What Is the Difference Between a Health Reimbursement Account & a Health Savings Account?

Two health insurance options that have gained popularity compared to the conventional employer-paid health insurance are the Health Savings Account (HSA) and Health Reimbursement Account (HRA). The two have as many similarities as they do differences, and which plan is suited for your depends on your own circumstances, preferences, health, and how long you intend to stay at your current job.

Ownership

• In the simplest terms, the employer owns and contributes to the HRA, and a HSA is owned by the individual with the employer having the option to contribute to a HSA as a medlcal benefit to their employee. When employment ends with a company, the funds in a HRA are left behind; an individual who has a HSA will retain ownership of those funds. So long as the funds are not used (for medical or other purposes), the account acts much like a 401K account.

Premium Payment

• HSAs do not cover health insurance premiums. As a fringe benefit, HSAs are normally offered in conjunction with an employer-paid high deductible insurance plan. The HSA is meant to cover the high deductible in the event its needed, as well as co-pays or other costs. The HRA, on the other hand, can be used to pay insurance premiums of your choice, along with any other health-associated costs incurred by the employee.

No Money Needed

• For HSAs, regardless of who contributed (employee, employer or both), there must be money in the account for it to be withdrawn and used. With HRAs, because it's not an actual account but merely an employer-owned option, there need not be money in the account for it to be used. The employer merely needs to write a check for qualifying medical expenses, and accounting must categorize the expense as "HRA Expense".

Retirement Benefits

• Prior to 65 years of age, there is a 10 percent penalty, much like Individual Retirement Accounts (IRA), to make withdrawals for non-medical purposes. Once the individual reaches 65 years of age, he is allowed to withdraw funds from a HSA for any purposes without penalty, but must pay tax at his normal rate; all withdrawals for medical purposes remain tax-free. Unlike HSAs, funds can be withdrawn from HRAs only for medical purposes.

Tax-Free

• Employers fund and own HRAs so there is no tax benefit to the employee. On the other hand, all individual deposits to a HSA are tax-free, and accrue interest like an IRA; all employer contributed funds are tax-deductible to the employer, and also accrue interest. All of the funds in a HSA rollover to the next years, regardless of employment status; HRA funds are rolled over at the employer's discretion.