employer contributions are tax-deductible and are 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 eligible expenses and/or reimburse deductibles, copays, or coinsurance costs.

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-related out-of-pocket 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 eligible 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 2023 and 2024, the minimum HDHP deductibles are:

Coverage type	2023 minimum deductible	2024 minimum deductible
Individual HDHP	$1,500	$1,600
Family HDHP	$3,000	$3,200

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 plan 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 health benefits you can afford while providing support for your employees.

In addition, once an employee’s out-of-pocket costs for covered medical care meet the out-of-pocket limit for what can be paid for covered care, then health plans pay the full amount for covered services. For 2023 and 2024, the maximum HDHP out-of-pocket maximum amounts for individual and family coverage are:

Coverage Type	2023 Out-of-Pocket Maximum	2024 Out-of-Pocket Maximum
Individual HDHP	$7,500	$8,050
Family HDHP	$15,000	$16,100

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 vision and dental expenses 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 health insurance premiums 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.