Know the differences between HRAs and HSAs

Acronyms. Oh how we love acronyms. Except when they cause confusion among readers, who might make the wrong decision about their health care spending because of a simple misunderstanding.

So let's cut through the jargon, the acronyms and the confusion, and get down to deciphering health reimbursement arrangements (HRAs) and how they compare to health savings accounts (HSAs). These are two account types that are designed to give you financial support for health care needs, but which differ in some key ways.

First, a brief review of HSAs

HSAs are tax-free health savings accounts that allow consumers to set aside tax-free dollars to purchase medical products and services. Plus, consumers can take advantage of the triple tax advantage offered with an HSA (contributions, qualified distributions and interest are all done tax-free).

More importantly, an HSA is an account you own, not your employer. Wherever you go, it goes with you. And it serves as a rock solid supplement for your retirement.

(Of course, this is a very basic overview of HSAs -- for a much more thorough look at everything HSAs offer, start here.)

Alright, so what's an HRA and how does it compare?

An HRA is an account designed to pay for medical expenses you incur that your standard health insurance plan does not cover.An annual allowance on spending from the account is established by your employer, which is then used to reimburse you for eligible out-of-pocket medical expenses, after they happen.

Employers also often define what you can use your HRA on, so you may be limited to more common costs like copays and coinsurance, or you may have an HRA that's wide-open to all eligible medical expenses including over-the-counter items.

Payments made into an HRA are tax-deductible to your employer, while the reimbursements are tax-free to you.

But here's the hook -- much like flexible spending accounts (FSAs), HRAs are owned by your employer. In other words, if you take a new job with a different employer, your HRA isn't making the trip with you. In fairness though, HRAs are funded solely by your employer; you're unable to contribute as with an HSA or FSA.

To draw a comparison, an HSA is something you own. With an HSA, if you switch jobs, you take the account with you. All funds within the account remain yours, and rollover from year to year. HSAs can be used for all IRS-approved healthcare expenses.

This includes your deductibles, copays and coinsurance, alongside other types of medical expenses that are not covered under your regular health insurance plan like vision and dental care. Just remember, they can't be used to pay your monthly insurance premiums.

How do HRAs work, exactly?

Company-owned HRAs are paid into solely by your employer and the rules around how and when they can be used are also defined by your employer.

With an HRA, only out-of-pocket medical expenses are eligible for reimbursement. This may include out-of-pocket expenses your health plan doesn't cover, as well as other qualified expenses that are defined by the IRS and approved by your employer.

Worth noting: Something listed as an IRS-approved expense won't necessarily be an employer-approved expense. So, you'll want to check with your plan administrator regarding the specifics of what your HRA actually covers.

This is a stark contrast to an HSA, where, in addition to your financial contributions, your employer and family members can make contributions. HSAs are real money accounts that accumulate interest over time.

It all comes down to preference

Like we mentioned, employers are the only ones that can contribute to an HRA, and the reimbursement can only happen after the expense is made. HRAs do offer some areas of flexibility because they can be used with most types of health insurance plans, unlike HSAs, which require an HDHP to qualify. Plus, there is no maximum contribution limit set by the IRS, but limits are set by the employer.

Ultimately, HSAs and HRAs are two account types designed with the same goals in mind. And both offer significant advantages depending on your health and financial outlook. If you're considering adding either of these account types to your health insurance plan this coming year, be sure to speak with a financial professional to find the account that best suits your family's needs.

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