The question of whether or not to offer an HRA or HSA to your employees can be a tricky one, especially when there are so many options out there.
Naturally, you want to choose an option that benefits your company and its employees and won’t want to make the wrong choice or end up with an HRA or HSA that nobody uses or benefits from at all.
So, should your business offer an HSA or HRA? We can help you determine which option is the best fit for your business and its employees and show you how to implement this successfully.
What Is an HSA?
The IRS describes Health Savings Account (HSA) as tax-advantaged savings accounts used to pay for qualified medical expenses. It’s a medical savings account available to taxpayers who are members of a high deductible health plan.
HSAs are similar to personal savings accounts; however, they are primarily used to fund health care expenses. You have total control of the money in your HSA; the best part? The deposits in these accounts are not taxed.
So, if you contributed $5,000 to a Health Care Savings Account in 2022, you only have to report $5,000 as income—that way, you get additional savings from paying less in federal income taxes!
What Is an HRA?
A Health Reimbursement Account, formally known as a Health Reimbursement Arrangement (HRA), is a tax-advantaged way to pay for certain medical expenses not covered by your health insurance, including deductibles, co-pays, and prescription drugs.
The account is designed to reimburse employees for out-of-pocket medical expenses. As the employer determines, the account can qualify for vision, dental, pharmacy, and medical expenses.
There’s no federal income tax deduction when you contribute to an HRA, but money inside is tax-free as long as it’s used for qualified medical expenses.
With an HRA, employees are never required to use any amount they put into it, so there’s little financial risk involved in participating, even if they get sick right after enrolling. This leads us to our next point…
Should Your Business Offer an HRA or HSA?
Health savings accounts (HSAs) and health reimbursement arrangements (HRAs) are two of a business’s best tools for providing high-quality healthcare coverage to employees. And while HSAs and HRAs have similarities, each option has certain features that make it more appealing for certain businesses.
A business doesn’t have to choose between both plans. Instead, they can offer both to maximize their tax-free compensation. However, before you select one—or neither—you need to know about these health-benefits options and their differences to help you make an informed decision on what is best.
Differences Between an HRA and an HSA?
Health Reimbursement Arrangements (HRA)
- Health Reimbursement Arrangements are primarily provided by employers and are unfunded by national accounts with less cash value.
- An HRA is a cafeteria plan that allows employees to pay for their medical expenses pre-tax. This means that you don’t have to pay federal and state payroll taxes on whatever amount your employees use for healthcare.
- Employers offer an HRA as a supplementary plan that allows employees to pay for qualified health care expenses with pre-tax dollars.
Health Savings Account (HSA)
- HSA is a tax advantage account that allows you to pay for IRS-defined Health expenses. This covers both COBRA Premiums and long-term care.
- An HSA, meanwhile, is both a healthcare spending account and a tax-advantaged savings account. Employees get an immediate federal income tax deduction of up to $3,400. In addition, if they enroll in an HSA, employers aren’t required to contribute anything.
- Contributions made to an HSA aren’t tax-deductible, but withdrawals used to pay for qualifying medical costs are exempt from federal income taxes.
Because of these significant differences between HRAs and HSAs, some employers will choose one over another—but there are advantages to offering both plans. For example: If you offer an HRA and an HSA, your employees can choose whichever works best for them in any given year.
Can a Company Offer an HRA and HSA?
A company can offer these plans in conjunction, but they must be structured differently. However, it is important to understand how both HSAs and HRAs work. The best option will depend on your circumstances. To understand the advantages of having both plans, let’s look at their benefits.
What Are the Benefits of Each Plan?
While there are benefits to both, here’s what you need to know to make sure your business offers a plan that meets its needs. To get the best value, it is important to know the benefits of each plan.
Advantages to Employer
HRA:
- Control over health reimbursement arrangements HRA plan.
- It serves as an employee retention tool.
- Offers employers tax-favored benefits.
HSA:
- Employees enjoy health-related coverage in retirement.
- It offers employers the flexibility to either choose to contribute or not.
- Employer tax benefit.
- Reduce the need for record-keeping.
- As a result, members can become more engaged in their spending and health care behavior.
Advantages to members
HRA:
- Asset accumulation.
- Funded by employers.
- It does not require an HDHP.
Benefits of Offering both Plans (HRAs and HSAs)?
An HRA (Health Reimbursement Arrangement) or HSA (Health Savings Account) are both types of tax-advantaged savings accounts that can help you cover your health care costs.
However, an HRA only pays out to payees who have contributed to the account, while an HSA can be used by anyone in your household with a qualifying medical condition.
If you’re thinking about offering both of these plans to your employees, here’re some benefits:
- More than anything else, it is easy for employees to participate in both healthcare saving plans.
- Both HSA and HRA allow you to contribute to the health and welfare of your employees.
- The tax advantage of HSAs and HRAs promotes health care among employees. A healthy and happy employee means great productivity and less time away from work.
- Both plans allow employers to make decisions regarding planning and how much they intend to contribute.
Contact Us: We Are Ready When You Are
Looking for guidance on how to decide between an HRA and an HSA? Help is just a phone call away! Whether you need to get things started, come up with solutions, or fix problems along the way, we’re ready when you are.
Contact our team of experts If your business is looking for professional guidance in choosing between offering either a Health Reimbursement Arrangement (HRA) or health savings account (HSA).