You may have heard about Health Savings Accounts and Health Reimbursement Arrangements. Although the two are both tax-advantaged accounts and have close acronyms, they are very different. In certain situations, you might be able to get tax advantages with both an HSA and an HRA, so here’s more information about how they work.
Ownership. According to rules set by the IRS, HRAs are available to C-corps, S-corps, and Schedule C sole proprietors whose spouse works for the business. Health Savings Accounts are available to just about anyone. Even if your employer contributes to your HSA, only you own the funds.
HRAs are employer-sponsored plans that are used to reimburse employees for medical expenses and insurance premiums. Since they are owned by the employer, when an employee leaves the job, they lose access to those funds.
Eligibility. You need a qualified high-deductible plan to set up an HSA. Qualified plans for an individual must have a deductible of at least $1,200 and a family plan must have a deductible of at least $2,400. Not all plans in that deductible range will let you start an HSA, though.
As for an HRA, you are not even required to have a policy. Your employer sets rules for how you’ll be reimbursed for health care costs.
Contributions. HRAs do not have annual maximum or minimum contributions, and only your employer can fund the account. You cannot take a tax deduction on those contributions.
Health Savings Accounts, on the other hand, have an annual maximum contribution set by the IRS. For 2012, the maximum contribution for individuals is $3,050 and it’s $6,150 for family plans. These contributions are tax-deductible.
Balance. HSA funds are rolled over year after year. With HRAs, that’s up to your employer.
Here’s a tip. You are allowed to use your HSA with an HRA as long as you do not use HRA money to pay for health care that counts toward meeting the deductible on your HSA plan. If you’re in a position to take advantage of both an HSA and an HRA, you may be able to save thousands of dollars a year.
Wiley Long is President of HSA for America, and a passionate advocate for consumer-based solutions that will improve price transparency and lower health insurance and medical costs for people purchasing individual and family health insurance plans.