Health insurance premiums have been surging over the past several years, and as a way to offset the increases in cost, individuals are opting to enroll in a HRA or HSA account. These accounts are easily confused because their names are so similar, and they do have many similarities, but many key differences as well. Both accounts are designed to help make healthcare more affordable for workers and their families by providing financial support for health related expenses. Both accounts can be part of an employer-sponsored benefit plan, and some employers offer both. Members and account holders can use their funds to pay for qualified medical expenses such as dental treatment, doctor’s office visits and copays, surgery (with the exception of cosmetic surgery), eye exams and eyeglasses, flu shots, physical therapy, and drug prescriptions and over-the-counter medicines.
HSA (Health Savings Account)
A Health Savings Account (HSA) is defined as a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan. The funds contributed to an account are not subject to federal income tax at the time of deposit.
Am I Eligible?
To be eligible for a HSA, you must be enrolled in a high-deductible health plan (HDHP). There are no exceptions to this rule. A high-deductible health plan means you’ll be paying more out-of-pocket before your insurance kicks in, but in exchange, you get lower monthly premiums and the option to put money into an HSA to save up for your medical costs. For 2020, a HDHP is required to have a minimum annual deductible of $1,400 for single coverage and $2,800 for family coverage. The out-of-pocket maximum is $6,900 for individuals and $13,800 for families.
Who Owns the HSA?
An employee or individual owns their HSA account. The account can be funded by the employee or the employer. Because the HSA is personally owned, the employee can keep the account and transfer it when he or she changes jobs. Account holders are also able to invest their HSA funds once the account reaches a minimum threshold.
How Much Money Can I Put Into My HSA?
There is a limit to how much you can contribute to your HSA account each year.
• HSA Contribution Limits for 2020 (Employee + Employer)
◦ Single Coverage: $3,550 Family Coverage: $7,150
• HSA Catch-Up Contributions for 2020 (Age 55+)
◦ Single Coverage: +$1,000 Family Coverage: +$1,000
If you don’t use all of your HSA funds by the end of the year, don’t worry! Your HSA balance rolls over year to year, so you still have access to all the money in your account. You may contribute to your HSA each year and never need to use it to pay for medical expenses, but 10 years down the road a catastrophic event takes place and you have thousands of dollars saved up from over the years in your HSA to cover the possible high costs. You can even use your HSA funds in retirement and pay for medical expenses tax-free. Also, once you turn 65, your HSA acts like a traditional IRA and you can take out money for anything you’d like, but you’ll pay taxes on it when you do, just like a traditional IRA.
HRA (Health Reimbursement Arrangement)
A Health Reimbursement Arrangement (HRA) is defined as an employer-funded plan that reimburses medical expenses, and in some cases, insurance premiums. Employers offer employees a monthly allowance of tax-free money. Employees then buy the health care services they want, such as health insurance ,and the employer reimburses them up to their allowance amount. An HRA does not earn interest, and does not require a HDHP to be in place.
Am I Eligible?
If your employer offers a HRA and you’re a W2 employee, you and your qualified dependents (spouse, children) are eligible to participate in the plan and receive reimbursements 100% tax free. An owner can participate in the HRA as well, but how the company files, and the owner’s status determines if the owner can receive HRA reimbursements 100% tax free.
C-Corp owners may participate in a HRA and receive all HRA reimbursements 100% tax-free. Sole Proprietors, Partners, or S-Corp shareholders that own more than 2% of the company’s shares can use the HRA platform to reimburse and track medical expenses, but HRA reimbursements must be reported on the owners’ W2 and 1040 forms, and are subject to federal income taxes.
Who Owns The HRA?
According to IRS rules, the employer owns the HRA. When an employee leaves the company, retires, or is let go, any unused money stays with the company. There is usually a 90-day runout period when employees can submit reimbursement requests for expenses incurred during employment.
How Much Money Is Contributed Into My HRA?
HRA’s are fully funded by your employer, and the amount being contributed to the HRA is the decision of your employer. There are annual limits on contribution for QSEHRA (Qualified Small Business HRA), and the excepted benefit HRA. Each year, the IRS outlines these annual contribution limits through a revenue procedure. In 2020, small businesses may offer up to $5,250 per self-only employee and up to $10,600 per employee with a family. Other types of HRA’s, including the ICHRA, retiree HRA, and one-Eason stand-alone HRA, there are no contribution limits.
Which Plan Is Better For Me?
Carefully consider the pros and cons of each account and make the best choice for yourself based on the information. While there are advantages to each account, my recommendation would be to opt for the HSA if it’s offered to you. HSA contributions are tax-deductible, which could result in a larger refund or a lower tax bill. HRA contributions are only tax-deductible for your employer. The money you contribute to your HSA rolls over each year and continues to earn interest until you withdraw it. HRA money often becomes use-it-or-lose-it, because your employer decides whether or not you’re allowed to carry contributions over year to year. Also, your HSA can be used as a retirement planning tool. Withdrawals from an HSA for anything other than health care expenses would incur a 20% tax penalty and ordinary income tax. After the age of 65 though, you can withdraw money from your HSA for any purpose at all without being subject to the 20% penalty. You would only owe ordinary income tax. This is something to consider if you contribute through your working years and stay healthy, as a way to supplement retirement income.
If you aren’t enrolled in a HDHP and you aren’t offered a HDHP, an HRA is worth having. Remember it’s funded by your employer, so it is essentially free money to you.