Health Care Consumerism: HSAs and HRAs

Stephen Miller, CEBS By Stephen Miller, CEBS May 2, 2016

The information below is excerpted, in part, from a longer SHRM article, Consumer-Driven Decision: Weighing HSAs vs. HRAs.

Updated September 26, 2018

Consumer-directed health plans (CDHPs) typically combine a health insurance plan with a tax-advantaged account that enrollees can use to pay for medical expenses—most commonly a health savings account (HSA) or health reimbursement arrangement (HRA).

Enrollees in CDHPs, whether linked to an HSA or HRA, must keep track of funds in their accounts. If the account's funds are exhausted before the deductible is met in a given year, enrollees are responsible for paying for the difference out of pocket until they meet the plan deductible.

After an enrollee meets the deductible, the plan operates much like a traditional preferred-provider organization (PPO) plan. That is, generally the plan pays for most of the cost of covered services and the enrollee contributes a cost-sharing amount—which varies by plan—until meeting the maximum out-of-pocket spending limit, at which point the plan pays 100 percent of the cost of covered services.

HSAs vs. HRAs: Requirements and Features

Health Savings Accounts
(HSAs)

Health Reimbursement Arrangements
(HRAs)

Plan Design

• HSAs must be linked to a high-deductible health plan (HDHP). For 2018 and for 2019, HSA-linked HDHPs must have an individual deductible of $1,350 or higher, or a family deductible of $2,700 or higher. 

• HSAs have maximum total out-of-pocket (OOP) expenses. For 2018, these maximums are $6,650 for self-only coverage and $13,300  for family coverage. For 2019, the OOP maximums are $6,750 for self-only coverage and $13,500 for family coverage. 
Also see the SHRM Online articles on:
-- 2018 HSA plan limits.
-- 2019 HSA plan limits.

• HSAs cannot be used to pay either group or individual-market health plan premiumsalthough HSAs can pay for COBRA continuation coverage, qualified long-term care insurance,  health insurance while receiving federal or state unemployment compensation,  and Medicare or Medicare Advantage plans, but not Medicare supplemental (Medigap) premiums.

• HRAs are often coupled with an HDHP but there is no requirement that they must be.

• There are no government-set out-of-pocket maximum limits specifically for plans linked to HRAs.

• HRAs for active employees generally can not be used to pay health plan premiums. However, a law enacted at the end of 2016 lets a new type of small business stand-alone HRA pay nongroup plan premiums, such as for individual policies purchased by an employee through the Affordable Care Act's Marketplace exchange. The qualified small employer HRA (QSEHRA) is only available for employers with fewer than 50 full-time equivalent employees, if the employer doesn't sponsor a group health plan.

In September 2018, federal agencies issued proposed regulations to let all employers fund a premium-reimbursement HRA that employees could use to buy individual-market insurance.


Unspent Funds

HSA funds are "real dollars" in an employee-owned account. Unspent funds are rolled over to the next year, reducing or eliminating the enrollee’s share of the deductible in subsequent years.

HSA account-holders can invest funds in interest-bearing accounts or, if the administering firm allows it, mutual funds.

An HRA is a notional account controlled by the employer. Most HRAs allow the attributed "funds" to accumulate from year to year; however, this is not required and is at the employer's discretion.

Most HRAs do not pay interest to participants, nor do they allow participant-directed investments.

Funding

HSAs may be funded by employees, by employers, or by both. 

For 2018, the HSA contribution limits from all sources is $3,450 for single coverage and $6,900 for family coverage (plus the additional $1,000 catch-up contribution for account holders age 55 or older).

For 2019, the HSA contribution limits from all sources rises to $3,500 for single coverage and $7,000 for family coverage (with an additional $1,000 catch-up contribution for account holders age 55 or older).

Employer contributions are not taxable to the employee. Employee contributions can be made with pretax dollars through a Section 125 salary-reduction cafeteria plan.

HRAs must be funded solely by employers. Employer contributions are not taxable to the employee.

Unlike HRAs, QSEHRAs have annual contribution limits, adjusted annually for inflation. In 2018, annual employer contributions for QSEHRAs are capped at $5,050 for a single employee and $10,250 for an employee with a family.

Portability

HSAs are employee owned and portable on termination of employment. Prior to termination, HSA funds can be transferred from one HSA administrator (including the default firm selected by an employer) to another HSA administrator at the account-holder's discretion.

An HRA's funds generally revert to the employer on termination of employment.

Employers can offer post-retirement HRAs as a retiree-only medical benefit.


There are some exceptions to the requirement to satisfy a CHDP's deductible before the plan will pay for health services received. Under the Affordable Health Care Act (ACA), for example, coverage of preventative health care (including annual physicals, vaccines and cancer screenings under specified guidelines) must be provided on a first-dollar basis, outside of the deductible, including for those enrolled in HSA- or HRA-linked plans.

Prescription Drug Coverage

Funds contributed into an HSA on a pretax basis—whether by employees or their employer—can be used to pay for most prescription drug costs paid out-of-pocket by employees, but not for over-the-counter medications except for diabetes supplies and some other eligible expenses.

Prescription drugs for chronic health conditions are often not considered preventative care by insurers, and therefore treated as only reimbursable in an HSA-linked plan after the deductible is met. However a growing number of HSA-compliant high-deductible plans have begun treating prescription drugs that seek to avert disease for at-risk enrollees as preventative treatment covered outside the deductible and without cost-sharing (for instance, see this HSA-compatible preventative drug list from CVS Caremark and this preventative drug list for Premera Blue Cross HSA-compliant plans).

Retiree Health

HSA reserves can be used by account holders to pay for qualified post-retirement health expenses but cannot be limited by employers to post-retirement health. But HRAs, on the other hand, can be designed so that employees vest in funds during active working years but can only use those funds to pay post-retirement health bills.

Employers also have flexibility to tailor post-retirement HRAs in a number of ways, including by designing them to pay only "Medigap" supplemental health plan premiums, for instance. 

Penalties for Nonqualified Expenses

Those under age 65 (unless totally and permanently disabled) who use HSA funds for purchases other than eligible medical expenses face a penalty of 20 percent of the funds withdrawn from the HSA and used for those purchases. Funds spent for nonqualified purposes are also subject to income tax.

HSA distributions that are made by mistake can be returned to the HSA if there is clear and convincing evidence that the distribution was made "because of a mistake of fact due to reasonable cause."

HSA rules are provided in IRS Publication 969.

Why an HRA?

"The HRA component of a health plan is essentially self-funded by the employer, which gives the employer a lot of flexibility, and can be tailored to their specific needs or desired outcomes," explained Elizabeth Kay, compliance and retention analyst at AEIS Advisors, a benefits consultancy in San Mateo, Calif.

"For example, if an employer has a young population that is healthy, it may want to use an HRA to pay for emergency room visits and hospital in-patient stays, but not office visits so the employer can help protect its employees from having to pay those 'large ticket items,' but not blow their budget. While an employer with a more seasoned staff, or diverse population, may want to include prescription drugs as a covered benefit under the HRA, as well as office visits, hospital in-patient stays, outpatient surgery, etc. Or, if an employer needs to look at cost saving measures, it may want to exclude prescriptions from being eligible under the HRA."


Related SHRM Articles:

2019 HSA Limits Rise, IRS Says, SHRM Online Benefits, May 2018

IRS Issues 2018 HSA Contribution Limits, SHRM Online Benefits, May 2017

New Law Lets Small Employers Use Stand-Alone Health Reimbursement Arrangements, SHRM Online Benefits, December 2016

Do HSAs Lead to a Shift in Prescription Drug Use?, SHRM Online Benefits, April 2014

Misunderstanding HSAs Is Open-Enrollment Hurdle, SHRM Online Benefits, August 2013

Additional Resources:

HSAs vs. HRAs: Things Employers Should Consider, United Benefit Advisors, May 2017

Why Some Companies Offer an HRA, United Benefit Advisors, May 2017

FSA, HRA, and HSA Comparison Chart, Marsh Consulting Group, May 2017

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