HRAs + HSAs = Better Together?
Published on September 13th, 2023
Health reimbursement arrangements (HRAs) and health savings accounts (HSAs) have several things in common – notably, their tax-advantaged status. Both create an opportunity for significant savings, for employers as well as employees.
So can they be combined to maximize these tax benefits? The answer is yes, provided you follow some key rules.
Considerations & limitations
Pairing an HRA with an HSA is subject to certain regulations, including those set and enforced by the IRS. To open and contribute to an HSA, the account holder must be enrolled in a qualified high-deductible health plan (HDHP). And the HDHP must meet IRS criteria including specific minimum deductible and maximum out-of-pocket limits. It’s important to ensure that the paired HRA does not provide coverage that would disqualify the HDHP from HSA eligibility.
To remain eligible for an HSA, two options are a limited-purpose HRA or a post-deductible HRA. Limited-purpose HRAs are designed to cover only specific expenses, such as dental, vision or preventative care, until the employee meets their HDHP’s deductible. Post-deductible HRAs pay or reimburse for preventative care or medical expenses incurred after the minimum annual HDHP deductible is met.
Similar, less common types of HRAs that can work with an HSA include retirement HRAs (which cover eligible expenses incurred after retirement) and suspended HRAs (wherein the account holder elects to forgo reimbursement during a specified coverage period).
Further, the account holder can’t double-dip, or use both accounts to pay for the same expenses. In other words, if an expense is reimbursed from their HRA, then they can’t also withdraw money from their HSA to help cover the same expense. It’s essential to coordinate contributions and reimbursements effectively to maximize outcomes while complying with IRA rules.
This is where a skilled benefits administrator can play a crucial role in protecting the employer and employee from penalties. And because regulations are subject to change over time, staying informed about the latest rules and guidelines is another value administrators bring to their employer clients.
Advantages of pairing an HRA with an HSA
Both HRAs and HSAs help consumers manage and pay for qualified medical expenses. It logically follows, then, that having two accounts is better than one. Advantages include:
Tax advantages – As mentioned above, both HRAs and HSAs offer the potential for tax savings. HSAs provide a triple-tax advantage – contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified expenses are tax-free. HRAs, meanwhile, are funded by the employer and not included in the employee’s taxable income – making them feel a little bit like “free money”!
Cost savings – For the employer, total costs (medical plan premiums plus HRA administration and reimbursements costs) are often less with a higher-deductible (lower-premium) medical plan and HRA combination than with a lower-deductible (higher-premium) medical plan alone.
Employer contributions – Employers can contribute to both HSAs and HRAs on behalf of their employees, on a tax-deductible basis. What’s viewed as a perk to employees happens to also benefit the employer.
Portability – Both types of account are generally portable, although the specific rules depend on how the employer’s plan is set up.
With medical expenses continually on the rise, having an HRA and HSA simultaneously can relieve more of the financial burden for consumers while allowing them a chance to save for retirement. You might call that a greater outcome than the sum of its parts.