Do HRAs and HSAs Work Together?

The world of health insurance is filled with acronyms. While they can be difficult to decipher, understanding them can help you better understand your healthcare expenses and leverage your health benefits to unlock significant savings.

“HRA” and “HSA” are two acronyms you may have come across. These stand for health reimbursement arrangements (HRAs) and health savings accounts (HSAs)—two popular options that employers and employees alike use to help manage rising healthcare costs. But the way they’re set up and their rules can leave individuals confused about how to use them at the same time for the best money-saving strategy.

In this article, we'll explore how HRAs and HSAs can work together as part of a comprehensive employee benefits package.

In this blog post, you'll learn the following:

• The tax benefits of HRAs and HSAs.
• What happens to unused funds in an HRA and HSA.
• How using both benefits together can help employees save on medical costs.

What is an HRA, and how does it work?

An HRA is an employer-owned and employer-funded health benefit. With it, employers can offer employees an allowance for eligible medical expenses which can include individual health insurance premiums. This way, employers don’t need to purchase a costly group health plan for their entire team.

Here's how it works:

• The employer chooses a monthly benefit allowance of tax-free money to offer each employee.
• Employees use their own money on the medical services that matter most to them.
• Employees submit proof of purchases to their employer or HRA administrator for reimbursement.
• After eligible expenses receive approval, the employer reimburses the employees up to their allowance amounts. Unused balances stay with the employer.

With more than 200 HRA-eligible expenses, employees can conveniently get reimbursed for a wide range of healthcare necessities.

Some of those out-of-pocket costs include:

• Monthly premiums for health, vision, and dental plans (with a stand-alone HRA)
• Vision expenses, such as contact lenses or eye exams
• Dental expenses, such as cleanings or orthodontia
• Preventive care services
• Emergency care services
• Prescription drugs
• Over-the-counter drugs

What is an HSA, and how does it work?

An HSA is a tax-advantaged savings account that employees can use to pay for qualified health expenses. To be eligible to open and contribute to an HSA, the employee must have an HSA-qualified high deductible health plan (HDHP). These plans typically feature lower premiums and higher deductibles compared to traditional health plans.

Employees can use their HSA funds to pay for several types of eligible healthcare expenses, including:

• Doctor visits
• Prescription medications
• Dental care
• Vision care
• Other medical services

Unlike an HRA, the employee owns the HSA. This means that funds in the account remain with the account holder even if they change jobs or health plans. Additionally, unused funds in the HSA roll over indefinitely and continue to grow if not spent.

Additionally, account holders may have investment options with their HSA. This allows employees to invest their HSA funds, which could enhance their savings for future medical expenses or retirement.

Can you have an HSA with an HRA?

Yes, you can have an HSA and an HRA at the same time, provided you're enrolled in a qualifying HDHP. However, the federal government has rules regarding how these accounts work together.

Employees can't use their HSA funds to cover medical expenses that their employer has already reimbursed through an HRA. It's important to ensure employees don't "double-dip" by seeking reimbursement from both benefits for the same expense.

Let's go over two popular HRAs that work well with HSAs: the individual coverage HRA (ICHRA) and the qualified small employer HRA (QSEHRA).

How the ICHRA works with an HSA

An employee is allowed to contribute to their HSA if their employer’s ICHRA solely reimburses monthly insurance premiums, provided they're also enrolled in an HDHP.

In this scenario, the employee can use their ICHRA to purchase an individual health insurance plan, contribute to their HSA, and tap into their HSA funds to cover additional eligible healthcare expenses until their annual deductible is met.

However, suppose an employer sets up the ICHRA to reimburse both individual insurance premiums and other medical expenses. Employees can't contribute to an HSA tax-free if an employer hasn't set up a Section 125 cafeteria plan. If they have a premium-only ICHRA and a qualifying HDHP, they can open and contribute funds toward an HSA—they just have to count those funds toward their taxable income.

But HSA funds don't expire, unlike HRA funds. This means an employee can choose to disregard their HSA while their employer offers an ICHRA. Once they're no longer participating in the benefit, they can pick up where they left off with their HSA.

How the QSEHRA works with an HSA

An HSA also works with a QSEHRA. But employers must modify the QSEHRA benefit for employees with HSAs. The easiest way to do this is to alter the QSEHRA into a limited-purpose HRA.

During the years when employees or their spouses contribute to their HSAs, they can only use their QSEHRA to reimburse four specific types of expenses before meeting their HDHP annual deductible.

These four expenses are:

• Health insurance premiums
• Dental expenses
• Vision expenses
• Long-term care premiums

These adjustments are required solely for employees who contribute to their own or their spouse's HSA while enrolled in the QSEHRA. Eligible employees who only want to use their existing HSA funds rather than contribute new funds to them don't need to change their QSEHRA.

HRAs vs. HSAs

HRAs and HSAs can help cover eligible healthcare expenses using pre-tax money. While you can use both benefits together, you can also use them separately.

Let's review a few key differences between HRAs and HSAs:

How PeopleKeep can help you manage your HRA

Although each HRA has its own unique features, they're all subject to a common set of federal regulations, including HIPAA and ERISA. Since these regulations can be challenging to deal with, many employers who offer an HRA work with an HRA administrator, like PeopleKeep.

With our ICHRA and QSEHRA administration platforms, employers can provide personalized health benefits to their employees in just minutes each month.

We simplify the process of providing HRAs by:

• Customizing HRAs to the specific needs of an employer's workforce.
• Reviewing employee reimbursement requests for eligible medical expenses.
• Creating legal plan documents.
• Sending automatic notices to employees.
• Providing award-winning customer support.

Plus, employees can shop for individual health coverage and ancillary benefits directly from their PeopleKeep dashboards. This makes it much easier for them to compare different types of health plans based on network type, metallic tier, or carrier.

Conclusion

While both HRAs and HSAs can offer considerable benefits, understanding how they complement each other is crucial for making informed decisions about your healthcare strategy. From their differing tax implications to their allowed uses, knowing how to leverage these accounts together can lead to significant savings and increased access to necessary medical care.

This article is for informational purposes only and shouldn’t be relied on for tax advice. To maximize your health benefits and ensure compliance with the law, you should seek advice from a legal or tax advisor.